Explained: Everything you need to know about cryptocurrencies

<p><span style=" font-family:="" font-size:="" http-equiv="refresh" letter-spacing:="" montserrat="" montserratv2="" sans-serif="" verdana="" white="">NEW DELHI: Cryptocurrencies are once again in the news as the government is reportedly looking at fine-tuning the definition of income and gains for crypto assets in the upcoming budget. The Centre has sought opinion from senior tax advisors on whether the income earned from investing in cryptocurrencies could be treated as business income as against capital gains from this year onwards. But before we get into the taxation and legality of cryptocurrencies, let's first understand this digital asset and how it really works.
What are cryptocurrencies?
A cryptocurrency is a form of digital currency. "It is a collection of binary data which is designed to be anonymous and secure. Cryptocurrency works on the model of Cryptography wherein data is converted into codes," explains Gaurav Dahake, CEO & Founder, Bitbns, a leading cryptocurrency exchange in India.
The virtual currency is designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of currency. These are decentralised in nature, which means that no single entity owns or controls them. Moreover it does not rely on central banks, and is a collection of data, overall designed to work as a medium of exchange, using its underlying technology, the blockchain.
"It is a peer-to-peer system that allows anyone to make and receive payments from anywhere. Cryptocurrency payments exist solely as digital entries to an online database identifying specific transactions, rather than as tangible money carried around and exchanged in the real world. The transactions that you make with cryptocurrency funds are recorded in a public ledger. Digital wallets are used to store cryptocurrency," said Kshitij Purohit, Lead Currency & Commodities at CapitalVia Global Research.
How big is the crypto market?
By 2025, the global cryptocurrency market is expected to be worth $2.73 billion. According to an HDFC report, there are currently over 8,500 cryptocurrencies in the world and increasing with market capitalisation of over $2 trillion. "This is equal to 18% of total gold holding globally."
"The reason for the explosion of cryptocurrency is because it has a fairly low barrier to entry -- when something is free and decentralized, it's easy to replicate and copy," says Vinay K Mayer, Marketing Research & Consulting @ Asia Research Partners LLP.
An interesting fact: The first commercial bitcoin transaction was to buy 2 pizza for 10,000 bitcoin in 2010. Today the same is worth $400 million!
There are two types of crypto assets – coins and tokens. Coins have their own blockchain network while tokens are part of projects built on top of existing blockchains.

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