Understanding Cryptocurrency: Definition, Advantages, Applicability and Types

Cryptocurrency is a digital currency that is used to buy goods and services. These are types of currency are generally issued by various companies called as a token. These tokens are used for buying goods and services which are provided by the company. To excess goods and services of the company, they have to exchange the real currency into cryptocurrency.

Blockchain is the technology used for cryptocurrency. It is the decentralized technology spread among various computers to manage the transactions related to cryptocurrency.

There are more than 4000 cryptocurrencies issued by the companies. Bitcoins are the most common than other cryptocurrencies. There is no law in the country related to buying/ selling of cryptocurrency.

Advantages of cryptocurrency

• Funds can be transferred easily as no third party is required can only be done between two parties.
• It’s a cheaper alternative as compared to other online transactions.
• Offers an unprecedented level of anonymity.
• Payments are safe and secure.
• Minimum processing fees are required.
• A Cryptocurrency system comes with a user wallet or account address that can only be accessed with the public or private key. The private key will only be known to the owner.

Disadvantages of cryptocurrency

• Not accepted everywhere and have limited value.
• Payments cannot be reversed.
• Chances of fraud as they are not legally accepted in most of the countries.
• If anyone loses the wallet there is no chance of recovery.
• Not easy for an ordinary person to understand who doesn’t have knowledge of computers.

Legality of Cryptocurrency

These currencies are legal in most of the countries except in Iceland and Vietnam. China has also banned all the financial institutions that are dealing with these currencies. As there is no law relating to cryptocurrency in India. So, it is not clear that it is legal or illegal to trade in such currency. In 2017, Japan has legalized and accepted as a legitimate form of currency.

Applicability of Income-tax on Cryptocurrency in India

Taxation of income in India is governed by Income Tax Act,1961. Bitcoins could be deemed as capital assets if they are purchased for investments by the taxpayer. Any gain which arises from the transfer of the cryptocurrency will be taxable under capital gains.

If the investor holds cryptocurrency for more than 36 months then it would be taxable under the long-term capital gain. And if it is for less than 36 months than it would be taxable under short-term capital gain.

However, if the transactions related to cryptocurrency are more frequent then, it could be held that the taxpayer is trading in cryptocurrency. The income from the sale of such currency would be taxable under business income.

Basic Tips to Invest in Cryptocurrency

• Research Exchanges: Before investing in cryptocurrency, investors should do the proper research and review about the currency as there are more than 500 types of exchange.
• How to store your digital currency: Before investing the investors should investigate the storage. Where the investor should store i.e in the digital wallet or an exchange. There are many kinds of wallets and exchanges having their benefits and securities.
• Diversify your Investments: Diversification is very important for a good investment. As investing is only one crypto can not be a good decision there are many such types of currency. The investor should diversify the investment in another cryptocurrency also such not stick to one. For eg., Bitcoin is very popular so, it’s not important to invest the entire money in one. They can invest in others like ether, litcoin etc.
• Prepare for volatility: If your investment profile or mental well-being can’t handle the ups and downs of the cryptocurrency then should not invest in it. As the market of cryptocurrency is very volatile and the price of the currency changes very drastically.

Most Common Types of Cryptocurrencies

• Bitcoin: It is the first decentralized cryptocurrency using blockchain technology to facilitate payment and digital transactions. It is considered an original cryptocurrency. It was created in 2009 as open-source software. Like banks, there is no centralized authority for bitcoins. The users control the sending and receiving of money which allows anonymous transactions in the entire world.
• Bitcoin cash: It came in 2017 and most popular cryptocurrency in the market. Its main difference with bitcoin is the block size, the original bitcoin is 1MB and bitcoin cash is 8MB which means that bitcoin cash has a faster processing speed.
• Litcoin: It came in 2011, and it particularly works in the same way as bitcoin. It was introduced by Charlie Lee a former employee of Google. It was designed to improve bitcoin technology, which decreases the transaction time, lowers fees. It is the 6^th largest cryptocurrency in the world.
• Ethereum: It came in 2015, basically it’s like an app store and returns the control of the app to its original creator. The only person who can make changes would be the original creator and take away control from the middle man. Ether is a token that is used by the app developer and users. It is 2^nd largest digital currency after bitcoin.
• Ripple: It is one type of cryptocurrency but blockchain technology is not used in this. It’s not meant for the individual user but for the large corporation and companies, moving a large amount of money across the globe.
• Stellar: It came in 2014 and focuses on money transfer and the network is designed to make them faster and efficient even across the borders. It is operated by a non-profit organization called stellar.org.
• NEO: It was developed in china and its focus is the smart contract that would allow the users to create and execute the contract without an intermediary.
• Cardno: It is used for sending and receiving digital funds. It claims to be a more balanced and sustainable ecosystem for cryptocurrency.

Conclusion

With changing trends there are high chances of cryptocurrency to take a major stake in the capital market. The investors will have more investment options and they can trade easily in such digital currency without any middleman. As for now there is no law in India, but if it will take a major stake in the globe then in upcoming years there can be various laws. With the enactment of the law, the trading of such cryptocurrency will be legal and more secured.