Recently, one thing which has been in the news and everyone is discussing is cryptocurrency. Well, many of us don’t know what exactly it is, but because of some tweets and steep curves on the graph, we all know a term called Bitcoin.
It is not only a securities trader or investor who wants to know more about this, rather a student, small businessman, and every other person wants to know and earn from it. But looking at the prices and fluctuations most people are not even thinking of investing in it. So, what is it? Is it gambling? legal? Is it even true that it has increased so much? Let’s try to find the answers to it.
What is a cryptocurrency and how is it different from the traditional currency?
Starting with the basics, it is a digital form of currency that can exchange with some goods and services of the companies who are accepting this as a payment method. The concept is somewhat similar to digital cash which everyone uses through one or the other wallets like Paytm, MobiKwik, gpay, etc.
But the difference between digital cash and crypto is, it is not regulated. The paper currency or the money in your wallet is regulated by the government. The value of different denominations is fixed and accordingly, the goods and services are exchanged. But the price of any cryptocurrency is not regulated by one or a group of authorities. It depends on the market forces and the mining of such currencies.
How and why do people buy these currencies?
Let’s understand the basic idea first. Buying cryptocurrencies can be understood as exchanging one currency against another. Take an example when you go to a foreign country you exchange the currency of your country with that of other countries. The transaction is at a rate of the exchange rate, which decides how much money in exchange you will get.
The same is the case with cryptocurrency, you pay through your bank in your currency and get another currency in return like a bitcoin. But now the point is when I can purchase things in my currency why should I buy cryptocurrency?
Here comes the concept of investing and trading. When you buy one bitcoin, suppose for one lakh INR. Now you can either go to a company that accepts crypto as a payment method and buy goods for one lakh/one bitcoin. Or you can wait for some days or months, say you checked the price after 15 days and it was 1.5 lakh INR. Your money grew by fifty thousand and now you can either exchange it again for 1.5 lakhs or buy goods for 1.5lakh/one bitcoin. But remember it can go reverse also making your one lakh as 50 thousand.
Why are they trending?
If you have heard about the stock market then you already know the reason. As in the stock market, the forces of the market, demand, and supply, news, rumors affect the prices of stocks. Same way cryptocurrencies respond to market forces, news and tweets these days.
But a major difference is, in the long-term stock prices depend on the fundamentals of the company. But cryptocurrency being unregulated and on a decentralized platform. There are very rare chances that there are such fundamentals with it. And that is the only reason why there is so much fluctuation in the prices.
Understand the price fluctuation in cryptocurrency
The fluctuation in exchange rates of different countries can be because of many reasons. But each of them has a fundamental basis like the GDP growth of the country, relations between the two countries, political stability in the country, etc.
But when the price fluctuations have a strong basis, neither fundamental nor technical, it is a speculation. And, such speculation is not visible in all the cryptocurrencies, rather only in one or two. This makes it clear that those coins which are trending these days and are fluctuating so much are more or less part of speculation. And the same is possible with any of the thousands of cryptocurrencies that are present in the market.
What should I do?
We are not giving you any investment advice, rather we are advising you on planning your investments. The fundamental rule before doing any investment is to find your goal and then select your tool. Next is to understand your tool, it can be fundamentally or technically, and when you know how to use it then only move ahead.
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