The fact that you’re here tells me that you might have several questions related to cryptocurrency. Like what is it? Why is it useful? Will its prices go up or down in the future? Or will the government even ban it? There are many such questions that you might have but not enough resources out there that can help you understand it all.
You just need to know 5 concepts in order to understand cryptocurrency better.
1. Money v/s Currency
Until now, you might have been thinking that the cash you have is called money. Let us assume that the government decides to ban the 2000 rupee note you have in your pocket. So, the value of all the currency that you have will become 0 instantly! But there’s a difference in money. Its value cannot be 0. Why? Because it has its intrinsic value stored. For example- You have a gold coin. It has a value, so you can exchange it with currency. The government just cannot ban it at any time and it is acceptable in the whole world.
It might be the case that currency of one country isn’t acceptable in some other country. You have to go through all the hassle of converting currencies through a foreign exchange. But things like Gold, or Silver which have value associated with them are acceptable everywhere. So, you have to understand that there is a difference between currency and money. Because currency can be manipulated. The government regulates it but at the same time also does manipulation. As much Currency can be printed by the government as they want, but nobody can create Money at their own will. Nobody can make gold coins at home! Mining needs to be done in order to get Gold and there are a limited number of resources for it. The limited resources and people’s belief in it makes Gold so much valuable.
2. Centralised v/s Decentralised
The Rupee that you use is controlled by the Government. They can print any number of notes they desire which results in Inflation. This is in the hand of only one organisation, i.e. the Government and hence called centralised.
On the other hand, decentralised means that no single person or organisation has authority over it. Not me, not you, not the Government. Example- Bitcoin. No Government is controlling it and nobody can create Bitcoins at their own will. There’s a limited supply of it. And since there is a limited supply, it has a value associated with it. Due to its limited supply, people believe that it acts similar to Gold. Just as Gold, Bitcoin is also limited. So, most people say that in the future Bitcoin prices will go up. Now, since no government is manipulating it, there are no regulations associated with Bitcoin.
China devalued its own currency in 2015! You might be thinking that this would have adversely affected their own economy. But how this works is that all currencies like the Dollar, Rupee, Euro, or Yuan are very much interconnected with each other. So, they devalued their own currency but it had an adverse effect on the US stock market as well as Oil prices in India.
So, what we need to take away from this is that if a Government manipulates its currency, it could affect the whole world. And since necessity is the mother of invention, decentralised currencies like Bitcoin gained popularity and more such cryptocurrencies were created.
3. Fiat currency — Not backed by assets
Fiat currency in simple terms is a government-issued currency that is not backed by a commodity such as gold. The Rupee, Dollar, or Euro that we use are all fiat currencies.
Some years ago, every country was only able to print currency in proportion to the amount of Gold that they had in reserve or assets that they had. As of today’s date, the currencies that the governments are printing are not backed by any assets. So, it is upto the governments to print any number of notes they desire.
You might be knowing what happened with Zimbabwe. Similarly, there are other countries too that worsened their own economy by printing excess currency. So, since fiat currency is totally under the control of the government, people think that it is fake currency. It is not backed by any gold or any assets.
So, converting the currency that you earn into assets like gold, silver, or even buying land can help in beating inflation. What that would mean is that the value of your money will not depreciate over time.
4. Digital v/s Physical currency
A few years ago people didn’t trust Paytm. People used to think that they are putting currency into their Paytm wallets, but what if Paytm runs away? People had the most trust only on physical currency.
Let me now share a small story with you. A man saved a lot of currency over the years for his medical treatment. He used to keep it all in his cupboard but he didn’t know that a rat could get into the cupboard. So, a rat got in and shredded all the notes into pieces! Now think about what the person might have been going through.
It is true that you get to hold the physical currency and digital currency is just figures that you see in your bank account. But it might happen that someone steals your physical currency, it might get lost, or even a rat can shred it into pieces! But digitally storing your currency is so much safer than just holding physical currency.
Cryptocurrencies are totally based on digital technology. They are only in the digital world. You cannot get a physical Bitcoin, all your Bitcoins are only stored on your digital wallet.
Many people say that they don’t have much trust on cryptocurrencies but trust blockchain technology a lot. And this is the same statement by the RBI Governor, Shaktikanta Das. He said that the technology behind cryptocurrencies is something that we should adopt, i.e. Blockchain technology.
Now, you might be wondering, what Blockchain actually is? In simple terms, it can be considered similar to a Ledger. A ledger means to keep a record of transactions that are happening between different accounts. Currently, the bank might be maintaining all your transactions. So, all your transaction records are with the bank.
But if you know Harshad Mehta’s story, you would know that if an entry is not put into the ledger it could result in a large number of problems. This is what most financial frauds are, i.e. Missing transaction entries from the ledger. And this type of thing has happened with many banks over the years.
Now, what blockchain technology says is that you cannot erase any entry from the ledger! There is no way to do so. Here, people have computers which store all the past blockchain data and any new transaction would have to be verified by everyone in the blockchain network. And if at any stage an error occurs that would result in the transaction not being verified and is ultimately not processed. This means that nobody can manipulate the blockchain ledger. Every transaction is being recorded on the blockchain.
There’s a lot of research going on this technology and it is relatively new.
Uncertainity is actually quite normal whenever new technologies come into existence. You might have heard about the “.com” bubble which happened when the Internet was relatively new, and now almost everyone is using it.
So, when a technology is new, its users are limited and it takes time to gain trust. But as things go well, it gains adoption. Now is your time to be an early action taker.
So, what do you think? What is the future of cryptocurrencies according to you?