Introduction
Can you imagine a thing. the value of which was zero around ten years back and today. It's value has touched almost $68,789! I'm talking about Bitcoin, that has recently touched its all time high price point due to which it is being talked about in the market and the media again So, I thought this would be the right time.and explain to you.
What Bitcoin actually is what's its history?
Merely 12 years ago, on 31st October 2008, a person named Satoshi Nakamoto published a paper on the Internet
Why Bitcoin Started?
Satoshi's main motive was clearly evident from the first line of the paper A version of electronic cash that would allow payments tobe sent directly from one party to another party without going through a financial institution. Cryptocurrency is a digital asset over which central banks or financial institutions have no control or regulation
For instance, the US dollar is controlled by the central bank of US. But there is no central bank or any main financial institution that controls the bitcoins/cryptocurrencies. Back then, cryptocurrency was merely an idea in the mind of that person. But now, there is trading worth lakhs and crores on its crypto exchange just like shares are traded on the normal stock markets
In order to understand the paper of Satoshi and the context of crypto currency, we will have to understand some concepts of our economic history. Our financial systems are based on trust. The currency notes and coins have value in our society because they are guaranteed by the government and the central bank
Take a look at any note in your wallet. For example, a 100 hundred dollar note. I promise to pay the bearer a sum of 200 hundred dollar. This is a promise made by the Governor of the Central Bank, that is, the Reserve Bank. There is his signature right below
This note holds no value without this promise/guarantee. This note will be reduced to an ordinary paper if it does not carry this signature. There is a small, but interesting story in this context
After the second World War, America became the most powerful country in the world and the rest of the countries had to align their currency with the US dollar And what was the US dollar aligned with/guaranteed by?
A reserve of gold. The actual value is that of gold or silver. But it is not practical to carry gold or silver around in your pocket. The currency notes were printed for convenience. But US did away with this gold standard rule back in 1971. After that, the central banks of the rest of the countries could print their notes as per their wishes.
But what do cryptocurrencies and Bitcoin have to do with this? It helps you to guess how powerful the government and the banks- especially, the central banks of the country are as far as monetary policy is concerned The fact of the matter is that when you deposit your money in the banks, you give the banks permission to play with that money, in one sense
Making use of these deposits, the banks give loans to companies and individuals. This is what fetches returns, that is, interest on the money that you have deposited. Very recently, we have seen that these banks use these savings and deposits in a very irresponsible manner. It happens quite often that banks give loans to big industrialists without performing adequate checks and then these loans become bad debts/NPAs. And who becomes the victim in such cases? Depositors like us.
Those in favour of the Bitcoins and cryptocurrencies are so because they do not want the government or the central banks to exercise so much control over their money or currency
Do you now understand the original idea/vision of Satoshi?
Satoshi imagined Bitcoin as an alternate financial system. which would be based on software technology and would be outside the control of third parties. You might be able to recall the Global Economic Meltdown of 2008
Cryptocurrencies were born right after this scenario. Bitcoin was the first to arrive. And then many other crypto currencies surfaced- Ethereum, Litecoin and Ripple. In fact, in the beginning of the year, more than 2000 cryptocurrencies were available on the internet Let us move on to the main point now: How does crypto-technology work?
How Cryptocurrency Works?
If truth be told, in order to understand this, one needs to have knowledge of advanced mathematics and computer science. If you want to start investment or trading, then basic knowledge would suffice
Let us take the example of Bitcoins. There is one public account in digital form, of all the bitcoin transactions, this is called a 'ledger' A copy of this ledger exists on all the systems that are a part of the Bitcoin network. Those that run this system are called 'Miners'. The job of the miners is to verify transactions
Let say, A has to transfer 2 Bitcoins to B's account. Miners will have to confirm whether A actually does have 2 Bitcoins in his account or not. To complete the transaction, miners will have to solve a complicated mathematical equation.You might have studied about variables back in school. Every Bitcoin transaction has a unique variable
The job of the miners is to calculate it. It's not that they sit with a pen or paper to solve the equations. All these calculations are carried out on the computers automatically because they are extremely complicated and their combinations run in millions. which is why these miners require computers with very complex and high processing power
Once the equation is solved, the other computers within the network confirm it and this transaction is added to the chain. A block of transactions gets created. And hence, the technology is called 'block chain'
And what do miners get in exchange for this? They get the most valuable thing. Bitcoins! This system is called 'Proof of work'. The miners have to prove the computation work they do in order to get awarded the Bitcoins in return. If all this explanation went straight above your head like a bouncer, then do not worry!
Because understanding the philosophy, vision and future of crpto technology is far more important than understanding the working of crpto technology. Now comes the question of how to use crypto currency and Bitcoins.It is extremely important to understand that as well. Because on one hand, some people use Bitcoins as an investment
Bitcoin as Alternate Currency
While on the other hand, some people use cryptocurrency as an alternate currency. A lot of people want to replace it with currency and use Bitcoins in place of dollars. But the main use of crypto currency at present is like an investment. We invest money in cryptocurrency hoping for a higher return in the future and hence get more money in return. This, then becomes a "store of value", just like Gold.
Just like we don't use gold in our daily transactions but instead buy it and store it in the bank lockers like a guarantee to get more returns in the future because the price of gold keeps rising gradually. People do the same with Bitcoins and this is why Bitcoins are also called "Digital Gold". But just like any other investment, this too, entails risks. And those who criticize this as a form of investment say that
Bitcoin is a digital currency. It has no inherent value of its own. For example, you can physically touch the gold in your hands. If you buy a house as an investment, it will be physically available to you.
Bitcoins, on the other hand, are not physical. Everything is happening on the computer. It could still be referred to as a "niche product" that does not have a widespread acceptance in the society
Cryptocurrency is not yet a medium of exchange, that is, you cannot go to the nearby shops and buy bread and eggs with Bitcoins. But this trend might change in the future because there are several restaurants and hotels in the Western countries that have begun to accept Bitcoins as an alternative form of payment
There is a technical challenge here that makes it difficult to use Bitcoins as a medium of in daily transactions. The Bitcoin transactions on the block chain take time to get confirmed. One block process takes around 10 minutes for the computers to calculate
So, you can understand that it is not practical to wait for 10 minutes for a transaction to get completed in daily life. But at the same time, there are some present day usecases for Bitcoins where they work better than our traditional ways
Present Day Uses of Bitcoin
The best example of this is our Foreign Funds transfer. When you have to transfer money from one country to another, the banks deduct a lump sum in the name of foreign transfer fees. They charge a lot of fees and take a lot of time to transfer money from one country to another
The Bitcoins are more economical in this case. Bitcoins do not charge any transfer fees and ten minutes is a much lesser time as compared to the 1 to 2 days that the banks take. A similar thing applies to the credit card fees. Cryptocurrency can be more economical than credit card fees
This is why banks, credit card companies and remittance companies have been against the Cryptocurrencies and are so even today because Cryptocurrency can become a rival to their business model
Especially due to the Covid pandemic, situations have changed. While several industries and mutual funds have been struggling, the value of Cryptocurrencies like Bitcoins and Ethereum has been on the rise
From the 1st of March, until November 30, the value of Bitcoin has risen more than 120%, that is, it has more than doubled in value. Paypal, the world's biggest digital payments company, has introduced the feature of crypto transactions in November
J P Morgan Bank used to be the biggest foe of Bitcoins. When Bitcoin was on a bull run in 2017, That is, when its price was rising exponentially, the CEO of J P Morgan had said that it was a fraud
And now, J P Morgan has opened corporate accounts for famous crypto exchanges like Coinbase and Gemini Trust. So you can see how the doors that had earlier been shut for cryptocurrency have now been opening up
An open mindedness is being observed with regard to cryptocurrency in the general public and the financial industry. The banks treated the crypto platforms with lot of harshness. With the platform accounts frozen, they were not able to pay their employees or pay rent to their landlords
Negatives of Bitcoin
The reality is that cryptocurrency has some negative points as well that are mainly related with money laundering and security. In the dark web on the internet, the people had started accepting payment in Bitcoins for buying weapons and drugs
It became very difficult for the law enforcement agencies to track transactions because they were outside the traditional financial system. Issues related to hacking also surfaced
Another reason is that any one can come up with their own cryptocurrency. This is why, a lot of bogus and fraud companies took money from the public with a promise that once trading started in that particular currency, the value of their money would double/triple, so they claimed that the money invested would double/triple
Crypto exchanges i.e. platforms where you can invest in cryptocurrency and convert dollars into Bitcoins had been operational in since 2013. Some exchange founders decided to challenge the banking ban in courts. It was not only a matter of their livelihood, but also a matter of principles
They were of the opinion that the negative points pertaining to cryptocurrency are also valid on other asset classes as well. There can be money laundering over property, fake notes can be printed. There can be money laundering there as well. There are many fraud schemes that operate in a lot of other things. The software of banks or stock exchanges can also be hacked
There are chances of that as well. So, the problems that exist with Bitcoins exist with other things as well. In response to this, the reputed platforms included a lot of safeguards. For example, KYC (know your customer) process was made mandatory during sign up
How to Invest?
One of these is Binance, an app on which you can deal in more than 350+ cryptocurrencies. More than 30 million+ users have signed up and their safety measures are also extremely stringent. These days, crypto investment has become as easy and painless as online food ordering. Of course, you will have to follow some rules of common sense .
For example, Do not trade by taking loans from Banks or others. If there is a need for you to take loans to invest in cryptocurrencies or Bitcoins, do not do that. Then, this is not for you
Only invest that much money that you are comfortable losing because this is an extremely risky investment. The price of the cryptocurrencies fluctuate a lot and it is extremely volatile. So, it is pretty clear that it is both an opportunity as well as a risk. Your risk appetite and investment goals decide whether you want to play a short term or a long term game
Overall, it can be said that cryptocurrencies and Bitcoins could play an important role in the future of finance. It remains to be seen whether cryptocurrency can become a medium of exchange that will be subject to widespread use or will it remain a store of value investment?
Will you be able to buy bread and eggs from your nearby shops with Bitcoins in the future? or will it not be possible? That day might be very far but it cannot be ruled out as impossible that easily