The Future of Currency: Bitcoin!

Bitcoin price started at $0.30 in 2011 and now is currently trading at $39,182, which is approximately ₹28,69,369.35. In 2020, global markets crashed because of Covid-19 pandemic, but bitcoin rose 200 percent in this year beating every financial instrument.

So, What is Bitcoin? How does it work? Why has its value increased so much? What is the reason behind such robust growth? Every question will be answered here.

According to JP Morgan, Bitcoin is a competition to Gold and it could rise to $146,000. 

In this article, you have the answer of:

1. What is Bitcoin?

2. Why did Bitcoin come into existence?

3. How does it work?

4. Reason behind such robust growth?

5. Is it legal in India?

6. How to invest in Bitcoin?

7. Is it risky?

What is Bitcoin?

Bitcoin is the first Cryptocurrency. Cryptocurrency is a digital currency, through which one can buy goods and services or transfer to anyone in the world. So, Why Cryptocurrency? Because it uses Cryptography as its core ingredient. Cryptography means encoding and decoding data by using mathematical and computational practice. Cryptography ensures security of transactions and participants, it doesn’t involve any central authority and it protects from double-spending. 

Bitcoin is not the only cryptocurrency in the world, but there are approximately 5,932 Cryptocurrencies available. Among them the Popular one are Bitcoin, Ethereum, Tether, XRP, Litecoin etc. 

Why did Bitcoin come into existence?

Bitcoin was founded in 2008, by an unknown person or group of people named Satoshi Nakamoto. It started its operation in 2009, when it launched its open-source software. 

Bitcoin came just after the 2008 global financial crisis, which shook the world. And the culprit for such a crisis was the Banking System. So, to mitigate the flaws of the traditional financial system, Bitcoin is created. So, what kind of flaws raises concern over the banking system. The main flaws are centralized systems, Delay in transferring funds, charging fees for online transactions, Systems issues and many more. While Bitcoin uses a decentralized approach, it is not controlled by one person or authority like the Government. Bitcoin is not a physical currency like dollars, rupees, Euro etc. It has a digital presence. Bitcoin can be transferred to anyone in the world in a matter of seconds, with nominal fees. 

How Bitcoin works?

So, we all know that bitcoin uses the Cryptography method for operating, but what makes it very secure? The answer is Blockchain. A blockchain which makes Bitcoin a complete product.

A Blockchain?

Bitcoin basically works on a network that runs on a protocol termed as Blockchain. A Blockchain is a kind of Database. A database is a collection of information which is stored electronically on a computer. 

How Blockchain works for bitcoin?

A blockchain collects information in groups, also known as blocks, which hold a certain set of information. Blocks have their own storage capacities. When the block's storage is fully filled, it gets connected or chained with the previously filled block, forming a chain of data known as “Blockchain”. Then the process continues, new information collected, which follows that newly added block and  is compiled into a newly formed block that will then also be added to the chain once it is filled with information.

This blockchain system makes an irrevocable timeline of data when implemented in a decentralized nature. Each block when added to the chain is given an exact timestamp.

How does it fit in bitcoin?

In the bitcoin network, a block is created after every 10 minutes. What all transactions occur in this 10 minutes are collected in blocks and then this block is transmitted to a network of peer-to-peer computers scattered across the world for confirming the validity of transactions, who are known as “Miners”. Actually, bitcoin transactions are a complex hashing puzzle, which has to be solved for confirming the legitimacy of a transaction. Then this network competes among themselves to solve these equations faster than others and whoever solved it first and verified by other peer-to-peer networks are being rewarded a Bitcoin, it is called “Proof of work”. This way more bitcoins are generated. The entire process of generating bitcoin is known as “Mining”. Mining name is given because all natural resources or precious metals such as Gold are generated by mining.

Verified block is then given a hash code, which is generated using SHA256 Cryptographic hash algorithm. It is an automatic generated hash code, so it cannot be tempered. Every block in blockchain has its unique hash code just like a fingerprint. 

Basically, a block contains 3 kind of information:

1. A hash 

2. A hash of the previous Block

3. Transactions details

Every block contains a unique hash of itself and also a hash of previously added blocks which makes it almost impossible to temper or hack bitcoin. Because anyone who tries to temper with a block, the hash of the block will change, which leads to error because the foremost block has previous block hash and if it changes it the hash of the current and foremost block will be different. You will have a better understanding while looking at the chart. So, the whole blockchain gets disrupted if anyone tries to temper with it. It also protects from double-spending.

 

Then finally, this block is added in the blockchain. 

What is the reason behind such a robust growth of Bitcoin?

The reason behind such a rapid rise is that Bitcoin is inflation resistant, it grows with inflation. Most people are holding bitcoin for long, as they think it will increase more in the future which causes a shortage. When it launched, bitcoin was criticized by many, but now looking at its liquidity and future prospects many investors are attracted toward it which increased demand of bitcoin. 

Bitcoin price is increasing because of its growing adoption as a payment method. Recently, Paypal announced that it soon allows its users and merchants to buy, sell, hold and accept bitcoin and other cryptocurrencies as a form of payment. This news gave a further boost to bitcoin.

Bitcoin technology also attracts people and big institutions because it is very secure, not like a banking system which can be hacked and data may be leaked. It allows users to transact easily globally without any server disruption and charges, and it is available 24/7 and 7 days a week. 

The top reason behind such a rise is because bitcoin is limited. Just like precious metals or natural resources. All things which are limited have its value and they grow as time passes. There would be only 21 million bitcoin, which can be mined. When the 21 million bitcoin mined there were not any bitcoin generated. So, these are some reasons why bitcoin is growing at such a rapid speed. 

As JP Morgan, an American multinational investment bank and financial services, said Bitcoin could rise to as high as $146,000 in the long term as it competes with gold as an alternative currency.

Is it legal in India?

Bitcoin is a medium of payment. As of now, is neither being authorized nor regulated by any central authority in India. Also, there are no set rules laid down for resolving disputes that arise while dealing in bitcoin. So, no one can conclude that bitcoin is illegal as there is no ban  on bitcoin in India. As Supreme Court, on March 5, 2020, quashed the ban on Cryptocurrency payments imposed by the RBI (Reserve Bank of India) on its circular dated on April, 2018.

How to invest in Cryptocurrency?

Most easy and convenient method of investing in cryptocurrency is either by purchasing a coin or a fraction of a coin through available trading apps in the market. Popular trading apps are Coinswitch, Coindcx, Zebpay, WazirX etc. One needs to register in any trading platform, provide personal information to open an account and a wallet. A wallet is where bitcoin is stored for future use or to sell at a later date. One can also buy bitcoin through brokerage, bitcoin exchanges etc. One can also get bitcoin as a reward by doing mining as explained above.

Is it risky?

Bitcoin is a highly risky investment option. As it is advisable not to invest a bulk of your investment in bitcoin directly. One should consult with experts or with their respective brokers before investing in Cryptocurrency.

Cryptocurrency are highly volatile. It constantly fluctuates. If one loses private keys or passwords of the external wallet services, then it's not possible to get access to it. Recently a news came that a person named Stefan Thomas, a German programmer has put his cryptocurrency wallet keys in a small hard drive called the Iron key and locked it. And now he doesn’t remember the password of it. He has tried to unlock it but he failed 8 times and now only two chances are left to unlock it, if these attempts fail it will get encrypted forever. The wallet contains 7,002 bitcoins, whose current value is around $226 million as per currency price of Bitcoin. So, if you lose its password or private keys then it is impossible to get access to it. So, one needs to get complete information on all the certainty, before investing in cryptocurrency.

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