Understanding Cryptocurrency - From Tech Toy to Financial Force
- Kaushik Barai
- Jun 29
- 11 min read
Updated: Aug 6
Introduction
In just over a decade, cryptocurrency has transformed from a niche experiment among tech enthusiasts into a global financial force. As digital coins like Bitcoin and Ethereum make headlines and spark debates, many ordinary Indians are left wondering: What is cryptocurrency, really? Why was it created? Is it safe to use? And most importantly—can Indians legally invest in it?
This article breaks down the complex world of cryptocurrency into simple, relatable terms. Whether you're curious, cautious, or considering your first investment, this guide will help you understand the basics, the risks, and the current legal status of digital currencies in India.
What Is Cryptocurrency
To understand cryptocurrency, it helps to trace the evolution of money itself. From ancient barter systems to commodity money like salt and metal, societies gradually adopted coins, paper currency, and eventually digital banking. Today, mobile wallets and UPI have made digital payments a part of daily life. Cryptocurrency represents the next leap in this journey—a fully digital, decentralized, and borderless form of money.
Unlike traditional currencies issued by central banks, cryptocurrencies are not controlled by any government. They exist solely online and are powered by blockchain technology—a secure, transparent digital ledger that records every transaction across a global network of computers. Once a transaction is added to the blockchain, it becomes permanent and tamper-proof, building trust without the need for intermediaries.
The first cryptocurrency, Bitcoin, was introduced in 2009 by an anonymous figure known as Satoshi Nakamoto. In 2008, he published the original white paper and in early 2009 launched Bitcoin by mining its first block—embedding a message about banking instability. It demonstrated that money could be transferred directly between individuals without banks.
Though Nakamoto communicated briefly online via forums and emails, he never revealed his identity or appeared publicly. By 2011, he quietly withdrew from all activity, leaving behind a technology that challenged traditional finance.
Since then, thousands of digital currencies have emerged—such as Ethereum, which enables smart contracts; Ripple, designed for fast international payments; and Litecoin, known for its speed and low fees.
Why It Matters
Cryptocurrencies offer several compelling advantages over traditional (fiat) currencies, especially in terms of technology, accessibility, and financial autonomy. Here's a breakdown of the key benefits:
1. Decentralization and Independence
Unlike traditional currencies controlled by central banks, most cryptocurrencies operate
on decentralized networks. This means:
No single authority can manipulate supply or freeze your funds.
Users have full control over their assets.
2. Faster and Cheaper Transactions
Cross-border payments with crypto can settle in minutes, compared to days via banks or SWIFT.
Lower fees, especially for international transfers, since there are no intermediaries.
3. Enhanced Security and Transparency
Transactions are secured by cryptography and recorded on blockchains, which are tamper-proof.
Every transaction is publicly verifiable, reducing fraud and corruption.
4. Financial Inclusion
Anyone with a smartphone and internet can access crypto—no need for a bank account.
This is especially powerful in underbanked or unstable regions.
5. Hedge Against Inflation
Many cryptocurrencies (like Bitcoin) have a fixed supply, making them resistant to inflation caused by excessive money printing.
This appeals to investors in countries with volatile fiat currencies.
6. Programmability and Innovation
Platforms like Ethereum support smart contracts, enabling automated, trustless agreements.
This opens doors to decentralized finance (DeFi), NFTs, and tokenized assets.
7. Global Accessibility and 24/7 Markets
Crypto markets never sleep—you can trade or transfer funds anytime, unlike banks with limited hours.
It’s a borderless system, not tied to any one country or economy.
That said, crypto also comes with risks—volatility, regulatory uncertainty, and security responsibilities. But as a technological leap, it’s reshaping how we think about money, ownership, and trust.
Is Cryptocurrency Legal in India?
For many Indians, one pressing question has been: Is investing in cryptocurrency legal in India? Especially before 2020, the regulatory landscape created a great deal of confusion. The answer lies in understanding the chronology of key legal developments and clarifying some common misconceptions.
In 2018, the Reserve Bank of India (RBI) issued a circular directing banks and financial institutions not to provide services to cryptocurrency exchanges or related businesses. This effectively made it difficult for Indian crypto investors to use banking channels, although holding or investing in crypto assets was not officially illegal. As a result, many users continued to trade through peer-to-peer networks or foreign exchanges.
In March 2020, the Supreme Court of India struck down the RBI's banking ban, calling it unconstitutional. This landmark judgment revived India’s crypto sector and paved the way for mainstream adoption. Since then, cryptocurrency investment has been legally permitted in India, although the sector remains largely unregulated.
Currently, Indian law allows individuals to invest and trade in cryptocurrencies, but with strict compliance. The government has introduced a 30% tax on crypto gains and a 1% TDS on transactions, treating digital assets like a speculative investment class. However, there is still no dedicated regulatory authority or comprehensive crypto law in place.
It is also important to note that while investing in crypto is legal, cryptocurrencies cannot be used as a legal mode of payment in India. That means you cannot use Bitcoin, Ethereum, or any other crypto to pay for goods or services, as you would with Indian Rupees (INR) or US Dollars (USD). The Reserve Bank of India does not recognize crypto as legal tender, and any such usage is not permitted under current financial regulations. but as seen above, Indian law allows individuals to invest and trade in cryptocurrencies.
In essence, crypto investment in India has never been explicitly illegal—but it operated in a regulatory grey zone until 2020. Today, while legal and taxable, crypto remains restricted in use, and the need for a clear regulatory framework is essential for investor protection and long-term stability.
Can you buy a Crypto with an Indian Bank Account
Indian citizens can legally purchase cryptocurrency using Indian Rupees through registered crypto exchanges. These platforms allow users to link their bank accounts and buy digital assets, provided they complete Know Your Customer (KYC) verification.
However, crypto transactions are closely monitored. Some banks may flag or delay transfers if they detect unusual activity. To avoid disruptions, it’s best to use exchanges that are registered with the Financial Intelligence Unit–India (FIU-IND) and follow all regulatory norms.
Understanding FIU-IND and Its Role
The Financial Intelligence Unit–India (FIU-IND), under the Ministry of Finance, is the central agency responsible for monitoring financial transactions to prevent money laundering and terrorism financing. Since March 2023, crypto exchanges and wallet providers have been brought under the Prevention of Money Laundering Act (PMLA).
This means all crypto platforms operating in India must register with FIU-IND, implement KYC procedures, and report suspicious transactions. Over two dozen exchanges—including CoinDCX, WazirX, and CoinSwitch—are now compliant. Some global platforms like Binance and KuCoin joined later after facing regulatory action.
While FIU-IND ensures compliance, India still lacks a dedicated crypto regulator. Discussions are ongoing to involve bodies like SEBI and the RBI in shaping a broader regulatory framework.
Crypto Taxation in India: What You Need to Know
India’s crypto tax regime is among the most stringent globally. Under Section 115BBH of the Income Tax Act, profits from the sale or transfer of cryptocurrencies—classified as Virtual Digital Assets (VDAs)—are taxed at a flat rate of 30%, regardless of holding period or income level.
Additionally, a 1% Tax Deducted at Source (TDS) is applied to transactions exceeding ₹50,000 annually (or ₹10,000 in some cases), as per Section 194S. This TDS is deducted at the time of the transaction—even if the investor incurs a loss.
Importantly, no deductions are allowed except for the original purchase cost. Expenses like transaction fees or platform charges cannot be claimed. Also, losses from crypto trading cannot be offset against other income or carried forward to future years.
Crypto received through airdrops, mining, staking, or as gifts is also taxable, either as business income or income from other sources, depending on the context.
How a Typical Crypto Transaction Works in India
1. Opening a Crypto Exchange Account
To begin investing in cryptocurrency, users must first open an account with a crypto exchange registered with the Financial Intelligence Unit–India (FIU-IND), such as CoinDCX, WazirX, or CoinSwitch. The onboarding process involves signing up with an email ID and mobile number, completing Know Your Customer (KYC) verification by submitting documents like a PAN card, Aadhaar, and a selfie, and linking a bank account for deposits and withdrawals.
When a user registers on a crypto exchange, two separate wallets are created under their account—one for Indian Rupees (INR) and another for cryptocurrencies like Bitcoin or Ethereum. The INR wallet is used for depositing or withdrawing money in rupees via bank transfers, UPI, or net banking. It acts like a traditional wallet and is the funding source when placing buy orders.
Once the user buys a cryptocurrency, the digital asset is not stored in the INR wallet but moved to a separate crypto wallet within the same exchange account. This wallet securely holds various cryptocurrencies the user owns. While both wallets are visible in the same dashboard, they serve different purposes.
For example, if a user deposits ₹10,000 into their INR wallet and uses ₹5,000 to buy Bitcoin, the INR wallet balance reduces accordingly, and an equivalent amount of Bitcoin is credited to the crypto wallet. Similarly, when selling crypto, the process is reversed: the cryptocurrency is deducted from the crypto wallet, and the INR received from the sale is credited to the INR wallet, from which it can be withdrawn to a bank account.
This wallet separation helps maintain clarity in transactions and fund flow. INR wallets are sometimes labeled “Fiat Wallet” or “Rupee Balance,” while crypto wallets may be referred to as “Spot Wallet,” “Asset Wallet,” or simply “Holdings.” Though distinct in function, they are designed to work seamlessly together within the exchange ecosystem.
2. Funding the Wallet with Indian Rupees
Once verified, users can deposit Indian Rupees (INR) into their exchange wallet using UPI, net banking, or IMPS. The funds typically reflect in the wallet within minutes, although some platforms may charge a nominal deposit fee.
3. Purchasing Cryptocurrency
With funds in place, users can proceed to buy cryptocurrency. They select a digital asset—such as Bitcoin or Ethereum—enter the desired amount in INR or the number of coins, review the current market price and applicable fees, and confirm the transaction. The purchased cryptocurrency is then credited to the user’s exchange wallet almost instantly.
4. Choosing Where to Store Crypto
At this point, users have the option to either hold their crypto within the exchange wallet or transfer it to a private wallet, such as MetaMask or a hardware wallet like Ledger, for enhanced security and personal control.
5. Selling Crypto and Withdrawing Funds
When it’s time to sell, users return to the trading section of the exchange, select the cryptocurrency they wish to sell, and convert it back to INR. The proceeds are credited to their exchange wallet and can be withdrawn to their linked bank account.
6. Meeting Tax Obligations
Tax compliance is a crucial final step. The exchange automatically deducts 1% Tax Deducted at Source (TDS) on applicable transactions. Additionally, investors are responsible for declaring and paying a 30% tax on any profits when filing their income tax returns.
Understanding the Risks of Cryptocurrency Investment
Investing in cryptocurrency can be thrilling, but it comes with a unique set of risks that every investor should understand.
1.High Price Volatility
One of the most significant concerns is price volatility. Digital assets like Bitcoin and Ethereum can fluctuate dramatically in value within hours. These sharp swings make crypto a high-risk, high-reward investment—appealing to some, but unsettling for others.
Here's a year-wise snapshot of Bitcoin's price history over the past 10 years, based on data from 2015 to 2025:
*2025 data is current as of June and may change by year-end.
This table shows just how volatile—and at times explosive—Bitcoin’s growth has been. Sources: 99Bitcoins Historical Chart, Investing.com Bitcoin Data
2.Security Risks in the Crypto Ecosystem
Unlike traditional banks, cryptocurrency exchanges are not backed by government insurance. If an exchange is hacked or collapses—as seen in the FTX crisis of 2022—investors may lose their entire holdings. Even storing crypto in personal wallets demands technical know-how and secure handling of private keys. Losing access to your wallet could mean losing your funds permanently.
3.Regulatory Uncertainty and Policy Shifts
Globally, crypto regulations are still evolving. In India, while digital assets are not banned, they are heavily taxed and closely monitored. Sudden policy changes—such as stricter compliance rules or potential bans—can trigger market volatility and reduce investor confidence.
4.Fraudulent Schemes and Investor Scams
The crypto space has seen a surge in scams, from fake tokens and Ponzi schemes to phishing attacks and “rug pulls.” Many investors have been lured by promises of unrealistic returns. Vigilance is key—if an offer sounds too good to be true, it likely is.
5.Limited Investor Safeguards
Traditional financial systems offer protections like dispute resolution and fraud recovery. In contrast, the crypto world operates with minimal oversight. If something goes wrong, investors often have no formal recourse. This makes it essential to conduct thorough research and use only trusted platforms.
6.No dedicated regulatory body for cryptocurrency in India
Without a dedicated regulatory body in India, cryptocurrency investments remain exposed to risks like fraud, cyberattacks, and abrupt legal changes. To reduce these risks, experts advise using exchanges registered with the Financial Intelligence Unit–India (FIU-IND), which follow strict Know Your Customer (KYC) and anti-money laundering protocols. Staying informed and choosing compliant platforms can make a significant difference in safeguarding your investments.
Should You Invest in Cryptocurrency?
Cryptocurrency has revolutionized how we think about money—offering global access, decentralization, and technological innovation. Yet, it remains a high-risk space, especially in countries like India where regulations are still evolving.
For those considering crypto investments, education and caution are key. Start small, understand the tax implications, and use only trusted platforms. Whether crypto becomes a mainstream financial tool or remains a niche asset, one thing is clear: digital money is already shaping the future, and understanding it is no longer optional.
India’s Cryptocurrency Journey: From Boom to Balance
India’s relationship with cryptocurrency has been nothing short of a rollercoaster. In 2020, the Supreme Court delivered a landmark judgment by lifting the Reserve Bank of India’s ban that had prohibited banks from facilitating crypto transactions. This ruling sparked a surge in adoption, propelling India to the top of the global crypto adoption index by 2021, with an estimated 115 million users.
However, the momentum slowed in 2022 when the government introduced a 30% tax on crypto profits and a 1% TDS on transactions. These measures significantly dampened trading activity. By 2023, the number of active investors had dropped to around 19 million—still a substantial figure, but a sharp decline from the previous high. Interestingly, the majority of these investors were under the age of 35, with growing participation from smaller cities such as Nagpur, Lucknow, and Jaipur, reflecting a shift beyond metro hubs.
Despite the slowdown, the Indian crypto market remains resilient. In the final quarter of 2024, top Indian exchanges processed trades worth approximately USD 1.9 billion—more than double the volume of the previous quarter. Yet, it’s estimated that over 90% of Indian crypto trading now occurs on foreign platforms, largely due to the heavy domestic tax burden.
India continues to rank among the countries with the highest number of crypto investors. According to industry estimates and reports from global firms like Chainalysis and Statista, between 15 to 20 million Indians have invested in cryptocurrencies, with total holdings possibly exceeding ₹50,000 crore. While interest peaked during the 2020–2021 boom, it has since stabilized, and India remains a key player in the Asian crypto landscape.
The broader trend is clear: cryptocurrency adoption in India is being driven by a young, tech-savvy population, including a rising wave of small-town investors who see digital assets as both a financial opportunity and a symbol of digital empowerment.
In Conclusion
Cryptocurrency has ushered in a new era of possibilities—enabling faster global payments, expanding financial access, and introducing innovative investment opportunities. Yet, it also presents complex challenges that governments, investors, and technologists around the world are still working to understand and address.
India, in particular, is treading a careful but forward-looking path. By embracing innovation while introducing regulatory safeguards, the country is striving to strike a balance between opportunity and oversight. Whether digital currencies become a mainstream part of our financial system or remain a specialized asset class, one thing is certain: cryptocurrency has already reshaped the way we think about money, value, and the future of finance.
Comments