What is Bitcoin? How can I invest in Bitcoin in India?
Parth Nagpal
Answered 3 years ago
If we look into the history of money, we will find that first there was barter system, then came commodity money. But using these modes of payment was not practical. We gradually shifted to the paper currency that we are using today but 8 years ago, a new mode of payment entered our world- Bitcoin.
Bitcoin is a virtual currency which was invented by an unidentified programmer or a group of programmers, under the name of Satoshi Nakamoto. It was released as an open-source software on 3rd January 2009.
Why do we need Bitcoins?
The good thing about a bitcoin is that it is a decentralized currency i.e. there is no central authority that regulates its value. One can manipulate the system for personal gain but the supply and the demand of bitcoins are the main elements that determine their value. On the other hand, the currency that we currently use (paper currency) is regulated by people who can put restrictions or manipulate it for personal gain. A person can transfer bitcoins to someone else without any restrictions by the banks or the government.
Since bitcoins are present in the virtual world, the need to physically carry money is avoided. So, they serve the purpose of both the commodity money and our paper money.
One might think that since there is no central authority to control the quantity of bitcoin in the market, one can make as many bitcoins as one wants due to which the value of bitcoins will go down in future. But it doesn’t work this way. The number of bitcoins that can come into existence has been already fixed by Nakamoto. A total of 21 million bitcoins can exist in the market and these many bitcoins can be seen only in the year 2140 (we will look more into this, later).
To be able to send money through a bank or receive money from credit/debit cards, one needs to pay some processing fee. The case with bitcoins is different. Instead of a 2-3% fee typically imposed by credit card processors, merchants accepting bitcoins often pay fees of 0% to less than 2% of the total purchase.
All the transactions are stored online. For example, you mined/earned some bitcoins (more on mining, later). Now, when you transfer these bitcoins to someone else, there will be a ledger which will store this transaction. Also, if the recipient transfers these bitcoins further, that transaction will also be stored in that ledger. All the records of the transactions are verified by the miners. This means that the entire journey of those bitcoins is visible to the public.
How do you get the bitcoins?
These are the two ways which can help you get bitcoins:
You can mine bitcoins using a computer: To mine bitcoins, you need to solve complex mathematical (cryptographic) problems using your computer’s processing skills. You can use your computer’s CPU, GPU or even an ASIC card. ASIC or application-specific integrated circuit is an integrated circuit (IC) customized for a particular use. GPUs are more efficient than CPUs and ASIC cards are more efficient than CPUs.
You can exchange them for other commodities or currencies: These days, many people in the world buy goods and services using bitcoins. If you are offering any product and you manage to find a buyer, you would be able to get bitcoins by selling that product. Also, there are many websites that sell you bitcoins in exchange of other currency.
We saw earlier that ultimately only 21 million bitcoins can come into existence but a good thing is that you don’t need to spend an entire bitcoin to buy commodities. Unlike our Indian currency which can be divided into paise, a bitcoin can be divided up to 8 decimal places. So, you can use 0.000001 bitcoin to buy some commodity. This smallest denomination of 0.00000001 bitcoins is known as satoshi (named in homage to the creator of bitcoin).
Is it the best currency?
With all the benefits that bitcoins offer, there are some limitations as well.
Although, over 100,000 merchants and vendors accept bitcoin as payment, a large share of vendors/merchants around the globe still aren’t aware of bitcoin.
Since, there is no regulation the value of bitcoin fluctuates a lot. Investing in them is feasible only if it is a long term investment.
If you lose the key to your wallet or forget the password to your account, you would not be able to get those bitcoins back and that amount of bitcoins will be frozen as no one would be able to use them.
If you are mining bitcoins, you should ensure that the power consumption cost is not more than the reward bitcoins that you would be getting after solving those mathematical problems. For example, if you use a computer that uses a lot of electricity but is not able to mine enough bitcoins, you will be spending more than you are earning.
Finally, the future of bitcoin is not certain. We will be seeing new bitcoins in the market till the year 2140 but that doesn’t mean that people will be using it till then or even after that.