Hello Friends, Can you imagine a thing- the value of which was zero around 15 years back and today, it's value has touched almost 75 lakhs! I'm talking about Bitcoin. What is its history?
 |
| What is Bitcoin? Why Bitcoin is So Popular |
Why Bitcoin Started?
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 the US. The Indian Rupee is controlled by the RBI. But there is no central bank or any main financial institution that controls bitcoins or 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. Every 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.
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. 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. Then many other crypto currencies surfaced- Ethereum, Litecoin and Ripple.
How Cryptocurrency Works?
Let us move on to the main point now: How does crypto- technology work? If truth be told, in order to understand this, one needs to have knowledge of advanced mathematics and computer science. 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. To complete the transaction, miners will have to solve a complicated mathematical equation.
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'. 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 crypto technology is far more important than understanding the working of crypto technology.
Bitcoin as Alternative Currency
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 while on the other hand, some people use cryptocurrency as an alternate currency. A lot of people want to replace it with currency and use Bitcoins in place of rupees and dollars. But the main use of crypto currency at present is like an investment. We invest money in cryptocurrency hoping for a higher return in the future and hence get more money in return. Bitcoin is a digital currency. It has no inherent value of its own.
For example, you can physically touch the gold in your hands. If you buy a house as an investment, it will be physically available to you. Bitcoins, on the other hand, are not physical. Everything is happening on the computer. Cryptocurrency is not yet a medium of exchange, that is, you cannot go to the nearby shops and buy bread and eggs with Bitcoins. But this trend might change in the future because there are several restaurants and hotels in the Western countries that have begun to accept Bitcoins as an alternative form of payment. There is a technical challenge here that makes it difficult to use Bitcoins as a medium of daily transactions. The Bitcoin transactions on the blockchain take time to get confirmed. One block process takes around 10 minutes for the computers to calculate. So, you can understand that it is not practical to wait for 10 minutes for a transaction to get completed in daily life.
Present Day Uses of Bitcoin
But at the same time, there are some present day use cases for Bitcoins where they work better than our traditional ways. The best example of this is our Foreign Funds transfer. When you have to transfer money from one country to another, the banks deduct a lump sum in the name of foreign transfer fees. They charge a lot of fees and take a lot of time to transfer money from one country to another. Bitcoins are more economical in this case. Bitcoins do not charge any transfer fees and ten minutes is a much lesser time as compared to the 1 to 2 days that the banks take. A similar thing applies to the credit card fees. Cryptocurrency can be more economical than credit card fees. This is why banks, credit card companies and remittance companies have been against the Cryptocurrencies and are so even today. Because Cryptocurrency can become a rival to their business model. Especially due to the Covid pandemic, situations have changed. While several industries and mutual funds have been struggling, the value of Cryptocurrencies like Bitcoins and Ethereum has been on the rise.
In April 2018, the RBI had frozen out the crypto industry from the banking system. The RBI had instructed the banks via a circular to desist from dealing in crypto related platforms or transactions. The mainstream media had claimed that RBI had placed a ban on cryptocurrency but it was technically inaccurate to say so. Cryptocurrency had never been directly banned in India. RBI had merely blocked the banking access of the crypto ecosystem. The result of this was that the public could not deal in Indian Rupees on the crypto platforms. The banks treated the crypto platforms with a lot of harshness. With the platform accounts frozen, they were not able to pay their employees or pay rent to their landlords.
Also Read, What is Sensex and Nifty? Nifty 50 and Sensex Explained in Deatails.
Negatives of Bitcoin
So, a question arises: Why did the RBI do this? The reality is that cryptocurrency has some negative points as well that are mainly related to 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 anyone can come up with their own cryptocurrency. This is why a lot of bogus and fraudulent companies took money from the public with a promise that once trading started in that particular currency. They claimed that the money invested would double or triple.
Opinion
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. Do not trade by taking loans from banks or others. If there is a need for you to take loans, to invest in cryptocurrencies or Bitcoins, do not do that. Then, this is not for you. Only invest that much money that you are comfortable losing because this is an extremely risky investment. The price of the cryptocurrencies fluctuates 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.
0 Comments