A cryptocurrency is a form of digital money that exists on a blockchain, a distributed ledger maintained by thousands of computers worldwide. Unlike rupees or dollars issued by a central bank, most cryptocurrencies are not controlled by any single institution. Ownership is proved by cryptographic keys rather than by an account at a bank.
How cryptocurrency works
Every transaction is broadcast to a peer-to-peer network, validated by nodes following agreed-upon rules, called a consensus mechanism, and recorded in a permanent block on the chain. Once confirmed, the transaction cannot be reversed. This removes the need for an intermediary to verify whether the sender actually holds the funds.
The two most common consensus mechanisms are proof of work, used by Bitcoin, where miners solve computational puzzles, and proof of stake, used by Ethereum, where validators lock up coins as collateral.
Common types
| Type | Example | Purpose |
|---|---|---|
| Payment coin | Bitcoin | Store of value, peer-to-peer payments |
| Platform coin | Ethereum | Powers smart contracts and dApps |
| Stablecoin | USDT, USDC | Pegged to a fiat currency for price stability |
| Altcoin | Solana, Cardano | Alternative networks with different designs |
Cryptocurrency and Indian law
India does not ban owning or trading cryptocurrency. The Supreme Court struck down the RBI's 2018 banking ban in March 2020. However, there is no dedicated regulatory framework yet. The government classifies crypto as Virtual Digital Assets (VDA) under the Income Tax Act.
Taxation in India
From 1 April 2022, all gains on VDAs are taxed at a flat 30% under Section 115BBH, with no deduction except the cost of acquisition. Losses from one VDA cannot be set off against gains from another VDA or any other income. A 1% TDS under Section 194S applies on every transfer above the threshold. Indian exchanges deduct this automatically.
Risks to consider
- Volatility: prices can swing 20-30% in a single week.
- Regulatory uncertainty: future laws could restrict certain activities.
- Irreversibility: sending coins to a wrong address usually means permanent loss.
- Scams: unregulated tokens and fraudulent schemes are common; stick to well-known assets on registered exchanges.