The simplest way to define cryptocurrencies is just limited entries in a database no one can change without fulfilling specific conditions. The way a Bank account holder does transactions in his ledger account in digital format that gets validated either through matching signature or a code; similarly cryptocurrency is a verified entry in some kind of database of accounts, balances and transactions.
Mining of coins and confirming Transactions
Let us comprehend mechanism of cryptocurrency database, which consists of network of peers. Every peer holds record of all transactions and, thereby, having balance of every account. Cryptocurrency is a medium of exchange, created and stored electronically in the block-chain, by making use of encryption techniques to control the creation of monetary units and to validate transfer of funds. It doesn't have intrinsic value, not in physical form and its supply is not determined by centralized database. Unless a transaction is confirmed, it could be altered and/or forged. Only miners are allowed to confirm transactions. They stamp them as legal and disseminate it in the network. Post confirmation, every node has to add it to its database then it becomes part of the block-chain. For this activity, miners are rewarded with cryptocurrency monetary units.
Miners need to investigate - a product of cryptographic function - that would connect new block with its predecessors. This is also called Proof-of-work.
Legal Aspects and Safety
Since cryptocurrency is a private currency, major countries have not legalized it. The trading happens on the exchanges meant for trading of cryptocurrency and some large e-commerce platforms and private players accept virtual currencies as mode of payment. But the way the price volatility prevails, it appears to be concentrated in a few hands where price is not linked to the demand-supply mechanism i.e. market forces. The data base stored in electronic format is not safe and many cases have come to light where cryptocurrency has been stolen, there by making it vulnerable. The Central Bank in India has banned sale and purchase of cryptocurrency through channels controlled by it. The Income Tax department has carried out raids on the Cryptocurrency exchanges operating in India and gainers have been asked to pay tax on the profits made out of the trades carried out.
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