Bitcoin is a word most of us have heard somewhere or the other. However, most of us have only a minuscule knowledge about it. Through this blog, I would like to throw some light on this latest revolution.
What is Bitcoin?
Bitcoin is a crypto currency. Simply put, it is a digital form of money. It was designed by Satoshi Nakamoto. Interestingly, no one knows whether Satoshi Nakamoto is a real person or a group of programmers using this pseudonym.
How Bitcoin works?
Bitcoin is different from the app based wallets that we are used to, like Paytm and Freecharge. While these apps use actual currency for carrying out transactions, Bitcoin is the currency through which we can transact. Bitcoin itself is a store of value.
To understand this, we first need to know the history of our current system of currency.
Remember the olden days, when there was no money. People used barter system for carrying out transactions. But doing transactions in barter system was cumbersome. There arose a need to have a common denominator which could be used for the simple act of buying and selling. This lead to the invention of money. First it took the form of any and every item which was perceived as precious- shells, precious stones, metals, even animal dung in certain places.
With the advent of civilisations, there arose a need to have a standardised denominator which could be used for trade throughout the empire. First coins were minted. Coins prevailed during the dark ages. But as civilisations grew, demand for currency grew too.
Soon demand for coins-far outstriped its supply. There just wasn’t enough metal to keep up with the supply. The solution- Notes were conceived. And today, we have a mixture of coins and notes as the drivers of world economy.
Importance of Bitcoin
People have faith in their currency. But these coins and notes are not true money. They are merely representative money. If you have a 2000 rupees note, it doesn’t mean you have 2000 rupees. What you have rather, is a promise by the government of the day, that they will pay you 2000 rupees worth of true currency (in most cases Gold) whenever you demand it.
If you are able to understand this, you will surely understand what a bitcoin is. Bitcoin is in essence that Gold, figuratively. It holds value by itself. It does not derive its value from any source.
Also, it does away with major flaws of Gold as a store of value. It is infinitely divisible (8 decimal places normally, more with consensus of the network).
It is a decentralised currency. This is a very big statement. It means that no one has the right to create bitcoins. Our paper currency decisions are taken by bankers and governments, but in case of bitcoins, there is a fixed supply limited at 21 million. Moreover, these are not just there. These have to mined.
The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The first participant who solves the puzzle gets to place the next block on the block chain and claim the rewards. The rewards incentivize mining and include both the transaction fees (paid to the miner in the form of Bitcoin) as well as the newly released Bitcoin.
What particularly caught my attention is the investment opportunity in Bitcoins. Past reports have shown a 30,000 times rise in the price of bitcoins since its inception. Infact, in the short term, its price has risen astronomically. Over the past one year, it has increased almost four fold from less than $500 to $2072 (21-05-2017).
Rather than only speculation, this increase is also based on one of the most fundamental law of Economics- the law of Demand and Supply.
There will only be 21 million bitcoins in existence at any point of time- neither one less, nor one more. And when demand is not met with supply, the prices are bound to increase.
Many well known analysts have bet that the price of one bitcoin can easily touch $100,000. Some opportunists claim the amount to be $500,000. As a CA student, it wouldn’t hurt me if I were to assume it to rise to just $3000, for that would roughly translate to a 33.33% profit.
Just FYI- @$100,000 – profit would be 4900%
and @$500,000 – profit would be a whopping 24,900%.
The universe prefers balance. The same applies to Bitcoins too. Till now, you just read about the bright side of bitcoins. You were only shown the rosy picture. But now prepare yourself for the anticlimax.
Most of the exchanges which allow trading of bitcoins charge a certain percent as fees. It can vary from 0.3% to as high as 10%.
Secondly, these exchanges are not always safe. Classic example of this is Mt.Gox- the $460 million disaster of bitcoins. The underlying blockchain which powers bitcoins transactions cannot be hacked but the exchanges can be hacked into.
Thirdly, many illegal activities and terrorist fundings are done through bitcoins. The Ransomware is most recent example of how hackers can use this technology and yet remain incognito.
Bitcoin is the technology of future. It has the potential to overthrow all the existing currencies of the world. Taransparency and decentralization are its forte. Just imagine a world where power to create money is not in the hands of a few select individuals but can be mined by anyone who has the required hardware and software.
Truly, a revolution has begun. Not the conventional revolution but one which has the potential to disrupt the power balance of the world without even firing a single bullet!