To understand what cryptocurrency is, we need to first understand what is money? What exactly is money? What lies at the heart of this very profound concept that governs our world? In its basic form, money is a promise : a promise made to its bearer that he /she will get to exchange it to acquire whatever they require at the moment. This promise is what maintains stability in countries across the globe. The inability of the governments to keep that promise intact  is what causes economic collapse like the economic crisis of Greece in 2007-2008.

Cryptocurrency is a digital currency in which transactions are verified and records are maintained by a decentralised system using cryptography, rather than by a centralised authority like a bank. Cryptocurrencies work under peer to peer networks, which means that they enable secure online payments without the use of third-party intermediaries. 

Cryptography functions through the process of encryption of tokens, which are converted into ciphertext (non-readable forms of encrypted data). Each cryptocurrency has its own encryption system and blockchain. Each token (unit of currency) has a special code encrypted on it, which means that cryptocurrency cannot be counterfeited like paper notes can.  Due to the secure nature of this encryption procedure, cryptocurrency creates a new paradigm to the world of investment and money security, where large amounts of transactions can happen securely with less chances of fraud. 

Since the abolishment of the gold standard  in 1971, most currencies worldwide are considered fiat, which is that a central body recognizes currency as legal tender. Most cryptocurrencies are not recognized as legal tender around the world (except for el salvador and central african union). This means that the value of cryptocurrency depends on the perception of the masses, akin to other commodities like precious metals or collectible goods. 

Advantages of Cryptocurrency 

• Unlike other forms of currency, Cryptocurrency and its flow is not controlled by a centralised body. So, cryptocurrencies eliminate the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one that was triggered in 2008 by the failure of institutions in the United States. However, in 2022, the crypto market saw a similar crash. Crypto traders work entirely in USD, which makes the fact that Cryptocurrency is not controlled by a centralised body obsolete. Crypto trading still requires you to base the value of the crypto on some form of existing currency based around a centralised body. 
• Cryptocurrencies  make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company.
• Cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers because they do not use a third party intermediary . 

Disadvantages of Cryptocurrency

• Though they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. They do leave a digital footprint that can be deciphered.
• Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. 
• In theory, cryptocurrencies are meant to be decentralised, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. For example, an MIT study found that just 11,000 investors held roughly 45% of Bitcoin’s surging value.
• Though cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of “coins” stolen.
• Cryptocurrencies traded in public markets suffer from price volatility. Bitcoin has experienced rapid surges and crashes in its value, climbing to as high as $17,738 in December 2017 before dropping to $7,575 in the following months. Bitcoin itself has seen values drop 30% in a day. 

A blockchain is a ledger that records data, documents, and transactions. “Blockchain” is a combination of the words “block” and “chain.” Data recorded on the ledger is stored on the blocks, and blocks are chained together in a cryptographic sequence.

Block

Blocks are data structures within the blockchain database, where transaction data in a cryptocurrency blockchain are permanently recorded. A block records some or all of the most recent transactions not yet validated by the network.

 Once the data is validated, the block is closed. Then, a new block is created for new transactions to be entered into and validated.

A block is thus a permanent store of records that, once written, cannot be altered or removed.

Features of Blockchain

Shared Ledger

There is only one version of blockchain ledger which is shared with all participants so that everyone has the access to the same bundle of information at all times. 

Transparency

The data stored in blockchain provides transparency to all participants in the network. The nodes of the blockchain can easily access the data in the network, effectively removing any loopholes that may lead to fraudulent activities.

Accountability

Since all the data remains transparent across the network, each participant is accountable for any activity undertaken. 

Cryptography

Data is bundled into blocks and secured through cryptography. Cryptographic protocols prevent hackers from tampering with the data and each piece of data can be traced back to its origin.

Immutability

The blockchain stores data in such a way that the data cannot be modified or deleted at any time.

Real Time

Each and every data on blockchain is updated in real time.

Time Stamp

Each piece of information is time stamped when it was added to the ledger.

Advantages of a Blockchain

• High security and less fraud
• Low-cost transaction
• Faster processing time
• Free of friction
• Assets are controlled by the owner
• Verification is independent
• More transaction trust
• It is completely transparent, so it is safer.
• Disadvantages of a Blockchain

Disadvantages of a Blockchain

• Significant technology cost is associated with mining bitcoin.
• Low transactions per second
• History of use in illicit activities, such as on the dark web
• Regulation varies by jurisdiction and remains uncertain
• Data storage limitations
• It is really energy intensive.

Initially, a participant of a blockchain network performs a transaction, which can be a transaction of money, uploading a document, or transaction of data. Because blockchain does not have a centralised entity, the transaction lands in a decentralised peer-to-peer network in order to get verified. Immediately, other members of the blockchain network start verifying the authenticity of the data or transaction.

Initially, a participant of a blockchain network performs a transaction, which can be a transaction of money, uploading a document, or transaction of data. Because blockchain does not have a centralised entity, the transaction lands in a decentralised peer-to-peer network in order to get verified. Immediately, other members of the blockchain network start verifying the authenticity of the data or transaction.

If a majority of the network agrees that the transaction is legitimate, then the transaction is verified. Subsequently, the approved transaction is bundled with other transactions made within a specific duration and recorded in a block. The newly formed block is then connected to the previous block through a cryptographic-hashing protocol.Blocks are connected in a sequential manner such that any modification of data in any one block results in the incorrect sequencing of all of the blocks succeeding it as well. Similarly, cryptographic sequencing makes it impossible for a bad actor to tamper with data on the blockchain network. 

Each block is time-stamped with the time that it is added to the blockchain network. Once the data is updated on the ledger, all of the members in the network are updated in real-time as well. It cannot be reversed or modified. Likewise, a new transaction may be entered, but the previous transaction remains immutable.

Why Does Blockchain Matter?

Currently, some multibillion-dollar firms exploring blockchain applications include major banking institutions like JPMorgan Chase; automobile makers like BMW; technology players like Facebook, Amazon, and Microsoft; retail corporations like Starbucks and Nestle; and fintech firms like Visa and PayPal. Even governments across the globe are leveraging blockchain technology tools for applications in the public sector.

Per a Markets and Markets Report, the global blockchain market is expected to grow at a compound annual growth rate (CAGR) of 67% between 2020 and 2025.Similarly, Research Institute Gartner estimates that blockchain technology will generate $3.1 trillion in new business value by 2030.

Blockchain technologies could boost the global economy US$1.76 trillion by 2030 through raising levels of tracking, tracing and trust.

Crypto Mining

Crypto mining is the process of creating individual blocks added to the block chain by solving complex mathematical problems. The purpose of mining is to verify crypto currency transactions and show proof of work, adding this information to a block on the block chain, which acts as a ledger for mining transactions. 

Most people think of crypto mining simply as a way of creating new coins. Crypto mining, however, also involves evaluating crypto currency transactions on a block chain network and adding them to a distributed ledger.  Most importantly, crypto mining prevents the double spending of digital currency on a distributed network.

Some Consensus Algorithms

• Proof of work (PoW)
• Proof of stake (PoS)
• Byzantine fault tolerance (BTF)
• Delegated Byzantine fault tolerance (DBGT)
• Ripple protocol consensus algorithm (RPCA)
• Proof of importance (PoI)
• Delegated proof of stake (DPoS)
• Proof of activity (PoA)

Proof of Work (PoW)

Proof of work is a consensus mechanism used to confirm that network participants, called miners, calculate valid alphanumeric codes called hashes to verify crypto transactions and add the next block to the blockchain. It does so by having other participants in the network verify that the required amount of computing power was used by the miner that is credited

Pros of Proof of Work (PoW)

• Proof of work enables crypto transactions to be confirmed and recorded without a central authority.
• It disincentivizes attacks on a crypto’s blockchain by making verifying transactions expensive.
• It is more secure than other mechanisms like proof of stake.
• It is relatively easy to implement.

Cons of Proof of Work (PoW)

• It consumes a considerable amount of energy.
• If you want to mine cryptocurrencies, then you need specialised equipment which is a heavy investment.
• Due to increasing computation needed, mining pools could potentially dominate the mining game, leading to centralization and security risks.

Proof of Stake (PoS)

Proof of stake is a type of consensus mechanism used to validate cryptocurrency transactions. With this system, owners of the cryptocurrency can stake their coins, which gives them the right to check new blocks of transactions and add them to the blockchain. Since proof of stake is much more energy-efficient, it has gotten more popular as attention has turned to how crypto mining affects the planet. 

The proof-of-stake model allows owners of a cryptocurrency to stake coins and create their own validator nodes. Staking is when you pledge your coins to be used for verifying transactions. Your coins are locked up while you stake them, but you can unstake them if you want to trade them.

When a block of transactions is ready to be processed, the cryptocurrency’s proof-of-stake protocol will choose a validator node to review the block. The validator checks if the transactions in the block are accurate. If so, they add the block to the blockchain and receive crypto rewards for their contribution. However, if a validator proposes adding a block with inaccurate information, they lose some of their staked holdings as a penalty.

Some major cryptocurrencies that use proof of stake protocol are Cardano, Tezos,etc.

Pros of Proof of Stake (PoS)

• It is energy efficient.
• It provides fast and inexpensive transaction processing.
• It doesn’t require special equipment to participate in crypto mining.
• It reduces the amount of computational work needed to verify blocks and transactions.

Cons of Proof of Stake (PoS)

• Validators with a large stake can have excessive influence on transaction verifications.
• It lacks in terms of security in comparison to Proof of work protocol.
• Few of the Proof of Stake cryptocurrencies require locking up staked coins for a certain period of time.

Cryptocurrency as a financial tool

Cryptocurrencies are a new form of digital asset that operate through blockchain technology and whose purpose is to be used as a means of exchange. Some, such as bitcoin, have become globally recognized in recent years, but the uncertainty surrounding cryptocurrencies raises questions about their intended use. 

Cryptocurrencies are not financial instruments under U.S. GAAP because they do not represent cash or a contract establishing a right or obligation to deliver or receive cash or another financial instrument.

However, the  growth of cryptocurrency  has translated into an aggregate daily trade volume of cryptocurrency exchanges of more than USD 391 billion.

Another benefit of cryptocurrency is that it has wider appeal to investors who have traditionally had trouble building long-term wealth, including people of colour, women and those with lower incomes. 

Women make up more than 40% of cryptocurrency traders as opposed to 38% of stock traders, the NORC survey found.

The people of colour and those with lower incomes surveyed by NORC were also more likely to invest in cryptocurrency than stocks. People of colour make up 44% of crypto traders compared to 35% that hold stocks.

In addition, the average age of crypto traders was 38, compared to 47 for those holding stocks.

Total market cap of Bitcoin, as of May 2022 is $576 billion.

The Future of Blockchain in Emerging Economies

For Paul Domjan, former global head of research, analytics, and data at investment bank Tellimer (formerly Exotix), emerging nations are the most promising beneficiaries of blockchain tech. He argues that, because “frontier markets in Latin America, Sub-Saharan Africa, and South Asia lag far behind [in the area of ownership recording], with average performance less than half that of the best-performing economies,” they are primed for the benefits of blockchain

Besides numerous applications , supporters of blockchain believe that it could enhance the distribution of government services in developing nations, help to provide identity services, and even help to enhance freedom of speech and anti-corruption activities as well.

In Nigeria, blockchain technology has been used to monitor toxin levels along the River Niger, where efforts are underway to clean up the river belt.

The Haitian government has suggested that blockchain technology could be used to record and register property transactions, voting, intellectual property, and other aspects of bureaucracy.

In India, ConsenSys Ventures, a blockchain software firm, signed an agreement with the Andhra Pradesh state government for an array of uses for its technology, including in land titling, supply chains, and health records.

Status of Cryptocurrency Around The World

In 2018, the Reserve Bank of India (RBI)  prohibited banks from processing transactions relating to cryptocurrency. But in the year 2020, the Supreme Court of India lifted the ban imposed earlier. However, the adoption and use of cryptocurrencies is still a dream in India as their government does not consider cryptocurrencies as legal tender in coins. Hence, the Government of India has listed a bill in the parliament seeking to ban all private cryptocurrencies in India while also laying the groundwork for an official digital currency.

In China, Bitcoin isn’t recognized as legal tender. Therefore all financial institutions and financial processes aren’t allowed to deal with it. 

The Bangladesh Bank considers Bitcoin and other cryptocurrencies illegal under the Foreign Exchange Regulations Act,1947 and the Money Laundering Prevention Act, 2012. 

Cryptocurrencies including bitcoin are not officially regulated in Pakistan. However, it is not illegal or banned. As of 16th January 2021, the State Bank of Pakistan did not authorise individuals or organisations to carry out the sale, purchase, exchange, and investment of virtual currencies, coins, and tokens. 

The Central Bank of Sri Lanka, CBSL has not given the licence of authorization to any entity company to operate schemes involving virtual currencies, including cryptocurrencies, and has not authorised any Initial Coin Offerings (ICOs).

As of December 2021, El Salvador was the only country in the world to allow Bitcoin as legal tender for monetary transactions. In the rest of the world, cryptocurrency regulation varies by jurisdiction.

As per a report by blockchain data platform Chainalysis, Africa’s cryptocurrency market grew by over 1,200 percent in a year between 2020 and 2021. The report stated that though Africa had a small cryptocurrency economy, with $105.6 billion worth of cryptocurrency received between July 2020 and June 2021, it was also “one of the most dynamic and exciting”.

Today, there are 18,142 cryptocurrencies, 460 crypto-exchanges and the market cap of cryptocurrencies amounts to $1.7 trillion. Every 24 hours, $91 billion worth of cryptos are traded, most of them Bitcoin or Ethereum.

Status of Cryptocurrency in Nepal

Through a directive passed on January 27, 2022, Nepal Rastra bank has banned investments in cryptocurrency. Considered as Speculative Assets, Cryptocurrency does not have legal tender status in Nepal. Moreover, Nepal Rastra Bank states that there is an existing presence of Multi-Level Marketing and Pyramid schemes in crypto trading. Multi-level Marketing is the practice of earning commissions on sales based on the number of participants recruited into the cause, which can cause heightened chances of fraud as when all participants buy the product to get recruited, sales happening are not organic sales but the company on record exists in profit. Nepal Rastra Bank also states that any Nepali or Foreigner living in Nepal and Nepalis living abroad found to be trading cryptocurrencies are liable to prosecution. 

How valid are the claims made by Rastra Bank? 

There are a few layers to the claim made by Rastra Bank. Firstly, There are over 10,000 different coins in the crypto market right now. Bitcoin and Ethereum hold 46.29% and 17.79% of Market Dominance each, and Binance, Tether, USD coin, BNB, Cardano, XRP, and Solana all hold under 5% of the market. However, every other coin consists of less than 1% of the Market. Still, as a collective, the crypto market holds a collective market cap of $1.24 Trillion, for which the top 10 coins make up $1.05 Trillion in market cap value. Whilst it might be true that new crypto currencies are rising extremely quickly and it doesn’t take any verification for creating a coin, the claims made by Rastra bank are weak as most people aren’t seeking to invest in alternative coins. 

However, it is true that investing in Cryptocurrency is extremely volatile because the value of these coins are extremely speculative. Value of anything depends on its scarcity in the market. Whilst Bitcoin is scarce (only 21 million will ever be mined, and currently around 18 to 19 million is in circulation), other coins are not. Memecoins, like Dogecoin, have infinite supply. Some coins try to create a sense of value by creating locked exchange environments, like UNISWAP.