Basics of Cryptocurrency: Bitcoin, legality and safety of crypto, and investments in cryptocurrencies

Introduction

Things did not remain the same in every era. Currently, everything is far more changed than it was before. Evolution to everything is inevitable. At first, people traded goods and services without using currency because there was no such concept as currency or money. Such a trading system is known as a barter system where different things are exchanged for different things. After the realization of this system’s failure, an official currency came into existence in 110 BC. Evolution happened until paper currency gained worldwide popularity.

Evolution once again came in this field and the concept of cryptocurrency developed. With the emergence of Bitcoin, it gained popularity because of its features. The technology of cryptocurrency removes the obstacles put forward by the Digital Banking System. It is a decentralized system encouraged because of has no limits on the transfer of funds. Although it is not encouraged by most governments because of its decentralized nature, still it is gaining popularity day by day.

What is cryptocurrency?

Cryptocurrency is a type of digital currency, also known as virtual currency, and is made as a medium of exchange. However, it has no physical form. The currency is a coded form of string. This market is different from Foreign Exchange Market.

Bitcoin: Emergence and trading in Financial Markets

Bitcoin is the first invention in the decentralized Crypto Market. To felicitate the transaction, it uses Blockchain Technology. After its invention by Satoshi Nakamoto (an entity), its popularity begins after its first transaction with Hal Finney, an initial adopter. Initial transactions were made through a peer-to-peer transaction, but as the popularity grew, centralized exchanges (currently popular exchanges are Coinbase, Kraken, Binance, etc.) facilitated trading.

There are Decentralized exchanges of cryptocurrency as well which operate with bit difference. These exchanges (like Pancake Swap, Uniswap, etc.) provide peer-to-peer transactions having no central authority and can trade directly from their wallets. Traders and investors can use both of these exchanges for their investments.

Some exchanges contributed well to the popularity of Bitcoin. One of them was BitcoinMarket.com started in March 2010. However, Mt. Gox was the most well-known exchange at that time which stands longer than the previous one. Its operation started in July 2010

After reading the following paragraph, we understand how much popularity and success Bitcoin got, but several factors contributed to the success of Bitcoin:

• It was a new invention and the first cryptocurrency. A new concept of decentralized digital currency and blockchain is introduced in proper application. It is an unconventional solution to problems created by the central authority system.
• The government controls currencies and there are limitations attached to them. Decentralization provides a solution to making freedom in financial decisions without answering to a central authority.
• Cryptocurrencies have limited supply. Bitcoin’s algorithm, at that time, is planned to have 21million in numbers.
• Used cryptographic techniques to secure transaction.
• One of the main factors which attract people is its global accessibility.
• Another important point is its store of value. It can be stored like digital gold.

All these factors are equally important for the success of Bitcoin and alternative cryptocurrencies. Presently, trading Bitcoin is not a daunting task because of its accessibility, but how to trade and when to trade is a problem for new traders. Trading success in Bitcoin depends on trading psychology, strong technical analysis, basic fundamental analysis, and having the right strategy on hand.

Other cryptocurrencies and emergence of crypto-tokens

After the thorough success of Bitcoin, other types of cryptocurrencies emerged with differences in functionality. Ethereum is considered a leading step in the advancement of cryptocurrency. Every type has its functions and Ethereum is one of them. The platform of Ethereum is designed to create smart contracts and other decentralized applications. Below are the reasons Ethereum is considered a monumental step.

• This platform encourages the creation of crypto tokens through its ERC-20 standard
• Considered as the base for decentralized finance. It offers various financial services, and decentralized exchanges through smart contracts and protocols (Uniswap, Aave, Compound)
• Now Ethereum has a possession of enthusiast developers community and vast ecosystem of project. This network contributes to its flexible nature, innovation, on-going evolution.
• The ability to upgrade and having a clear roadmap is one of the most important reasons. Its 2.0 version aims to address scalability issue and reduce energy consumption.

 In stables coins, Tether is used to put together the benefits of cryptocurrency and fiat currency (a government’s issued currency, in this case US dollar). This coin is hosted on Ethereum platform like USD coin. Binance coin is available on Binance Crypto Exchange for trading.

There is a question that is indispensable to answer How new crypto tokens are emerging? New tokens emerge through creation and development of blockchain platform. The complete answers lie in the following:

• Blockchain offers the infrastructure of newly emerging tokens. Well-known platforms are Ethereum (ERC-20), Solana (SPL), Binance Smart Chain (BEP-20). These standards define a set of rules for token implementation on its platform.
• Smart contracts are written by developers which defines for token a set of rules and functionalities. Specification for token supply and distribution is mainly concerned in the set of rules.
• Token standards are mostly the above discussed.
• After creation of Smart Contract and its deployment onto the blockchain, it can be mostly distributed mostly through airdrops and direct sales.

The success of any token is simple based on how community is adopting it and what are the ongoing enhancement to underlying technology.

The Question of legality and safety

When it comes to security and safety of crypto, doubt is indispensable to come in the mind of newbie because it opens other topics like different types of risk associated with crypto market. Legality is a question which would be different for every person depends on where they live because government in many countries do not encourage investment in crypto. Following are the few countries concerning the legal status of crypto:

• In America, crypto is legal.
• China has banned crypto (transactions, exchanges and mining) within its borders. However, it has its own CBDC (Central Bank Digital Currency)
• India is formulating it own legal framework regarding cryptocurrency. However, it is not illegal.
• Legal in European Union.

As far as the safety is concerned, it has earned a reputation of unstable investment because of scams, and especially volatility in ongoing market. User should be aware about the following risk:

• User should remember the password or phrase of a wallet. About one-fifth of bitcoins are lost due to losing of password of sending them on wrong addresses.
• Also check the legal status in your country because many countries still consider it illegal and sudden crack down could cost you your funds.
• In order to store cryptocurrency, don’t rely on exchanges.
• Market manipulation is one of the debates in cryptocurrency. Many investors, influential, and exchanges with huge sums of money works unethically.

There are still many risks attached with cryptocurrency but still its market capitalization is nearly 1 trillion.

Advantages and disadvantages of Investing in Crypto

Despite the risk associated with crypto market, people often chose crypto as their medium of investment. They might look for the following advantages:

• Cryptocurrencies have a potential for high returns. Bitcoin’s rallies are an example.
• Market is 24/7 open for trading.
• Evolution in technology because application of blockchain is beyond just trading the market.
• Highly accessible in nature and transactions are made very fast.

Despite the advantages, which show us some profit in the market, there are several disadvantages which needs to be considered during trading:

• High volatility creates fluctuations which leads to losses because most of the time market hunts stoploss of traders.
• Regularity of cryptocurrency is a question because government intervention impact market sentiment and questions the legality of certain cryptocurrency.
• Security risks are attached with it like hacking, fraud, and scams because of its digital nature.
• Price movement are mostly based on technical analysis and speculation. Most of the time tokens lack its fundamental value, and traditional financial metrics are not applicable on them.
• Market manipulation done by large money is one of the main disadvantages.

Concluding Remarks

To sum up all this, I would suggest that newbie must considers the risks and disadvantages attached to it. In cryptocurrency, experienced traders suggest that only invest the money that someone is willing to lose. A person must be risk tolerant and must understand how financial market works. If an investor has a surplus of funds, then it would be recommended that don’t rely on Crypto or forex market. They must have to look for long term project because such projects contains very little risk.

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