Bitcoin is the talk of town these days. On one hand, few countries like Japan are exploring bitcoin as legal tender, while on the other, JP Morgan CEO Jamie Dimon calls it a “fraud”. If you find the concept of Bitcoin confusing, you are not alone. The virtual currency is still not well understood. Bitcoin – the initial virtual banking currency of the internet – has existed for several years now and many people have questions about them. Where do they come from? Are they legal? Where can you get them? Here are the basics you need to know.
What is bitcoin?
Bitcoin was the first cryptocoin currency ever invented. No one knows exactly who created it – cryptocurrencies are designed for maximum anonymity – but bitcoins first appeared in 2009 from a developer supposedly named Satoshi Nakamoto.
A Bitcoin is a digital token — with no physical backing — that can be sent electronically from one user to another, anywhere in the world. A Bitcoin can be divided out to eight decimal places, so you can send someone 0.00000001 Bitcoins. This smallest fraction of a Bitcoin — the penny of the Bitcoin world — is referred to as a Satoshi, after the anonymous creator of Bitcoin.
All this gets confusing, because Bitcoin is also the name of the payment network on which the Bitcoin digital tokens are stored and moved. Unlike traditional payment networks like Visa, the Bitcoin network is not run by a single company or person. The system is run by a decentralized network of computers around the world that keep track of all Bitcoin transactions, similar to the way Wikipedia is maintained by a decentralized network of writers and editors. The record of all Bitcoin transactions that these computers are constantly updating is known as the blockchain.
How Bitcoin Works?
Bitcoins are completely virtual coins designed to be ‘self-contained’ for their value, with no need for banks to move and store the money. Once you own bitcoins, they behave like physical gold coins: they possess value and trade just as if they were nuggets of gold in your pocket. You can use your bitcoins to purchase goods and services online, or you can tuck them away and hope that their value increases over the years.
Bitcoins are traded from one personal ‘wallet’ to another. A wallet is a small personal database that you store on your computer drive (i.e cold storage), on your smartphone, on your tablet, or somewhere in the cloud (hot storage).
For all theoretical intents, bitcoins are forgery-resistant. It is so computationally-intensive to create a bitcoin, it isn’t financially worth it for counterfeiters to manipulate the system.
One of the advantages of Bitcoin is that it can be stored offline on a person’s local hardware. That process is called cold storage and it protects the currency from being taken by others. When the currency is stored on the internet somewhere (hot storage), there is high risk of it being stolen. On the flip side, if a person loses access to the hardware that contains the bitcoins, the currency is simply gone forever. It’s estimated that as much as $30 billion in bitcoins have been lost or misplaced by miners and investors. Nonetheless, Bitcoins remain incredibly popular as the most famous cryptocurrency over time.
What is the legal use of Bitcoin? Is it allowed to use Bitcoin in India?
Only a small percentage of all transactions on the Bitcoin network are explicitly illegal. Most transactions are people buying and selling Bitcoins on exchanges, speculating on future prices. A whole world of high-frequency traders has sprung up around Bitcoin.
People in countries with high inflation, like Argentina and Venezuela, have bought Bitcoin with their local currency to avoid losing their savings to inflation. In that sense, Bitcoin is being seen as a competing universal currency to US Dollar.
One of the most popular use cases is to use Bitcoin to move money over international borders. Large international money transfers can take weeks when they go through banks, while millions of dollars of Bitcoin can be moved in minutes. So far, though, these practical applications of Bitcoin have been slow to take off.
Reserve Bank of India also has taken a negative or cautious view of Bitcoin so far. So one must step in with extreme caution here. Anyone investing money into bitcoin, must be fully prepared to lose all their money.
Who decides what a Bitcoin is worth? What is the current price of bitcoin?
The price of Bitcoin fluctuates constantly and is determined by open-market bidding on Bitcoin exchanges, similar to the way that stock and gold prices are determined by bidding on exchanges. Currently, the average price of one Bitcoin is about $16,570. This price is as of 09-December-2017, but will keep changing every second with the passage of time.
What Are some alternatives to Bitcoin?
Because Bitcoin was the first cryptocurrency to exist, all digital currencies created since then are called Altcoins, or alternative coins. Litecoin, Peercoin, Feathercoin, Ethereum, IOTA and hundreds of other coins are all Altcoins because they are not Bitcoin.
IOTA is one alternative to Bitcoin. One may ask – How to buy IOTA in India? You can not directly buy IOTA from India at the moment. You first need to buy Bitcoin from India. You could do that from the sites such as Zebpay, Unocoin or Koinex. Once you have that, then create account on Bitfinex and trade your Bitcoins for IOTA. Here are some cautions before you go for all this. Once you buy IOTA on bitfinex, you cannot exchange it back to btc/eth. You can only withdraw it in USD or to another IOTA wallet. So, when you buy IOTA there, you will need to hold it till any Indian exchange starts giving services on IOTA. Once you have your Indian IOTA wallet, you can transfer and draw INR from it. Pull back is, if IOTA price starts going down, you cannot do anything until you have an India wallet.
Should I buy Bitcoin? Is it safe to be a bitcoin investor?
As of today investing in Bitcoins is pure speculation. Many experts have cautioned it to be similar to a Ponzi scheme. Reserve Bank of India also has taken a negative or cuatious view of Bitcoin so far. So one must step in with extreme caution here. Anyone investing money into bitocin, must be fully prepared to lose all their money. With Bitcoin, none of the tradition valuation models will work, so if you have the risk appetitite then you can try buying. Overall, it is may be suitable for financially sophisticated HNI’s with a great amount of risk appetite. It is advisable for a common man to stay away till be a clear legal and regulatory framework in India emerges for the same.