When the brain child of Satoshi Nakamoto, ‘Bitcoin’ was introduced to the world, little did anyone know that the prodigy was born to take the world by storm. Built using an application of blockchain technology, Bitcoins have shown a tremendous potential which indicates the changes that it can bring in several sectors and industries. Laced with features of decentralization, transparency and immutability, this entity has garnered a lot of attention in recent times. And just like everything else, Bitcoins also come with a price which keeps on surging and plunging and the cryptocurrencies need to survive the bear market.
The tax authorities, enforcement agencies and regulators worldwide are brainstorming the advantages and the nuances of Bitcoins and while some countries like Malta, Switzerland, Slovenia, Japan have shown positive approach towards the virtual currencies, countries like China, Russia and the United States have maintained a cynical approach towards Bitcoins.
Talking about India, the government has imposed a ban over the crytocurrencies. The Reserve Bank of India gave a three-month window to RBI-regulated entities to severe all the ties with firms and individuals dealing in cryptocurrencies.
Bitcoins are decentralized digital currency where transactions take place without a central bank or single administration. It can be sent from peer-to-peer Bitcoin network without any intermediaries. For the Bitcoins transactions, you first need to verify it through the network nodes through cryptography and they are recorded in a public distributed ledger called Bitcoins. It was invented by an unknown person or a group that goes by the name of Satoshi Nakamoto which was released in 2009. Bitcoins can be extracted through the process of mining.
“Bitcoin is a peer-to-peer version of electronic cash that allows payments to be sent directly from one party to another without going through a financial institution. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”
– Satoshi Nakamoto
With the evolution of the mankind, the concept of transactions and means of storage of wealth have also evolved. Growing from the barter system to exchange of precious metals for buying and selling purpose to the current fiat currencies, we have come a long way. The inception of Bitcoin sparked many controversies and the cynicism about its usage and volatility are relevant till date.
The domain of ‘bitcoin.org’ was first registered on 18 August 2008 and a link to a paper penned by Satoshi Nakamoto under the title of Bitcoin: A Peer to Peer Electronic Cash System was posted to a cryptography mailing list. He implemented the Bitcoin software as open-source code and Nakamoto released it in January 2009. Genesis Block or the first block of the chain was mined on 3rd January 2009 which embedded some text in its coinbase. The text read, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Later, this was interpreted as a comment on the instability of the fractional reserve banking. Cypherpunk Hal Finnet, the creator of first reusable proof-of-work system (RPOW) was the first receiver of the Bitcoin who received 10 Bitcoins from Satoshi Nakamoto.
The first commercial transaction of Bitcoins is known to have happened in 2010 when programmer Laszlo Hanyecz spent 10,000 Bitcoin for two Papa John’s pizzas. It is said that Satoshi Nakamoto mined one million Bitcoins before disappearing in 2010 after handing over the network alert key and the control of the code repository to Gavin Andresen.
The creator of Bitcoins, Satoshi Nakamoto had asserted two particular things its working mechanism. He said that only 21 million coins would ever exist and he also specified that the size of the block reward would get reduced by half after the mining of every 210,000 blocks. Halving is a process that is designed to happen every four years or after the mining of every 210,000 blocks. We have already witnessed two halvings, one took place in 2012 and the other one in 2016.
Bitcoins are attained through the process of mining where it confirms the transactions and also introduces new Bitcoins in the ecosystem through block rewards. Nakamoto designed halving to help Bitcoin combat inflation which means that after mining of every 210,000 blocks, the rewards get reduced by 50 percent. The rewards for blockchain began with 50 Bitcoins per block found. It got reduced to 25 Bitcoins in 2012 and in 2016, it became 12.5. Now the figure is again set to reduce by half in 2020.
The founder of Ethereum, Vitalik Buterin explained that the main reason behind the slowing down of number of Bitcoins was to keep inflation in control.
“The major reason of halving the Bitcoins is to check inflation. One of the major drawbacks of traditional currencies that are controlled by the central banks is that they are allowed to print as much of the currency as they want. However, the law of supply and demand ensures that the value of the currency starts dropping quickly if they print too much money,” he noted.
Bitcoin was designed with an aim of being a commodity with limited supply. Just like it becomes difficult to extract gold after the extraction of one gram gold, Bitcoins would keep getting tougher to mine with every halving. Satoshi Nakamoto hoped that this limited supply shall ensure the maintenance of its value over the years as an international store of value and a medium of exchange. Many experts of the cryptoindustry predict thzat the price of Bitcoin would go up with the next halving.
A decrease in supply will increase the demand which would push the price up. In last two halvings, the crypto market has felt the difference of halving a few months later.
It was noted in 2013 that a guy who had bought 5,000 Bitcoins in 2009 for $27 received a return of 3,281,500 percent as its value surged to $886,000 after four years.
Just like conventional money Bitcoins are also meant to serve as a means of payment which can be used for transactions. The price for digital currencies is also set similarly like the price of the conventional money. Similar to the exchange rate of normal currency, the price of Bitcoins is set in accordance to the market dynamics and is expressed as the midpoint of bid spread. It is set as per the CoinDesk Bitcoin Price Index (XBP). At the time of writing this article the market valuation of Bitcoin against US dollar is $3,664.32.
Bitcoins registered a dramatic surge in price in December 2017 when its value increased to $19,497. However, in April 2018, it went down to $6,603. If you wish to know how the price of a Bitcoin in determined, you must know that it works according to law of Demand and Supply. It means that the interaction between buyers and sellers trading with each other influence the price of the virtual currencies trading in the market. If the traders of crypto market show optimism towards the Bitcoin, it would positively impact the price of the Bitcoins. If they believe that the price of Bitcoins would increase in future, they would most likely pay for it, which in turn would keep the market afloat.
India is the second-populous country of the world hence it was conceived be a potential market for the evolving market of the cryptocurrencies. Although the government of India never mentioned a clear stance over the issue, the number of Indian investors in the cryptomarket is estimated to be in millions. The Economic Times quoted in 2016, “A Domestic Bitcoin exchange says that they add over 2,500 users every day.”
In 2017, The Reserve Bank of India set up a specific panel to study and investigate cryptocurrency, the RBI introduced a regulation on the virtual currencies in April for banning cooperation between financial institutions under its purview. In 2013, Bitcoin ignited some heat in the country where people of all classes started to make instant transactions. In the same year, people also started to technology and the crypto sector began to expand its feet. The period of 2013-2016 marked the golden period of the crypto market as several startups started to open in India and the blockchain technology began to set its feet in the Indian market. The cryptocurrencies provided the users an instant and low-cost service and its popularity surged after demonitisation. However, it didn’t last for long and 2017 marked a turning point for the development of the industry as the crypto currency nosedived significantly as the trading trend went negative.
The RBI finally enforced a crackdown and introduced a ban for stopping activities between crypto-businesses and institutions under its purview. In 2018, Finance Minister Arun Jaitley in his Union Budget speech declared the virtual currencies as ‘not a legal tender’.
At the time of writing this article, Bitcoin is trading in India for INR 2,54,345.19.
In the world of Bitcoin, Whales, Dolphins and Minnows are said to the manipulators of the ‘whales’ who own large hoards of the virtual currencies are claimed to be the manipulators of the cryptomarket.
It is said that the real Bitcoin whales are not found on the crypto exchanges and they do not place orders of 1000 BTC. Although even 1000 is relatively a large number, it does not correspond to the actually largest animals of the ocean. Bitcoin dolphins are the small fishes who occupy a considerable amount of the cryptomarket but are not whales. As a matter of fact is that there are even bigger players than Bitcoin dolphins. Actors who do not participate in the Bitcoin market directly and those who become a part of it via the web, usually deal with what is offered by the exchanges and the small fish (the retail market).
Players who buy and move hundreds of thousands of Bitcoins. This usually happens covertly under a special agreement with the crypto exchanges where Bitcoin hedge funds and Bitcoin mutual funds influence the Bitcoin price and create a short-term price slide or to buy empty order books.
A study conducted in 2018 reported that a crypto forensics firm Chainalysis examined 32 biggest whales who held a little more than 1 million of 17 million Bitcoins mined to date. They revealed that the smallest whale in the sample held 12,000 Bitcoins while the biggest one held more than 85,000 Bitcoins worth $75 million and $541 million respectively at recent prices. The study included ‘criminal whales’ who made their fortune during the initial years when Bitcoins were mainly used for conducting illegal transactions on the Internet. The other one is ‘traders whales’ who entered the market in 2017 and who have been buying and selling of actively. The survey found that the trader whales have been buyers and not sellers when the price of the Bitcoins plunge. The other two whales are the ‘miner whales’ and the ‘lost whales’ where while miner whales are the individuals who had bought Bitcoin at a time when they were inexpensive to mine. The study affirmed that this group inclined to hold it for a long term. The ‘Lost Whales’ are the ones who amassed large quantities of Bitcoin in the early days, but they lost their wallets due to lack of activity or have died. However, the study concludes that the role of whales in the Bitcoin market may be overstated. It asserts that the top 32 whales control 6 per cent of the total supply but the figure dropped to 4.6 per cent when lost Bitcoin were included. It also suggests that only a minority of whales are active in the crypto market and when they are they appear to behave in ways which support the long-term market value of the Bitcoin.
The hedge funds find the crypto market intriguing because they want to explore the market due to the listed features of the cryptocurrencies.
Liquidity of an asset is defined as its ability to be converted into cash readily on hand. So, an asset is said to have more liquidity if an asset can be bought and sold at a fair price.
The goal of the investors is to earn high by buying the Bitcoin at a low price and then selling it at higher prices. Liquidity assures that there aren’t many discounts or premiums attached during a buy and sell and indulging in it and exiting from it is easy. The forex market is defined as a liquid market which offers a turnover of more than $5 trillion on a daily basis (According to the reports of Bank for International Settlement in 2016) while real estate is an example of an illiquid asset. Property as an asset is less liquid tedious procedures and they have a smaller market. The law of liquid markets offers depth and smoothness while the illiquid market is difficult to navigate. Bitcoins have grown significantly in the past few years. The liquidity of Bitcoins keep varying from time to time and the liquidity of Bitcoin is influenced by the exchanges, acceptance and regulations. As of now, the liquidity of Bitcoin is relatively low and technologies are being developed for improving its trade in the market.