Bitcoins and other cryptocurrencies are popular in many parts of the world. And it is important to understand the system well before you begin trading.
So here goes. The first question that comes to mind is –
What is a cryptocurrency and where did it come from?
Although there were others before him, Satoshi Nakamoto , the founder of Bitcoin, also known as BTC, is widely recognized as the creator of cryptocurrency – a digital currency system controlled by an electronic algorithm.
The Oxford dictionary defines the term as “a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
The operative phrase here is “independent of a central bank.” While cryptocurrency is not controlled by the local financial system, it is nevertheless widely accepted as legal tender in many parts of the world – for instance, you can convert bitcoin into INR` and vice versa – and crypto exchanges such as CoinDCX are legal businesses – which bring us to the next question.
What can you do with cryptocurrencies?
As we said, cryptocurrency is widely accepted as legal tender in many parts of the world. So, subject to the law of whichever country or state you are in, you can use cryptocurrencies to buy just about anything from a house to a sub as long as both parties – you and the merchant – accept it as a medium of exchange.
Until recently, Indian banks were prohibited from collaborating with crypto exchanges. The recent lift of the ban by the Supreme Court has opened the doors for trading cryptocurrencies in India using INR.
How cryptocurrency works?
Unlike traditional money, which is printed and controlled by a central bank, cryptocurrencies are monetary systems that work independently of traditional systems. There is no single institution or system that tracks and regulates it. The currency works on a self-regulated decentralized P2P (peer-to-peer) system that operates on an underlying technology called the blockchain. There are many existing cryptocurrency systems.
In order to deal with cryptocurrency, you must have an account on a cryptocurrency exchange. You can then send or receive crypto coins to or from other users. When you sign up you will be given two encryption keys, which act as your identity on the exchange – granting you virtual anonymity while making your transactions visible. Every transaction on an exchange is recorded in a virtual ledger – which is nothing but a distributed database that resides on computers over the globe – called nodes – and has restricted access. Transactions by a single user form a chain of custody and ownership – reflecting all exchanges made by that user.
An example of how cryptocurrency works
Say you are located in India and are trading Bitcoin. The first thing you must do is select a cryptocurrency exchange – also called a trading platform – through which you will operate. Having selected the platform, you would purchase a certain number of coins at the BTC price in INR and credit them to your digital wallet. Your wallet is protected by your encryption keys.
When you decide to spend these coins – transfer them to another user – you broadcast a message – using the public key of the other user – to the entire network. Every BTC trader learns of your intention to identify you through your public encryption key. The message coupled with your private encryption key creates a digital signature that makes that transaction unique. It creates a permanent – irreplaceable – record of the transaction, which will be available throughout your life as a trader. While the transaction is visible to all, no one can change it because of the unique digital signature. If a hacker does attempt to change the message and redirect the coins to him, it would generate a new transaction with a verifiable signature.
Value, Tracking, and Accountability
When we deal in a traditional currency such as rupees, we are accountable to a centralized system about our transaction. Accountability in a blockchain – the underlying technology for most cryptocurrency platforms – is achieved using public and private encryption keys. The public key is the user’s public identity while the private key is used to encrypt and decrypt transactions. All transactions are linked using these keys and no record is ever deleted from the ledger. The transactions form a chain of custody that accounts for every coin purchased or traded.
When you initiate a request for 50 BTC from, let’s say X, they must show proof of ownership – that is to say, they must prove that they have 50 coins to give you. In order to do this, they would have to link all previous transactions under their encryption key that lead up to a balance of 50 coins in their wallet. This is automated, so in reality, all you do is generate a request – which is accepted or denied.
In order to know the value of BTC in INR, all you need to do is multiply the current price of BTC by the number of coins in your wallet. Most platforms offer tools that let you know the value of cryptocurrencies in rupees.
Since cryptocurrencies are independent of traditional regulations and control, it is important to choose your cryptocurrency exchange with care. Before we look at considerations when selecting a platform, however, a word on how the value of a coin – one unit of currency – is determined.
The initial value of cryptocurrency coins is fixed by the exchange. As trade progresses, the value is determined by market forces. If you were not a trader since inception, you would purchase your first coins at the value of cryptocurrency in rupees that is prevalent at the time of signing up – and pay for them through accepted channels like UPI, Netbanking, and debit or credit cards. It is also worth mentioning here that some exchanges charge a small fee for their services. The amount of fee and its application varies from exchange to exchange.
CoinDCX, the largest cryptocurrency platform in India, charges a fee per transaction, which is revised from time to time. We accept most payment gateways such as PayTM and Netbanking for both purchasing and redeeming your coins. Visit our website to know the fee structure and the current value of various cryptocurrencies in Indian rupees. We also require users to complete their KYC before they begin trading.
Choosing the right platform
Trading involves risk so the platform – or exchange – you choose should be selected with care. Some of the important things to consider when selecting an exchange include –
- Security – This tops the list for the simple reason that nobody wants their funds stolen. CoinDCX uses security measures like two factor authentication and deposit/withdrawal confirmation to ensure that members’ funds are secure. Visit the security page on our website or check out our Security related FAQ for details.
- Legality – As already mentioned, legality is incumbent upon your location. Therefore, it is advisable to review the local law regarding cryptocurrency before you sign up.
- Transparency – It is important for you to know who owns and runs the exchange, where it is located or registered as a business, and the laws of that region vis-à-vis the law applicable in your own country. This information is usually available on the website of the exchange. Details about CoinDCX are available here.
- Liquidity – Medium.com defines liquidity as the ability to convert a currency such as btc to inr or other currencies without compromising its value. While liquidity is market dependent, popular currencies such as BTC have high liquidity. Moreover, CoinDCX facilitates direct transfer to and from your cryptocurrency wallet to your bank account in India, which means you can quickly withdraw your funds whenever you wish.
- Fees – Most exchanges charge a small fee – usually as a percentage of the amount of trade. You should be aware of the fees applicable on various exchanges. You will find answers to your queries about CoinDCX fees here.
There are a few other things that you should check, such as ease of navigation, volume of trade, and the types of trade – Fiat Trading, Leverage Trading, etc. Overall it is important to do your own research and understand how trading on the platform works before coming on board.
CoinDCX has proved itself to be the most secure and user-friendly crypto trading platform in India. We provide easy liquidity from top exchanges like HitBTC and Binance. Our secure wallet is impenetrable – providing complete security through tools such as 2factor authentication and withdrawal confirmation.
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