What is Cryptocurrency?
An offspring of blockchain technology, cryptocurrency is a form of digital currency that exists only on the web. It is that pathbreaking technological development that has finally realized the potential of the internet to create a way of direct peer-to-peer exchange of currency. Cryptocurrency is truly innovative in that it is not controlled by any centralized authority, unlike any other known form of currency currently in circulation. Like the Reserve Bank of India (RBI) controls the supply of Indian Rupee (INR), cryptocurrency is controlled by a decentralized network of nodes — which lend transparency to this currency.
Basics of Cryptocurrency Trading
It is possible to trade cryptocurrency in an organized marketplace, much like other asset classes such as equities and commodities. This trading happens through trading portals such as CoinDCX, the biggest exchange in India. One can buy and sell coins in exchange for fiat money, such as INR, or other coins and tokens. The basic principle for crypto trading remains the same as that for shares: you aim to buy when the price is low and sell when the price is high.
A key difference, however, is the concept of asset-to-asset trading, something that stock market traders would be oblivious to as all trading there happens against fiat money. In the case of crypto assets, one coin can be traded for another coin without using any form of cash in the process. Consider the trading pair Bitcoin (BTC)/ Litecoin (LTC) for instance; this means that you can buy Litecoin with Bitcoin, or sell Litecoin for Bitcoin. Of course, it is also possible to buy coins directly using cash but generally speaking, most altcoins are bought using BTC or Ethereum (ETH) — the two coins that dominate the fiat-to-crypto trade in India.
Is Bitcoin Legal in India?
There had been ambiguity about the future of cryptocurrency in India ever since 2018 when the RBI banned Indian banks from providing services to crypto companies. However, a recent ruling by the Supreme Court has given the crypto ecosystem in India a new lease of life by overturning the ban. This essentially means that it is now legal for banks to facilitate transactions for cryptocurrency exchanges and traders. India is, therefore, a free market for cryptocurrency trading now!
How to trade in the BTC market using INR?
There are various Digital Currency Exchanges (DCE) that exist in India, each as a different market, offering its own price for the coins available to be traded on it. The prices of altcoins displayed on the exchanges are their BTC prices, ie. prices with respect to Bitcoin. Note that all other coins apart from Bitcoin are referred to as altcoins (alternate coins). This difference in prices on each platform can be owed to the difference in demand and supply of its users. Users can use a price conversion tool such as DCXconvert to ascertain the value of their coins in different currencies. As an example, the picture of DCXconvert below illustrates the conversion of Bitcoin into INR.
It is important to understand the concept of trading pairs to be able to transact profitably in cryptocurrency. Let’s consider again the example of BTC/LTC cited earlier, and assume that you have cash and BTC in your wallet and want to obtain LTC. Of course, one obvious method would be to directly buy Litecoin using INR. Now imagine that the value of BTC in INR goes up 10% but that of LTC stays the same. In this case, if you buy LTC using BTC, you buy 10% more than what you’d buy using INR. Thus, your buying power went up by using trading pairs instead of using a direct rupee trade. This very simple example explains how you can maintain different currencies in your portfolio by swapping one for the other, without ever using cash.
A cash-to-crypto transaction is also possible on exchanges. In fact, the very first transaction for a new user would be to buy some cryptocurrency using regular money from the linked bank account. It is also possible to sell out by getting INR transferred in one’s linked account from the sale of crypto assets.