What is Bitcoin?

Can you imagine a thing the value of which was zero around ten years back and today, its value has touched almost 15 lakhs. I'm talking about Bitcoin, which has recently touched its all-time high price point due to which it is being talked about in the market and the media again. A paper was posted online by Satoshi Nakamoto on October 31, 2008, just 12 short years ago. 

Satoshi's main motive was evident from the first line of the paper. A form of electronic cash that enables payments to be sent directly between parties without going via a financial institution. A digital asset that is unregulated by central banks or other financial organizations is cryptocurrency. A digital asset that is unregulated by central banks or other financial organizations is cryptocurrency. For instance, the US dollar is controlled by the central bank of the US.  

The RBI is in charge of the Indian Rupee. However, bitcoins and other cryptocurrencies are not under the jurisdiction of any central bank or other major financial organization. The concept of cryptocurrencies was all that existed in that person's head. However, there are already trades worth millions and billions of dollars on its cryptocurrency exchange, exactly like shares are traded on regular stock markets. We must comprehend a few ideas from our economic past to comprehend Satoshi's work and the context of cryptocurrencies. 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. After the First 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 the US did away with this gold standard rule back in 1971. Following that, the central banks of the other nations could print the notes they wanted.

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. The interest earned on the money you have placed is what generates returns. We have observed how very carelessly these banks exploit these money and deposits. It happens quite often that banks give loans to big industrialists without performing adequate checks and then these loans become bad debts/NPAs. 

And in these situations, who is the victim? Depositors like us. Those in favour of 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. Bitcoin was envisioned by Satoshi as an alternative financial system that would be built on software and free from outside interference. Cryptocurrencies were born right after this scenario. Bitcoin was the first to arrive. And then many other cryptocurrencies surfaced- Ethereum, Litecoin and Ripple. In fact, at the beginning of the year, more than 2,000 cryptocurrencies were available on the internet.

How do cryptocurrencies work?

The term "ledger" refers to the one, publicly accessible digital account that contains all Bitcoin transactions. Every system that is a part of the Bitcoin network has a copy of this ledger. Those that run this system are called 'Miners'. Verifying transactions is the miners' responsibility. 2 Bitcoins must be sent from A to B's account. Whether or not A has 2 Bitcoins in his account must be determined by miners. In order to complete the transaction, miners must solve a difficult mathematical puzzle. You might have studied variables back in school. 

Every Bitcoin transaction has a unique variable. The miners' task is to calculate it. It's not that they sit with a pen or paper to solve the equations. The miners need computers with incredibly complex and great processing power because all of these computations are carried out automatically on the machines because of their tremendous complexity and crore-based combinations. 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. Hence, the technology is called blockchain. 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 to get awarded the Bitcoins in return. comprehending the philosophy, future, and prospects of cryptography is significantly more crucial than comprehending how it works.

How to use cryptocurrency and Bitcoins

Additionally, it is crucial to comprehend that. On one hand, some people use Bitcoins as an investment while on the other hand, some people use cryptocurrency as an alternate currency. Many individuals wish to replace it with money and switch from using dollars and rupees to Bitcoins. The main use of cryptocurrency at present is like an investment. We invest money in cryptocurrencies with the hopes of earning a bigger return in the future and so receiving more money. This then turns becomes a store of value, similar to gold. Similar to how we don't use gold in our everyday transactions, but rather purchase it and put it in bank safes as a guarantee to receive higher returns in the future as gold's price steadily increases. 

People do the same with Bitcoins and this is why Bitcoins are also called Digital Gold. Just like any other investment, this too, entails risks. And some who object to this as an investing method claim that Bitcoin is a type of digital money. 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 is still possible to classify it as a specialized good with little social acceptance. Cryptocurrency is not yet a medium of exchange, that is, you cannot go to the nearby shops and buy bread and eggs with Bitcoins. This trend might change in the future because several restaurants and hotels in Western countries 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 daily transactions. The Bitcoin transactions on the blockchain take time to get confirmed. One block process takes around 10 minutes for the computers to calculate. You can understand that it is not practical to wait for 10 minutes for a transaction to get completed in daily life. However, there are some situations in which using Bitcoins today is preferable to using more conventional methods. 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. Ten minutes is a lot less time than the 1 to 2 days that banks require, plus bitcoins do not charge any transfer fees.  A similar thing applies to credit card fees. 

Cryptocurrency can be more economical than credit card fees. Because cryptocurrencies have the potential to compete with existing business models, banks, credit card firms, and remittance corporations have historically been opposed to them and continue to be so. In the last few months, 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. The value of Bitcoin increased by more than 120%, or more than twice, between the first of March and the last day of November. Paypal, the world's biggest digital payments company, introduced the feature of crypto transactions in November JP 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 said that it was a fraud. And just recently, J P Morgan opened business accounts for well-known cryptocurrency exchanges like Coinbase and Gemini Trust. You can see how the doors that had earlier been shut for cryptocurrency have now been opening up. An open-mindedness is being observed about cryptocurrency in the general public and the financial industry.