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  • Namita Bajaj

What is Bitcoin? How does it work?

Here is all that you need to know about Bitcoin - the cryptocurrency!



Launched in 2009, BITCOIN has been true to it’s nature in every manner and that is - cryptic! A phenomenon that took over the world’s cryptocurrency domain, it is a product of digitization like none other. Being the first cryptocurrency of its kind and the only one that really is treding, it was superseded by over 5000 new variants of cryptocurrency, a form of digital currency. When we say money, we think of bills, coins and paper money, but BITCOIN is nothing tangible!

So, it's money, it’s trending, you can’t hold it, but it invaluable! Wow. We need some air.


Well... that said, with all the hype, we decided to try and understand it and see what the fuss is all about.


So What is Bitcoin?


Bitcoin (BTC) is a form of digital currency, called cryptocurrency. It is a form of digital money! But then money, coins, shares, stocks, etc. are all regulated by their respective geographical centralized authorities or the government in charge, banks, stock exchanges, etc. Whereas in this case, Bitcoin, the cryptocurrency is decentralized or there is no ONE single authority regulating it. You can purchase it, sell it or exchange without going to a bank or any such intermediary. It is essentially a set of codes that individually represent each Bitcoin. It can be mined/created, sold, purchased or exchanged and every such transaction is available for public view and stored over a decentralized digital ledger system called the BLOCKCHAIN. The transparency of every transaction and each blockchain being linked with the other and only keeps building, makes it impossible for anyone to break the chain, cheat or make a fake/duplicate transaction.

Bitcoin was first introduced as an idea on a white paper under a pseudonymous name Satoshi Nakamoto. The person or people behind the name are the ones who first implemented and deployed the first Bitcoin as well as the first Bitcoin block chain database. The white paper was first published at metzdowd.com in October 2008 and was titled, “BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM”. The pseudonymous Satoshi Nakamoto quoted his reasoning for the need for Bitcoin on his White paper, as, “an electronic payment system based on cryptographic proof instead of trust.”


Why is it a hit?

  • The inherent security

  • Lower transaction fees on digital payments

  • No central body interference

  • User friendly

  • Global recognition


Various kinds of Casacius Bitcoins & a redeemed version of the same.

(source : wikipedia)

Casascius Bitcoins created by Bitcoin user, Mike Caldwell, Sandy, Utah, USA. These were metal coins sold until 2013 and had a hologram that had the bitcoin value prefixed to it. These can no longer be purchased. Once the coin is transferred, the receiver gets the value of the Bitcoin and the coin no longer stands valid or ceases its value.


Bitcoin Mining


In order to facilitate instant payment, BITCOIN system uses a peer to peer technology, which means it involves transfer of assets, sharing of data or information between people or parties without any centralized authority regulating the transfer/share/payment. When this is the case, Bitcoin works under a method of Bitcoin mining. Initially anyone who had a powerful computer, could solve cryptic puzzles and calculative algorithms and were rewarded with a new Block which is then added to the Blockchain. They are also rewarded with a Bitcoin for adding a new block and are also paid transaction fees in the form of Bitcoins. These people were called the miners or the creators of Bitcoin. However, the number of Bitcoins are limited to a maximum of 21 million in totality. As of January 2021, there are an approximate of 2, 385, 195 Bitcoins that are left to be mined. Since 2009, a total of 18,614,806 bitcoin have already been mined taking the price of each bitcoin from $0.0008 2009 to $56,170.40 in 2021.

A highly volatile price surge in Bitcoin happens because it is not regulated to match the increase in productivity but its release rate is set ahead of time and is based on computable algorithms.


What is a Blockchain?


Speaking metaphorically, a Blockchain is simply a collection or a chain of blocks linked together. These individual blocks, each hold a set of transactions. Every computer that runs a blockchain will have the same set of blocks, showing the same set of transactions and the subsequent built up of blocks or transactions. Thus, this system is transparent and cannot be played around with. It literally is a ‘blockchain’ that shows the constant built up of blocks and the related transactions, information about the parties involves, the date and time, total value and the unique identification code of each transaction.


Source: Forbes

Creating a Bitcoin


As stated above, Bitcoin mining results in the creation of Bitcoin and the blocks. This cryptocurrency is created when a community of computer-based people or miners solve extremely difficult mathematical puzzles that uses significantly lare amounts of electricity and once they are successful within a stipulated time-frame (specified as 10 minutes) they are rewarded with a Bitcoin. However, with the number of miners getting involved and limitations to the number of Bitcoins available, this process has become way more difficult. The software works such that it scales the level of difficulty and ensures that only one out the many few are rewarded based on its release algorithms.


Is it worth mining a Bitcoin?


The truth is, if you considered mining a bitcoin and invested a considerable amount into mining it (computer - No! your Mac won’t do, electricity, the brains), you would still be years away from your first Bitcoin. Thus, risks are adventurous, but its only sane to calculate the costs involved and realize that the value of the first Bitcoin that you may mine will be way lower than the costs you incurred.


Should you want to buy a Bitcoin?


Cryptocurrency has been widely popular because of the fact it has been so publicly volatile in its valuation. Although the truth is it is not something tangible, people still value it because they perceive it to be so. While there are debates on it being a popular investment option, there are fears across many countries where the government might simply ban virtual currency trading. India, does not consider as legal tender nor does it allow any of it banking service providers deal with it. As on February 2021, the finance minister of India, Nirmala Sitharam said, “The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system.” she went on to suggest that India does not revoke the advancements of digital technology and cryptocurrency and all private level cryptocurrencies must be banned except those/any issued by the State.


Source: Investopedia



“Bitcoins are valuable because people are willing to exchange them for real goods and services, and even cash.” - BBC.co.uk

As of now, there is no law limiting the citizens from transacting in Bitcoins in India. At places, Cryptocurrencies are looked at as hedge funds, similar to Gold because of their ability to withstand inflation. While people invest in it for small intervals and exit when they see a rise, it is not considered as a secure investment like your other long-term and regular investment avenues.


Yes there is risk, but can I go for it?


Cryptocurrency is an extremely high risk and high reward investment platform. Nischal Shetty, CEO, WazirX, in conversation with Financial Express, suggests that, “You should invest based on your risk appetite, after doing your due diligence on the project. I also recommend using legitimate exchanges that follow KYC and AML guidelines. Like any other industry, it’s important to beware of get-rich-quick scams or people who promise to double the invested amount, etc.”


How to Buy Bitcoin in India


The current rate of a Bitcoin in India stands at 42,26,556.08 INR. Cryptocurrency can be bought in India through crypto exchanges. There are a number of players and thus it is vital to ensure you select one that is reputed. They include Wazirx, Coinswitch Kuber, CoinDCX, Bitbns, etc. These exchanges are simply websites that help a new interested investor by investing their fiat currency.

The process involves:

  • Installing a reputed exchange app. (A thorough research is suggested when you choose your exchange.)

  • Register and verify your KYC. Set up a two factor authentication to make things secure.

  • Set up your bank details or UPI. Once done, you can make payments to your exchange.

  • Now you can purchase your desired cryptocurrency in exchange of your deposit.

Word of caution- Bitcoins worth tens and millions were once stolen from Bitfinex, a Bitcoin exchange back in 2016, when it was hacked!

Fun Facts:

  • Bitcoin can be converted to cash through portals such as Coinbase and Kraken.

  • Paypal is considering using Bitcoin as a mode of payment.

  • BTC has set up Bitcoin ATMs across 76 countries.

  • Many business and shops are accepting Bitcoins as a mode of payment across the globe.

  • Many Bitcoin exchanges allow you to convert your Bitcoin to USD, EUR, GBP and MYR. Bitbins does that in India.


Here are some exchanges where you can sell Bitcoin based on your country:

Sources:

Investopedia - www.investopedia.com

Forbes advisor - www.Forbes.com/advisor

The Balance - Thebalance.com

fincancialexpress.com

https://qrius.com/

https://thinkmaverick.com/

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