As we all know, the growing madness for the virtual currencies, “cryptocurrencies” is taking the world by storm. Many have heard that there exists something called “Bitcoin” or the concept of the cryptocurrencies.
Cryptocurrencies are the digital or virtual currencies, using cryptography to create a secure, anonymous, traceable and potentially stable monetary system.
Cryptocurrency, the name comes from their use of cryptography, which is the study of methods to encrypt information. The encryption is done to send the information securely and privately also for data security and authentication. Cryptocurrencies are built on such technologies by the cryptographers to create the digital coins, which are censorship and fraud resistant.
Unlike our regular currencies, instead of being managed and backed by any financial or government institution, cryptocurrencies are rather supported by a mathematic algorithm. Though the values of these virtual currencies depend on their perceived value and their insufficiency is maths based which cannot be corrected by any group or a person.
These currencies run on a distributed network to allow for a peer-to-peer (p2p) transaction system and hence without the need for third parties. The cryptos use mathematical algorithms and a public ledger, to keep the transactions secure.
A complex mathematical equation is linked to every account with the amount of expenditure, individual wishes to make using virtual currency to ensure that every transaction carried out is legitimate. Users, commonly called miner, solve these equations using their computing resources and are rewarded with a small amount of cryptocurrency.
Digital currencies have a volatile market at present. The instability of these currencies today is because they still hold a relatively small market size. These currencies tend to stabilise once their market size increases, and can prove to be more stable than the fiat currencies.
These virtual currencies have the tremendous potential to change the financial scenario of the world, and in many ways, it already is changing.
Bitcoin was the first cryptocurrency to be created which is still the most popular currency and occupies the dominant market share. There are many other major currencies in the digital currencies market. All the cryptocurrencies other than Bitcoin are called ‘altcoins’. Though there are many altcoins, the popular few include Ether, Ripple, Litecoin and Dash.
In the past, many attempts were made to create a currency that would be decentralised and would use the cryptographic protocols and distributed networks. With the launch of Bitcoin, the idea came to could be realised started to gain followers worldwide.
Bitcoin was developed in 2008 by a developer under the pseudonym Satoshi Nakamoto as a result of a side product of another invention. It was revealed by the inventor that he intended to develop a “Peer-to-Peer Electronic Cash System” and never intended to invent digital cash, which many people attempted to create before but failed.
Bitcoin is circulated by the network of its users, is a decentralised digital currency with no central bank or controller. The currency is the backbone of the blockchain. The blockchain is a public ledger which enables anyone to verify Bitcoin transaction ever, at any time.
Bitcoin gained popularity in 2013, the value of Bitcoin doubled during the Cyprus Banking Crisis. People started losing the confidence in the banks with their money and hence started converting their money into Bitcoin. The currency soon picked the interest of investors from the worldwide. The value went over from US$100 in June 2013 per Bitcoin, to currently as high as US$4500 in August 2017.
Bitcoin and its blockchain technology give the people who own them the control over their money, without the involvement of anybody else, including government, banks or parents.
Another significant advantage to Bitcoin is its wallets cannot be frozen, as the bank account. The transaction fees through Bitcoin are meagre as compared to the ones associated bank transfers, credit card payments.
With Bitcoin you can maintain your privacy which is unlike the credit cards, exposing to risks of information getting leaked by hackers.
Anyone can use Bitcoin since it is decentralised to buy anything online. The use of the crypto coin is not limited to online, but to many small businesses and local restaurants accept Bitcoin payments. Several non-profit organisations like Wikileaks, Khan Academy accept Bitcoin donations.
Bitcoin is an International asset, used and traded by the people all over the world. Anyone sitting in any part of the world can send it around the world, using the international business, without bothering the exchange fees.
Everybody knows, we Indians love to save and love to invest right. With the prices of Bitcoin soaring up by 300 % in just one year, Bitcoin can be the next kind of investment you are looking for.
However, this leads us to question if the very digital currency is safe to buy, store or sell in India. The countries like Korea and Japan are leading their ways and broadening the avenues for Bitcoin usage. It somehow becomes a necessity to at least acknowledge the presence of the digital coin, before it overtakes the world and we are left far behind.
One can buy these virtual currencies through different cryptocurrency exchanges. You can buy Bitcoins with a credit card. Coinbase.com and Coindesk.com are the two most famous exchanges in the world. They even offer tutorials on digital currencies.
One can purchase Bitcoins from Zebpay exchange in India. The exchange has its app on iTunes and Google Play, where you can link your bank accounts for fast transfers.
Zebpay lets you buy Bitcoins by making a payment to their bank account. You can also transfer the money to your bank accounts and track data on the currency value. A user is required to verify the ID by uploading a picture of PAN card, and KYC requirements also need to be fulfilled.
Another India based exchange, Unocoin, allows Bitcoins trading. A user can buy, sell, store and accept Bitcoin. The exchange claims to have 1, 50,000 registered customers.
After the demonetization, there was more than 250 % increase in the user base of these Bitcoin exchanges. BitBay, a Poland based crypto exchange is starting its services in India. The exchange would reportedly sell Bitcoin and eight other ‘altcoins’.
Despite digital revolution in India at its peak, the Indian government has not taken any step to recognise the cryptocurrency officially. In fact, the central bank in India, the Reserve Bank of India, which regulates the Indian currency, cautioned the users, traders or holder of the digital currencies, including Bitcoins earlier.
The central bank has said, “The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities.”
RBI Deputy Governor R Gandhi warned the people against cryptocurrencies, especially Bitcoin, in March. He warned people of these digital assets, citing that they pose potential financial, legal, security related risks.
He further added that the payments made by these currencies are on the peer-to-peer basis and that there is “no established framework for recourse to customer problems, disputes, etc. Legal status is definitely not there.”
However, the central bank has not banned the Bitcoins in the country.
Once you’ve purchased any amount of Bitcoin, you would require storing it someplace safe. For Bitcoin, there is Bitcoin wallet. There are four different types of wallets. Typically people need two kinds of wallets, one for storing, and the other one for spending.
One thing should be kept in mind, that the Bitcoin wallets are a lot safer than the physical wallets.
The four types of wallet currently used are:
1) Web wallet (also called online wallet and hot wallet) – It is hosted on an online server, often by a third party such as an exchange or dedicated hosting. It can easily be accessed to be used for transactions straight away.
2) Software wallet – A user requires downloading Bitcoin blockchain file of around 20 GB to open a software wallet. It is more secure than a web wallet as cyber-attacks cannot compromise its contents (the attackers may still compromise computer). It can also be used conveniently for instant transactions.
3) Cold storage wallet (also called offline wallet) – This type of wallet is completely disconnected from the internet. Most of the Bitcoins should be stored here, and cannot be stolen.
4) Hardware wallet – It is a type of cold storage wallet that uses additional hardware devices for an extra layer of security. They are used for large amounts.
In reality, Bitcoin wallets don’t hold actual Bitcoins. They are used to hold the private keys which give users the right to use the coins, which are stored on the blockchains.