What is Cryptocurrency and Should You Buy It?

 Let’s take a trip down the memory lane to the days when a new kind of digital currency stormed the internet, turning rags to riches and then consequently riches to rags. Why did this catch the eyes of so many people? What made this different from other types of investments or currencies? A lot of people just jumped in the train without knowing answers to these questions, much like how they do in stock markets. The wise jumped off the train just as swiftly when they were ahead. So, let’s see what the fuss is all about and how it is used and taxed in India?

• The Technicalities
• How to obtain/buy cryptocurrencies?
• Is cryptocurrency a currency or a tradable instrument?
• Taxation in India
• Why is cryptocurrency so much frowned upon?
• Should you buy it?

The Technicalities

Cryptocurrency is a digital currency secured by cryptography and are decentralized networks based on blockchain technology. One of its defining features is the lack of any central authority, unlike banks. This also ensures privacy to users. But, before we can go any further, there are two questions that need to be answered -

1. What is cryptography? “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions. In simple terms, it’s a very, very secure, cannot-be-hacked kind of system.
2. What is blockchain? A blockchain is a type of shared database that differs from a typical database in the way that it stores information; blockchains store data in blocks that are then linked together via cryptography. It is decentralized in system, different persons can verify each block of data and then chained together, creating a history of the transaction that can be viewed and verified by anyone.

In very simple terms, the process is as follows:

1. Person A sends money in cryptocurrency to Person B though a wallet.
2. This transaction is then verified by many crypto miners or participants, each with a node or block. Crypto disallows people from altering the nodes.
3. The blocks then get chained together in order.
4. The transaction is verified and completed.
5. Person B receives money in their wallet.

How to obtain/buy cryptocurrencies?

Cryptocurrency is primarily created / mined using supercomputers when participants verify the transactions. In some cases, it is also given away as tokens by the currency creators. These cryptocurrencies are then stored in crypto wallets and can be used in online transactions. Mining a cryptocurrency takes a lot of resources. And therefore, transaction charges, also known as gas fees, are also very high in cryptocurrencies like Bitcoin, Ethereum, etc.

If you are not able to mine, then you can buy them on crypto markets, much like stock market, but, without any regulatory. More on this in the next paragraph.

Is cryptocurrency a currency or a tradable instrument?

Both. It is a currency, as in it can be used to make payments. But, it is not a legal tender. A currency becomes legal tender when the Central Bank of the country recognizes the currency and allows its citizens to use it as a tender. In India, it isn’t a legal tender. The official term coined by the Government is “Virtual Digital Asset”. The RBI has already launched the pilot of Digital Rupee (e₹), which will be the country’s first official cryptocurrency.

Cryptocurrency is also a tradable instrument which is being traded in the market like stocks of companies. But, the main difference being the absence of a regulatory body. In India, stock markets are regulated by Security and Exchange Board of India (SEBI). It restricts certain transactions, for ex., insider trading; bans trading in derivates in some stocks when the specified limit reaches, etc. But, there is no such thing in crypto markets.

Taxation in India

Profit on crypto trading is taxed at flat 30% without loss set off / carry forward benefits. Meaning, any profit you make on, say, Bitcoin cannot be set off against losses on Ethereum. And any loss you incurred this year cannot be set off against the profits in the coming years. Additionally, 1% TDS is also applicable. This is not at all ideal for crypto traders. But, this is to discourage people from trading in cryptocurrencies. Why would the government want to discourage crypto trading? Answers in next paragraph.

Why is cryptocurrency so much frowned upon?

1. Lack of regulatory, as mentioned earlier. Price of a crypto can fall from Rs. 1,000 to Rs. 1 in a single day and there’s nothing to stop it.
2. Lack of proper knowledge. Many people can at least confidently say that the value of a company’s stock rises when it makes profit. But, what makes the cryptocurrency value move? What is its profit? Can the cryptocurrency holders vote in the affairs of the company?
3. Easily manipulated. For example, Shiba Inu’s 28% of supplies are held by just 11 wallets. And these 11 wallets could be of the same person, no one knows. And this person/ group of persons can easily manipulate the market value. Another example is back when Doge Coin’s value rose significantly just based on what Elon Musk said. No one went to verify the claims. If the price moves just based on what someone as stupid as Musk said, then there is really no limits to how much this can be manipulated. We also saw people like Justin Beiber, Neymar, Michael Jordan lose heavily on NFTs.
4. Mining is bad for Earth. The supercomputers used to mine the cryptos use so much resource and emit greenhouse gases. And indirectly, the electricity used to power these supercomputers is also not a laughing matter.

Should you buy it?

No. The cons really outweigh the pros by a margin. The current taxation systems are also not really ideal, even if you do make some profits. So, it’s better to stay away from these, at least until things get better.

Hope you liked the article. Keep on making smart and sound investment decisions.