The future of digital currency is here. It is time for us to understand cryptocurrency and its future.
Created in 2009, Bitcoin was the first decentralized cryptocurrency in the world. Like any other successful venture, bitcoin also brought in opportunists producing alternate cryptocurrencies, also referred to as Altcoins.
As of September 2017, the existence of over a thousand cryptocurrencies was noted which are similar to and derived from Bitcoin. The more important ones being Litecoin and Ethereum.
How are they valued?
Any decentralized cryptocurrency works on a network, and a rate for it is defined at a particular time. Just like the exchange rate of a nation's currency, the value of a cryptocurrency is also publically known.
Centralized currencies have a central regulatory body (RBI for Indian Rupee) that print units to control its supply. On the other hand, decentralized cryptocurrency cannot produce new units and have not yet been provided backing from entities that hold asset value measured in it.
So who values them?
The network or system is maintained by a community of individuals known as 'miners.' Let us take Bitcoin for example. The miners organize data in batches known as 'blocks' that is maintained in a public ledger called 'block chain.' These batches use cryptography to link to one another forming a chain.
This chain helps in avoiding duplication, thus making the technology behind Bitcoin one of the most accurate systems ever created.
What is mining? What do miners do?
When an individual buys a bitcoin, the transaction is recorded in the ledger and is publically visible to the entire network. A miner then uses computer processing to compete with other miners in confirming the operation by solving complex math equations. The first to figure out the validity of the block gets rewarded in bitcoins.
This validated block is timestamped and added to the 'block chain' in chronological order. Miners receive incentives to maintain the security of these cryptocurrency ledgers. The mining is also dependable on the processing powers of the computer systems, making it an expensive affair.
Is cryptocurrency legal in India?
There has been no official ban or acceptance of cryptocurrency by the Indian government.
What makes cryptocurrency so valuable?
Cryptocurrencies work on cap limits. The supply of litecoins is limited to 84 million litecoins and that of bitcoins is 21 million bitcoins. Initial Coin Offering (ICO) is a means by which funds are raised for new cryptocurrency ventures.
The decentralized network does not have a regulatory authority per se, but the algorithm defines in advance the rate and how the currency will be produced. These currencies are designed for limited supply thus increasing its value with demand. In case of bitcoins, a bitcoin is created everytime the miner discovers a new block. With complex mathematically algorithms, the generation of new blocks is reduced, thus keeping the supply limited.
What makes the future of other cryptocurrencies hopeful?
The rate of inflation in bitcoin mining is trending downwards as most of them have been mined. Investing in alternative cryptocurrencies might prove profitable in the future.