“Bitcoin is not a currency for the government. It is a global currency for the people!”
Bitcoin currency has been a media sensation since quite a while now. What makes these Bitcoins, which is essentially a ‘cryptocurrency’, so unique is that they take the power of making money away from central federal banks, and give it to the general public. Bitcoin accounts cannot be frozen or examined by tax men, and middleman banks are completely unnecessary for bitcoins to move. Law enforcement and bankers see bitcoins as ‘gold nuggets in the wild wild west’, beyond the control of traditional police and financial institutions. Let’s understand how it all works.
What exactly are cryptocurrencies and Bitcoins?
Simply put, cryptocurrency is a form of digital money that is designed to be secure and, in most cases, anonymous. It is a currency associated with the internet that uses cryptography, the process of converting legible information into an almost uncrackable code, to track purchases and transfers. Cryptography was born out of the need for secure communication in the Second World War. It has evolved in the digital era with advancements in mathematical theory and computer science to become a way to secure communications, information and money online.
The first cryptocurrency was bitcoin, which was created in 2009 and is still the best known. Satoshi Nakamoto, a secretive internet user, invented bitcoin in 2008 before it went online in 2009.
How do they work?
Cryptocurrencies use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematics problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
How is the price derived? And why does it fluctuate daily?
If something is both rare (scarce) and useful (utility), it must have value and demand a specific price – this is the basis for the price of a Bitcoin. Bitcoin is scarce: its supply is limited. There are currently about 16.2 million Bitcoins in circulation and the maximum that will ever exist is capped at 21 million. This set cap is well known, making its scarcity transparent. And, it is also useful. Not only does it currently have value as a payment system for transferring funds, but also as an asset class for investments. Today, there are already lakhs of merchants around the world accepting Bitcoin as a means of payment, thus proving the growing usefulness of it.
The price of each Bitcoin is essentially determined by the market in which it trades: by means of supply and demand. This is the same way the price of your secondhand car, a bag of apples in the supermarket, an ounce of gold and just about everything else is determined. Put simply, it is the ongoing interaction between buyers and sellers trading with each other that determines the specific price of Bitcoin. However, when determining price, one must also consider the amount that buyers are currently willing to pay for the future value of a specific item. In other words, if the market believes the price of something –like property, a certain stock or Bitcoin– will increase in the future, they are more likely to pay more for it now. Because these factors change daily, the price of a Bitcoin fluctuates daily.
Why are Bitcoins so popular?
Cryptocurrencies are known for being secure and providing a level of anonymity. Transactions in them cannot be faked or reversed and can be executed for a very low fee, making it more reliable than conventional currency. Their decentralized nature means they are available to everyone, where banks can be exclusive in who they will let open accounts. People see value in money which is totally free from government control and banks. Bitcoin has been seen as a tool for private, anonymous transactions. However, on the other hand, it has also become the payment of choice for drug deals and other illegal purchases due to its anonymity.
Is it worth investing in Bitcoins? And, how can you buy it?
The most common form of “investing” in Bitcoin is buying the currency in hopes that it will appreciate in value (also knowns as “hodling”). If this is the case then you need to decide for yourself if you think this is a good time to buy. Meaning, do you think the price will continue to rise? However, before taking any decision, keep these aspects in mind:
- Never invest more than you are willing / able to lose – Bitcoin is a very risky investment and you should keep in that in mind at all times. Cryptocurrency markets are unregulated and subject to marked manipulation, and hence, carry heavy risks
- After buying Bitcoins, make sure to move them into your own personal wallet and never leave them at the exchange.
- Make sure to buy Bitcoins only from exchanges that have proven their reputation.
- Buy Bitcoins through Dollar cost averaging – this means that you don’t buy all of your Bitcoins in one trade but instead buy a fixed amount every month, week or even day throughout the year. This way you average the price over the course of a whole year.
So, if you decide to invest go in with your eyes open that you could lose everything and make your own assessment and educate yourself about the market and the technology.
Several marketplaces called “Bitcoin exchanges” allow people to buy or sell bitcoins using different currencies. Zebpay and Koinex are a few platforms for trading in Bitcoins in India.
Are there other currencies like Bitcoins?
There has been a proliferation of cryptocurrencies in the past decade and there are now more than 900 available on the internet.
Another popular cryptocurrency is Ethereum. Developed in 2015, Ethereum is the currency token used in the Ethereum blockchain, the second most popular and valuable cryptocurrency, and had a market capitalization of around USD 18 billion as of July 2017. However, it has had a turbulent journey. After a major hack in 2016 it split into two currencies, while its value has in recent months reached as high as USD 400 but crashed briefly to as low as 10 cents.
Ripple is another distributed ledger system that was founded in 2012. Ripple can be used to track more kinds of transactions, not just of the cryptocurrency. It has been used by banks including Santander and UBS and has a market capitalization of around USD 6.3 billion.
Litecoin, another cryptocurrency, is most similar in form to Bitcoin, but has moved more quickly to develop new innovations, including faster payments and processes to allow many more transactions. The total value of all Litecoin is around USD 2.1 billion.
Are these cryptocurrencies legal in India?
As of today, laws are not in place to ‘regulate’ cryptocurrencies in India. They are unregulated, not illegal. However, the government finally thinking over Bitcoins and other cryptocurrencies as these digital currencies are gaining popularity in the financial market and becoming a hyper-growth investment. According to a recent report, IT ministry officials, Finance ministry officials, Reserve Bank officials, and NITI Aayog officials committee will regulate the virtual currencies in India soon.
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