What is Bitcoin?

 

Bitcoin is a new digital currency / crypto currency that was created in January 2009. It follows the ideas set out in a whitepaper by the person (or group of persons) using alias Satoshi Nakamoto. . Bitcoin offers the promise of a much lower transaction fees as compared to traditional banking / payment mechanisms and is completely decentralized as compared to a decentralized authority like central banks (e.g. RBI in India or FED in USA)

There are no physical bitcoins, only balances kept on a public ledger that anyone can access (view) bitcoin transactions are is verified by an enormous amount of computing power.

Note bitcoin is not a legal tender; however, it’s due to massive jump in its price ($18500+ as on 22^nd Nov 2020). Price of bitcoin has jumped 117% in this year.    

Why bitcoin?

Cross border payments are way cheaper in bitcoins than traditional way of money transfer. Also bitcoin transactions are anonymous.  

Understanding bitcoin (Source : https://www.investopedia.com/)

Bitcoin is a collection of computers, or nodes, that all run Bitcoin's code and store its blockchain. A blockchain can be thought of as a collection of blocks. In each block is a collection of transactions. Because all these computers running the blockchain have the same list of blocks and transactions and can transparently see these new blocks being filled with new Bitcoin transactions, no one can cheat the system. Anyone, whether they run a Bitcoin "node" or not, can see these transactions occurring live. In order to achieve a nefarious act, a bad actor would need to operate 51% of the computing power that makes up Bitcoin. Bitcoin has around 47,000 nodes as of May 2020 and this number is growing, making such an attack quite unlikely.

In the event that an attack was to happen, the Bitcoin nodes, or the people who take part in the Bitcoin network with their computer, would likely fork to a new blockchain making the effort the bad actor put forth to achieve the attack a waste.

Bitcoin is a type of Cryptocurrency. Balances of Bitcoin tokens are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bitcoins. The private key (comparable to an ATM PIN) is meant to be a guarded secret and only used to authorize Bitcoin transmissions. Bitcoin keys should not be confused with a Bitcoin wallet, which is a physical or digital device which facilitates the trading of Bitcoin and allows users to track ownership of coins. The term "wallet" is a bit misleading, as Bitcoin's decentralized nature means that it is never stored "in" a wallet, but rather decentrally on a blockchain.

Bitcoin initial days

Aug. 18, 2008: The domain name bitcoin.org is registered.

Oct. 31, 2008: Bitcoin whitepaper published in bitcoin.org by a person or group using the alias Satoshi Nakamoto . He/they announced, "I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party. Read whitepaper here "Bitcoin: A Peer-to-Peer Electronic Cash System,"

Jan. 3, 2009: The first Bitcoin block “Block 0” is mined. This first block is also called as "genesis block".

Jan. 9, 2009: Block 1 is mined, and Bitcoin mining commences.

Investing in Bitcoin

Investors can invest in bitcoin using sites/ marketplaces called “bitcoin exchanges”. Here one can buy /trade bitcoin and hundred of other cryptocurrencies know as Altcoins.

Globally there are many exchanges, Coinbase is a leading exchange followed by, along with Bitstamp Binance and Bitfinex. In India one can buy bitcoin using “Zebpay”. Zebpay is In the business of crypto currencies since the year 2014 and have over 3 million users.

Bitcoin wallet

Bitcoins are stored in a “digital wallet”. The wallet is a kind of virtual bank account that allows users to send or receive bitcoins, either for purchase or for selling / buying. Note bitcoin wallet is not insured by DICGC rules in India like bank deposits. Read more about deposit insurance here.  

Risk in investing in bitcoin

Every asset, have inherent risk be it property, shares or in this case bitcoin. Bitcoin or for that matter any virtual crypto currency / alt coins also have some unique risk involved owing to their “virtual form”. The risks involved are,

Regulatory risk

Given the anonymous nature of bitcoin, there is a potent black market that can be used for money laundering, tax evasion. This is the reason why regulators across the world are very skeptical regarding bitcoin. In 2018, India virtually banned crypto currencies barring entities from providing services to any individual or business dealing in digital currencies. This forced tens of thousands of retail investors to sell their holding suddenly at whatever prices those were on offer. 

Security risk

As bitcoin (& other cryto currencies) are virtual in nature, there is inherent risk of hacking or malware attack. There have been multiple instances of successful hacking bitcoin exchanges. One of the most notorious hacking incident took place in 2014, when Mt. Gox, a Japan based exchange in Japan, was forced to close down after millions of dollars worth of bitcoins were stolen. In Sept 2020, another exchange, Kucoin was hacked for whopping $150 million.

Market risk

Like with any investment, Bitcoin values also fluctuate. Rather as compared to traditional stock markets, bitcoin has seen wild swings in price over the years. In 2013, price of bitcoins fell by 61% in a single day in 2013, while in 2014m intra day fall was as big as 80%. This shows that bitcoin is not for light hearted investors.

The Future of Bitcoin

Investment in Bitcoin remains a high risk and high return game. Just because Bitcoin value has jumped 117% this year doesn’t means bitcoin is for everyone. Bitcoin is very volatile in nature and as such the trading / investment is only for people with significant risk appetite.