Introduction
Can you imagine a thing- the value of which was zero around ten years back and today, it's value has touched almost 35 lakhs! 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 to make an educational article on it and explain to you what Bitcoin actually is what s its history?
Why Bitcoin Started ?
Merely 12 years ago, on 31st October, 2008, a person named Satoshi Nakamoto published a paper on the Internet Satoshi's main motive was clearly evident from the first line of the paper . A version of electronic cash that would allow payments to be 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. The Indian Rupee is controlled by the RBI. 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 200 hundred rupee note. It reads- "I promise to pay the bearer a sum of 200 hundred rupees." 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. In the last 15 months, three deposit taking institutions have failed- Yes Bank, PMC bank and Laxmi Vilas bank. But even the decisions of the government can put the common man in danger. Do you remember November, 2016? Demonetization! The government laid to waste the 500 and 1000 notes in one single strike. 86% of Indian currency became unusable. 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 . Mega investment bankers like Lehman brothers had become bankrupt. 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.
What is Dogecoin ? Bitcoin vs Dogecoin
How Cryptocurrency Works ?
If truth be told, in order to understand this, one needs to have knowledge of advanced mathematics and computer science- which I don't have But 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 . 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 crores 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.
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. A person named Amit Bhardwaj came up with a similar fraud crypto scheme by the name of "Gain Bitcoin" . There is an allegation of a fraud of 2,000 crore against Bhardwaj. Bhardwaj claimed that he had "mining farms" in China.
- So, due to reasons like this, here was a negative bend of mind regarding cryptocurrency and bitcoins and in response, the RBI took the decision to impose a banking ban on crypto. Crypto exchanges i.e., platforms where you can invest in cryptocurrency and convert rupees into Bitcoins had been operational in India 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 got a chance to explain how the crypto technology and blockchain works to the government and the RBI. They were of the opinion that the negative points pertaining to cryptocurrency are also valid on other asset classes as well.
Conclusion
Overall, this is good news for all of us. We can freely invest in cryptocurrencies, if we wish to. We have this opportunity to diversify our financial investment. You could invest some money in cryptocurrency as an experiment.
After the decision of the Supreme Court, several exchanges have burgeoned and this process has become extremely straightforward and easy in India. 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. I hope you would have enjoyed this article.
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