“It's all over, but I still don't get it,” a colleague's wife recently said while searching for cryptocurrency information. Experts say that she is not alone, some investors do not even understand. Cryptocurrencies, which have soared during the pandemic, have lost more than $1 trillion in market value in two months. The value of Bitcoin has nearly halved since the November 2021 peak of $69,000. The government was due to introduce a bill to ban “private” cryptocurrencies in December, but the matter remains pending. However, that did not stop the finance minister from introducing cryptocurrency into the tax net in the latest budget. Below is a lower low in the highly volatile asset:
What are cryptocurrencies?
Cryptocurrencies are a digital form of money that represents financial freedom and privacy. Unlike traditional currencies, they are not issued by central banks. It is also not under the control of any individual or organization and is instead subject to the law. It allows secure transactions free from government or corporate influence. Due to crypto, it is not possible to issue fake currency or spend twice.
Why have they become popular?
Cryptocurrencies were born after the global financial crisis when people became disillusioned with the banking system. The initial supporters were those who understood the technology. However, in the midst of this pandemic, increased liquidity and lower interest rates have led to demand for riskier assets. Institutional investments and support from tech billionaires like Elon Musk have provided a boost.
Is crypto investment legal?
In March 2020, the Supreme Court ruled that the Reserve Bank of India's 2018 circular prohibiting banks from facilitating cryptocurrency trading was illegal. Currently, it is in a "grey area" where there is no legal backing or prohibition. However, existing laws (such as anti-money laundering and anti-fraud laws) apply.
What did the Finance minister announce in the Budget?
FM Nirmala Sitharaman has stated that crypto transactions will be taxed at 30%. The budget suggested that no deductions would be allowed except for the cost of acquisition and losses could not be offset against other income. The Secretary of State also said that taxing assets does not bring legitimacy.
How can one invest in crypto?
You can open an account with a crypto exchange by submitting your KYC details online. The investment process is similar to buying shares on online platforms.
Why are crypto prices volatile?
Most cryptocurrencies do not have any intrinsic value. Five years ago, 1 bitcoin was worth around $1,000. Now, it is approaching the $37,000 level, an increase of 3,600%. However, it has been a roller coaster ride with many accidents over the years. Demand, supply, competition and regulation are some of the factors that determine the value of cryptocurrencies.
If there is no central authority, how is money controlled?
Bitcoin is designed to cap out at 21 million and the generation rate is also predetermined: the last Bitcoin is scheduled to be mined in the year 2140. Other cryptocurrencies have their own supply rate. The limited nature of Bitcoin has led to it being called an inflation hedge.
Why are regulators wary of crypto?
Crypto threatens state control of monetary policy. Regulators feel private currency will undermine public "confidence" in money and lead to financial instability. In India, the Reserve Bank of India (RBI) has called for a complete ban on cryptocurrencies as partial restrictions will not be effective. Some countries are developing legal frameworks to treat cryptocurrencies as an asset rather than a payment method.
How do payments work and where can one spend crypto?
Crypto payments are enabled by a decentralized computing network, where those who verify the transaction are rewarded with crypto tokens. However, the avenues to spend cryptocurrencies are limited. El Salvador is the only country that has a legal personality in it. Last year, Tesla announced that it would accept payments in certain cryptocurrencies. The first Bitcoin payment was made to buy a pizza in 2010. A $40 bill was paid for with 10,000 Bitcoins, which would be worth $370 million today.
Why do people buy crypto?
Most people buy cryptocurrencies as an asset and not as a payment. They speculate that it will rise as the value of paper money deteriorates due to oversupply. Investors see it as a high-risk, high-reward opportunity.
How are secure/private payments?
Traditionally, a trusted third party facilitated transactions between two people. To eliminate third-party risks, cryptocurrencies use a less reliable computer network. The identities of the two parties have not been revealed, but their transaction is publicly recorded and verified.\
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