Wondering what cryptocurrencies are and how bitcoins work? Here’s an explainer

With the increasing interest in cryptocurrencies and the lack of clarity among first-time investors, many people have fallen prey to scammers.
Wondering what cryptocurrencies are and how bitcoins work? Here’s an explainer
Wondering what cryptocurrencies are and how bitcoins work? Here’s an explainer
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News came out a few days ago that a new cryptocurrency project called “Prodeum” disappeared overnight leaving behind a white screen which had the word ‘penis’ on its website. There was another scam which swallowed a whopping $400 million of investors’ money that also made the news recently. These scams are indicative of two things – the first being the tidal wave of interest in cryptocurrency that has emerged over the last few months and the second being the ignorance and lack of clarity among first-time investors with respect to what cryptocurrency really is. This toxic cocktail is the reason there are now as many cryptocurrency scammers as there are investors.

I received many emails from the wonderful women who read this column, who wanted to learn about cryptocurrency, how to protect themselves while investing in cryptocurrency and whether investing in them is worth the effort, so without further ado:  

Here’s how cryptocurrencies work

A cryptocurrency is a currency like the rupee or the euro that is regulated using cryptography. Cryptography is the science of converting information into gibberish using a cipher or a key. Unless you have this key, you cannot translate the gibberish back into information. There are many cryptocurrencies available for investment right now. There’s Bitcoin, Ethereum, LiteCoin and Tether, among others. Bitcoin is perhaps the most popular and the most powerful cryptocurrency in the world, and it comes in wallets that each require a unique key which will open the wallet to reveal the Bitcoin that you have in your name. This information about the number of Bitcoins you own is stored on the Bitcoin Blockchain.

What’s a block chain?

Here’s the thing – Bitcoin, or any cryptocurrency for that matter, is not a physical currency. It doesn’t exist in the real world, so you cannot carry it around like you would notes. The creator of Bitcoin, Satoshi Nakamoto, also put a cap on the number of Bitcoins that can exist, so there will never be more than 21 Million Bitcoin in the world at any point in time. When you transact with Bitcoin, the transaction takes place over the BlockChain.

Wikipedia will tell you that a blockchain is a continuously growing list of records called ‘blocks’ which are linked and secured using cryptography. Blockchains are managed by peer-to-peer networks. If you translate this into plain English – buying and selling cryptocurrencies like Bitcoin functions the same way a school’s public address/announcement system does. You go up to the mike, announce that you, Ms.Maathru will be giving say, 1 Bitcoin to your friend Ms. Bootham. Immediately, your audience, the peers who are maintaining records, will note the transaction down and presto! Ms. Bootham’s Bitcoin wallet will have the Bitcoin that she bought from you. When he wants to transact, he will have to do the same thing. The Blockchain will have record of every Bitcoin bought and sold.

No regulators! 

Transacting on the blockchain means that cryptocurrencies are self-regulated. They aren’t controlled by anyone other than those on the network. There are no banks, no governments, no agencies who can intervene. This is the first warning sign for everyone looking to make quick money with cryptocurrencies. If something happens to your money, there is literally no one you can complain or write angry letters to. The RBI has already taken a negative stance against cryptocurrencies so if you end up losing money, you’re on your own.

Should you Invest in cryptocurrencies?

Apart from the fact that there is no government authority to protect your interests, there have been reports of people having trouble redeeming the Bitcoins they invested and converting them into money as well. Personally, I feel it is very important for women to understand exactly what they’re investing in and go by their own convictions instead of falling for trends. It’s always tempting to dive into an inviting pool, but if you’re in the deep end and don’t know how to swim, well, you’re in trouble.

Rupee Rani is a weekly column on finance for women. Write to us with your queries at rupeerani@thenewsminute.com.

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