What is Cryptocurrency? A Beginner's Guide for Indian Investors

India now has over 20 million active crypto investors. This is higher than the number of active stock market participants just a few years ago. Yet, most of these investors begin with a basic question: what exactly is cryptocurrency, and why does it exist?

The core idea: money without a bank

Cryptocurrency is digital money secured by cryptography and recorded on a distributed ledger called a blockchain. Money held in banks is managed within the formal financial system.

Cryptocurrency works differently. It enables value transfer without a central intermediary.

Bitcoin, created in 2009 by an anonymous developer or group known as Satoshi Nakamoto, was the first cryptocurrency. Its white paper described it as a “peer-to-peer electronic cash system”. The objective was to enable direct transfer of value between individuals without relying on a financial institution. That core idea remains intact, even as thousands of other crypto assets have emerged with varied use cases.

Key takeaway: Cryptocurrency is not a company, a product, or an investment fund. It is a technology that enables a new method of recording and transferring value.

How it actually works

When money is sent through UPI, accounts are debited and credited within the banking system, and records are updated centrally.

Cryptocurrency replaces this with a distributed system. Every transaction is broadcast to a network of computers, known as nodes. These nodes verify the transaction independently and update a shared ledger. No single entity controls this ledger. It is maintained collectively.

Transactions are secured through public-key cryptography. A user has a public address, which can be shared, and a private key, which must remain confidential. Only the private key holder can authorise transactions. Loss of the private key results in loss of access to the asset.

Transactions are grouped into blocks and added sequentially to the blockchain after validation. This creates a permanent and transparent record.

Key features that make crypto different

• Permissionless: Anyone with internet access can participate. No bank account or credit history is required.
• Borderless: Transfers can be executed globally within minutes, often at lower cost compared to traditional systems.
• Transparent but pseudonymous: Transactions are visible on the blockchain, but identities are not always directly linked to addresses.
• Predictable supply: Bitcoin has a fixed supply of 21 million coins. Ethereum follows a different model with supply adjustments over time.

Types of cryptocurrency

Cryptocurrencies serve different purposes.

• Store-of-value assets: Bitcoin is the primary example, often compared to gold.
• Smart contract platforms: Ethereum, Solana, NEAR, and Cardano support decentralised applications.
• Stablecoins: USDT, USDC, and DAI are pegged to fiat currencies, typically the US dollar.
• Utility tokens: These provide access to specific platforms or services.
• Meme coins: Assets such as Dogecoin and Shiba Inu are largely sentiment-driven and highly volatile.

How cryptocurrency is used

The use cases have expanded beyond early adoption.

Investment and trading: The most common use case in India. This also carries significant risk.
Remittances: Cross-border transfers can be faster and more cost-efficient.
Decentralised finance (DeFi): Lending, borrowing, and trading through smart contracts.
Digital ownership: NFTs enable ownership and monetisation of digital assets.
Business payments: Some firms use stablecoins for cross-border transactions.

Risks and limitations

Cryptocurrency offers utility, but the risks are significant.

• Volatility: Bitcoin has seen declines of over 80% from previous peaks. Altcoins can fall 90–99%.
• No recourse: Transactions are irreversible. Errors or losses cannot be easily reversed.
• Fraud risks: Phishing, scams, and misleading schemes are prevalent.
• Regulatory uncertainty: Taxation is defined, but the broader regulatory framework continues to evolve.

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Cryptocurrency in India — what you need to know

Crypto assets are permitted to be traded in India. The Supreme Court set aside the 2018 banking restriction in March 2020, allowing the ecosystem to operate.

Profits from crypto transactions are taxed at 30% under Section 115BBH. With cess, the effective rate is 31.2%. Losses cannot be offset against other income.

A 1% TDS applies under Section 194S on transactions above specified thresholds. This is adjustable against final tax liability.

Giottus is registered with FIU-IND and follows applicable AML and KYC requirements. Transaction records are available for tax reporting.

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.