Bitcoin To Dogecoin: What Is Cryptocurrency And How Does It Work?

Indian investors are making a beeline for cryptocurrencies. More than 15 million Indians are currently buying and selling digital coins, such as Bitcoin, Dogecoin and Ether, and that¡¯s fast catching up with the 23 million traders in the US.

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India¡¯s crypto boom

This meteoric rise in interest can be gauged with the help of this data from Chainanalysis, which claims that investments in crypto grew from about $200 million to nearly $40 billion in the past year. And driving this juggernaut are the tech-savvy millennials who find it easier to invest in crypto than gold and are open to high-risk, high-reward investment. Latest World Gold Council data also confirms that people over 34 have a larger appetite for gold than younger consumers.

ALSO READ: Ether vs Bitcoin: Analysing The Crypto Market For An Indian Investor

Cryptocurrency | File Photo

In March 2020, the Supreme Court overturned the RBI Bank¡¯s two-year-old ban on cryptocurrency trading, after which the Mumbai-based CoinDCX saw a 10-fold increase in new user signups and the international exchange OKEx reported a 545 per cent increase in site visits from India a month later. However, regulatory uncertainties remain at large with the government proposing a ban on trading in digital coins six months before.

ALSO READ: The Insane Price Surge Of Dogecoin

For all its fame, though, cryptocurrency can be quite confusing. Here¡¯s a guide to answering the basics and what you should know before you start investing in digital coins.

How does cryptocurrency work?

A cryptocurrency is a virtual currency that can be exchanged online for goods and services. Cryptocurrency is often referred to as "decentralized money," meaning that it is stored, created, and processed outside of a central bank or government, allowing transactions to be processed anonymously. A cryptocurrency is actually a complex computerized code, which eliminates the possibilities of double spending and counterfeiting,

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Cryptocurrencies work using a technology called blockchain -- a sophisticated technology spread across several computers that manage and record transactions which can¡¯t be changed, deleted or hacked into.

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When a digital currency like Bitcoin is traded, the platform archives both the buyer's and seller's information and records it as a "hash," or string of letters and numbers generated by a complex mathematical function. This ledger contains every transaction ever processed, allowing a user's computer to verify the validity of each transaction.

Can you convert Bitcoin to cash?

Bitcoin is the first and most popular cryptocurrency in the world. When selling your Bitcoin holdings, users can choose for fiat currency, such as Indian Rupee (INR) or exchange it for another cryptocurrency, such as Dogecoin, Ether etc.

Are Bitcoins safe?

There are three primary risks associated with buying or holding Bitcoins: their value may decrease after your purchase; someone can steal your Bitcoins by gaining access to your private key; or you may forget your private key and lose access to all your Bitcoins.

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The first one is the same as making any investment, only that Bitcoin is highly volatile meaning the price may quickly move up or down. The other two are linked to your private key: Bitcoin wallet files that store the necessary private keys can be accidentally deleted, lost or stolen.

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In order to safeguard your Bitcoins, it¡¯s recommended you store your private key in an app or device that isn¡¯t connected to the internet or write it down on a piece of paper. Should you choose the latter, I really hope you don¡¯t end up like Stefan Thomas, who has two guesses left to figure out a password that is worth, as of this week, about ?1.7 thousand crore.

How many Bitcoins are left?

Any individual can use his computer prowess to crack computationally difficult puzzles integral to the blockchain technology in a process called ¡®mining¡¯ and earn rewards in Bitcoins. But the Bitcoin protocol is designed in such a way that new Bitcoins are created at a decreasing and predictable rate.

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Think of it as like extracting ¡®gold¡¯, only this is ¡®mined¡¯ via computational means. There are only 21 million Bitcoins that can be mined in total and the number of new Bitcoins created each year is automatically halved over time until this number is reached. By January 2021, the number of Bitcoins in circulation stood at 18.638 million, leaving out 2.362 million Bitcoins to mine.

How do I cash out my Bitcoin?

When selling a Bitcoin for fiat currency, users need to register on a crypto exchange such as WazirX that lists the BTC/INR trading pair, which may require you to furnish your address and ID proof to satisfy Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) regulations. After that, you can transfer the BTC into the wallet of your chosen exchange, click on ¡°Sell¡±, select the ¡°Highest Price¡± option and place the order. Click on the ¡°Withdraw¡± button and follow the prompts to initiate the withdrawal process to transfer the equivalent INR you¡¯ve acquired to your bank account.

How long does it take to mine 1 Bitcoin?

You don¡¯t mine one Bitcoin. You see, the way things are, every 10 minutes, the first miner to solve the crypto puzzle receives a block reward. When Bitcoin first started, the block reward was 50 Bitcoins. But after every 210,000 blocks are mined, or roughly after four years, the block reward halves, with the reward currently being set at 6.25 BTC per block.

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Also, there are thousands of Bitcoin miners each competing for the reward. Simple probability dictates that the chances of receiving that reward is infinitely small. Therefore, miners combine their equipment¡¯s computing power in mining pools that splits the puzzle into smaller tasks and distributes them between mining hardware connected to that pool. And then the reward is split according to the rules of the group.

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As more people join the Bitcoin network and try to mine Bitcoins, it becomes harder, and more computing power is required to solve the puzzle. The time taken to solve a problem depends on several variables, including your device¡¯s computing power.

Can Bitcoin just disappear?

Some people believe that when all 21 million Bitcoins are mined by the year 2040, the actual amount available to trade or spend will be significantly lower. Chainanalysis estimates that over 17 per cent to 23 per cent of existing Bitcoins have already disappeared, but with people realising the value of the digital currency more such cases are unlikely to happen.

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Apart from that, certain extreme measures such as killing the internet, destroying all the nodes and miners running the Bitcoin software, and by declaring Bitcoin illegal, we can make it stop. But then this would raise more complications.

Does Bitcoin have a future?

Bitcoin is completely open-sourced, transparent and decentralized with the transactions secured by heavily peer-reviewed cryptographic algorithms like those used for online banking. And because of that the popularity of cryptocurrency is expected to grow exponentially. There are a growing number of businesses and individuals using Bitcoin, including brick-and-mortar businesses like restaurants, apartments, and law firms, as well as popular online services such as Namecheap and Overstock.com.

ALSO READ: Indian Bitcoin Trading Apps Saw 60% Drop In Trading As Crypto Prices Fall

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But this is still a relatively new phenomenon and even if it¡¯s growing fast, governments may not accept Bitcoin as a mode of payment. In fact, Indian government was mulling over imposing a complete ban on cryptocurrency earlier this year but has since kept mum on the issue, which is being interpreted as a good sign.