The buzzword for 2017 was Bitcoin due to the surge in its value from US$ 1000 in the beginning to US$ 13000 at the end of 2017. The Google’s “Year in Search” document reported “What is Bitcoin?” and “How to buy Bitcoin in India?” as top inquiries. Many in support have termed it as the currency of the future, a revolutionary alternative to the traditional monetary system. Many of it has interpreted its steep rise as the creation of an economic ‘bubble’ and a haven for criminals.
It is the first decentralized digital currency and payment network which is not tied to any intermediary bank or government. Any usual currency like rupee or dollar is regulated by a sovereign government and printed by the central bank of the country. The assurance that a piece of paper of Rs.500 would fetch us the government gives something of the same value. But Bitcoin can be created online by anyone. It is peer to peer currency which can be mined on the internet by anyone. It can also be bought and sold online. Though the transactions are anonymous, the network nodes are verified through cryptography. Instead of banks, Blockchain Technology is used to maintain an online public ledger to record all transactions.
What is the history of Cryptocurrency
The 2008 financial crisis was caused by the failure of the traditional banking system. As the banks went bankrupt, the money of depositors was lost. Many lost all their life’s savings in the crisis. This brought to light the insecurities present in depositing money in banks. In its aftermath, Satoshi Nakamoto, a person or organization published a concept white paper online in 2008. It explained an “accounting system to transfer electronic cash from peer-to-peer without financial institutions.” Thus, Bitcoin was born in 2009. Nakamoto devised the concept and technology of bitcoin but in 2011 transferred the source code to others in the bitcoin network and disappeared.
What is a Blockchain in Bitcoin Transaction?
Bitcoin is a virtual currency that it is transferred between computers in a worldwide peer-to-peer network. Whenever someone transfers bitcoin to another, an entry or block is created in a huge public ledger called a blockchain. All bitcoin transactions till date have been recorded in this public ledger. Any central authority does not maintain this public ledger, but anybody can volunteer to maintain it. There is accuracy in the records because many people are keeping track of the same thing.
Why is it called cryptocurrency?
Cryptography is used to encrypt and decrypt data for secure and private communication. When a person transfers bitcoin, they announce it on the bitcoin network along with the bitcoin account details of both parties and the number of bitcoins to send. Public key cryptography is used to secure transactions in the anonymous network.
Every account or wallet created on the bitcoin network is linked to two unique keys- public and private. The private key has specific encrypted data and sign of the person who makes it unique. Only the account holder can access the key. Once the transfer is announced on the network, the others can use the public key to authenticate the account. The public key would only work if the request were signed through the private key.
How are bitcoins ‘mined’?
Bitcoins are mined through a mix of solving complex math problems and keeping records. Many people as a volunteer can maintain the blockchain. They maintain their separate ledgers of all transactions, but only one of them gets to update the central ledger. Each person who is maintaining a ledger gets to add a block of transactions if they are fastest to solve a complex math problem. A cryptographic hash function creates the math problem. It requires special computers using a massive amount of electricity to solve the problem. In return, the one who adds the block gets rewarded bitcoins as per a built-in reward system. Every single bitcoin was created as a reward for the bitcoin miner. It started with 50 bitcoins per block and kept decreasing, and currently, a miner gets rewarded 12.5 bitcoins per block.
Gold Vs. Bitcoin
There are many commonalities between gold and bitcoin- both are in a limited amount, their high prices and both are seen as investment instruments. Well like gold which is estimated to be around 171,000 metric tons in the world, bitcoin supply is also limited to 21 million bitcoins. The limited supply of both is responsible for their increasing value. As a result, people all over the world perceive gold and bitcoins as an investment as their value increases over time. But of course, gold due to its physicality is more trustable while bitcoins being a complex and new system is considered much riskier.
The economic aspect of Virtual Currency:
When bitcoin was invented in 2009, its value was almost nil as there were no transactions. In 2010 it grew lesser than a dollar. But in the last five years, Bitcoin has seen an elevation of more than 87000% in its value. Since the advent of bitcoin, thousands of cryptocurrencies have been created. Some of the other well-known cryptocurrencies are Ethereum, Ripple, Litecoin,
World’s stand on Bitcoin:
The world is divided on its stand on bitcoins or any virtual currency. Many see it as a revolutionary and visionary alternative to current economic model. They see it as a sign of rebellion against the monetary system governed by predatory governments benefitting only big corporates. It would weed out corruption and inefficiencies from the system and establish a global currency and a truly global economy.
The ones against the currency see it as a speculative ‘bubble.’ This is the biggest question around bitcoins. The buyers at the end of the chain might face the bursting of the bubble and the complete collapse of bitcoins. Another issue that is of concern is the anonymity attached to the account holders and transactions. The recent ransomware attacks like WannaCry and Petya demanded payment in Bitcoins or other digital currencies like Monero. Also, it was discovered that many online drug dealings and other criminal money transactions are done through digital currencies.
Indian Government and RBI stand on Bitcoin:
In the recently concluded winter session of Rajya Sabha, DMK MP, Kanimozhi had raised a question on the regulation and governments to stand on cryptocurrencies. Finance Minister Arun Jaitley replied that currently, such virtual currencies do not amount to legal tender. A committee chaired by the Secretary of the Department of Economic Affairs is deliberating over the matter.
The RBI released its first warning way back in 2013. In 2017, RBI time and again issued notifications that it does not authorize transactions in virtual currencies. Investors investing in cryptocurrencies do it at their own risk. India accounts for 11% of global trade in cryptocurrencies.
The Future of Bitcoin and Virtual Currenc
Bitcoins were initially only transacted online, but currently, more than 100 businesses around the world accept bitcoins as legal tender. Corporate giants like Microsoft, PayPal, and Dell, accept bitcoins. The basic limitation that all cryptocurrencies face is the complex nature of it. It deters its widespread use amongst consumers. Also, the risk that all the currency in the digital wallet could be hacked and stolen persists. But if in time these currencies become widely used, it would undoubtedly attract government regulation. This would negate the very core idea of cryptocurrencies.
Thus, if cryptocurrencies aspire to expand, they would have to fulfill paradoxical criteria. The mathematics need to be more complex to secure it from hackers’ while it needs to become more consumer friendly. It needs to devise ways to preserve anonymity while not letting the system become an aid to criminality. Hence, the future of cryptocurrencies should lie between the rigidly regulated national currencies and the present form of cryptocurrencies. It depends upon how Bitcoin the chief cryptocurrency manages these challenges.