There is tremendous buzz circulating among financial circles for the past few days. December 10th and December 18th of 2017, will be marked as red letter days in the short yet eventful history of Bitcoin. The CBOE Futures Exchange and CME Group will both be launching Bitcoin futures respectively, to enter trading of Bitcoins for the first time in history. (Although it is expected that CBOE would leapfrog CME Group to become the first to start trading for Bitcoins.)
Back in 2013, few would have thought this would be happening someday. The words ‘Cryptocurrency’ and ‘Bitcoin’ were introduced during this time and billed as ‘The future of financial transactions’, with some also billing it as ‘The new age of transactions’. To unearth the meaning and purpose of Bitcoin, we first need to understand what Cryptocurrency is. This is because Bitcoin is a type of cryptocurrency which in recent times has exploded as the ‘next big thing’ in virtual currency. Let’s get started with that and then learn more about Bitcoin.
We live in a world where cryptocurrencies have become a global phenomenon (yet still unknown to many). The enthusiasts ravel about its emergence; while banks, governments and financial circles are aware of its importance. A lot has already been written about it by finance experts and bloggers, alike. In the year 2016, Loan Singh did do a brief featurette about Bitcoin. Being a digital lending platform, Loan Singh takes care of everything from the online personal loan application process to the repayment of EMIs. All this happens electronically – over digital media. It is obvious that we would get some queries from our faithful blog readers about the emergence of crypto currencies and Bitcoin, in particular.
In late 2008, a mysterious inventor named Satoshi Nakamoto announced a ‘Peer-to-Peer Electronic Transaction System’ termed as Bitcoin. Satoshi’s goal, with the introduction of this cryptocurrency, was to prevent double spending by making use of a P2P network. An important aspect of Satoshi’s invention was that he found a way to build decentralized digital cash system. One thing we must understand is that for digital cash (a currency which has no tangible presence and is used online) to work, one needs a payment network set-up which includes accounts, transactions and balances. A huge roadblock to avoid, for any form of currency (or crypto), is ‘double-spending’. Double-spending is the practice of the same entity spending an amount twice. So, the central server has to be able to keep track of each transaction – maintaining its source and its next destination.
For a decentralized network, you do not need a central server. Every single entity of the network has to do the tracking by itself. Every peer needs to have a list of transactions to check if future transactions are valid. Cryptocurrencies use a decentralized technology to let users make secure payments and store money without the need to use their name to go through a bank. They run on a distributed public ledger called as a Blockchain, which records all the information about past transactions and all the transactions which have happened prior to the next one. Cryptocurrency is viewed as a monetary value which is free from government control and bank fee or charges. Blockchain plays the part of verification and Bitcoin is seen as a tool of cryptocurrency for private and anonymous transactions. As of July 2017, the total number of Bitcoins in circulation amounted to approximately 16.5 Million. As of March 2017, a single Bitcoin valued at $1268, exceeding the price of gold ($434 per 10gm) for the first time.
How does Cryptocurrency work?
A cryptocurrency consists of a network of peers. Every peer has a record which shows the complete history of all transactions and thus the balance of every account. An example of a transaction could read ‘Parth gives 12 Bitcoins to Prasad’ and is signed by Parth’s private key. All it contains is a public key cryptography. Once signed this transaction is put up on the network, sent from one peer to another. Each transaction is a block and connects to previous history like a chain. Voila! ‘Blockchains’ are formed.
The transaction is instantly recognized by the entire network. Confirmation happens after some time and is an important aspect of cryptocurrency. As long as a transaction is unconfirmed, it is pending and can be forged. Once confirmed, it is consolidated and becomes non-reversible; and becomes a part of Blockchain. Now this confirmation of transactions can only be done by miners. Their job over the cryptocurrency network is to stamp transactions as legitimate and spread them across the network. Miners are hence rewarded with a token of the cryptocurrency (Bitcoins). Anybody can be a miner. As cryptocurrency is built on a decentralized network, there is no authority to delegate any tasks to miners. Miners have to keep an eye out for forgery such as a situation where hundreds of peers spread forged transactions.
Features of Cryptocurrency
By now we know, that cryptocurrencies are entries about transactions present in decentralized databases. They are called Cryptocurrency because of being built on cryptography. They are secured not by people, but by the math involved. The features that they enjoy are not hard proof, but are properties that they enjoy thanks to their structure.
Cryptocurrency funds are locked in a public key cryptography system, and coupling that with a Bitcoin address makes it as secure as a vault.
A user can have multiple Bitcoin addresses, not linked to any name or personal info. Addresses are usually of 30 characters.
Not controlled by a single authority. If one network shuts down, the other takes over.
Bitcoin users can charge some fees to process the transaction faster. The higher the fee, the more priority it attracts on the network with quicker processing time.
Transfer of Bitcoin happens within minutes as soon as the Bitcoin network processes it. It involves a global network of computers.
Since there is no physical form of the currency, Bitcoins are free from counterfeiting. There are no risks to the country’s economy if millions of Bitcoins are lost.
Not a miner, not the President of India, not even Satoshi Nakamoto can save your money in case transaction is done to a scammer.
Ease of set-up
Downloading Bitcoin software for free and start with setting up of a merchant account. You can set it up within minutes and start receiving or sending Bitcoins.
All cryptocurrencies control the supply of the token by a schedule written in the code. This means that the monetary supply of a cryptocurrency for any given moment in the future can be calculated today
All confirmed transactions can be viewed by everyone (personal details are hidden). Anyone can view the Bitcoin Blockchain. It is exempt from governments or any organization.
The first and most famous of all cryptocurrencies, Bitcoin serves as a benchmark in the whole cryptocurrency industry. The word ‘Bitcoin’ is an amalgam of words ‘bit’ and ‘coin’. Many sources use the capitalized ‘Bitcoin’ to refer to the technology while the lowercase ‘bitcoin’ is used to refer the unit of account.
It is used as a means of payment globally and is inversely a prime currency that fuels cyber-crime over the dark net markets or ransomware. It’s been 9 years now and Bitcoin’s value has only soared. Bitcoin can be exchanged for other currencies or products or services. Bitcoin can also be held as an investment. On 1st August 2017, Bitcoin split into two derivative digital currencies – the classic Bitcoin (BTC) and Bitcoin Cash (BCH).
Bitcoins are electronically converted to long strings of code having monetary value. As Bitcoin is a cryptocurrency, it inherits all of its properties including decentralization and unregulated transactions. No bank or government is required to mint Bitcoins. There is no collateral while exchanging Bitcoins. The value of the currency resides within the currency itself. The miners (web of people contributing their personal computers to cryptocurrency) get paid for their work over the network in generating Bitcoins. Once you own a Bitcoin, the currency behaves just like physical gold. This can be used to purchase goods or used as safekeeping with hopes of its value increase over time.
A unit of account of a Bitcoin system is Bitcoin. The symbols used to represent Bitcoin are BTC or XBT. The smallest amount within a Bitcoin is termed as Satoshi (as homage to its creator) which is 0.00000001 Bitcoin (one hundredth millionth of a Bitcoin).
The ‘Bitcoin Market’ as a whole is metaphorically termed as the ‘Bitcoin Ocean’. The big fishes are the big Bitcoin players. The smaller players are metaphorically termed as ‘Retail Market’. The ‘waves’ are the market movement.
You will hear about the ‘Bitcoin Whale’, quite a lot in the next few days. The term is used to describe big Bitcoin players in the Bitcoin market. It is a popular misconception that the ‘Bitcoin Whales’ are the biggest players in the market. There are even bigger players as well. The big players are mostly institutions such as Hedge Funds and Bitcoin Investment Funds. These funds manage thousands of Bitcoins. These Bitcoins are put through the exchanges among the retail traders. With a large capital resource, these institutions can move the market at their own will. Hence, the Whale is the humongous for now.
Bitcoin is still at an early stage in India. Startups such as Coinsecure, Zebpay, BTCXIndia and Unocoin have taken the initiative to make Bitcoins accessible to Indians. RBI has however recommended careful use of virtual currencies. The risks involved can be operational, legal and financial in nature. Banks are not authorized to use Bitcoins as currency in India. Although Bitcoins enjoy the strong features that cryptocurrencies possess (see Features of Cryptocurrency), they still have to bear some disadvantages.
Many still do not know what cryptocurrency is. Education and awareness is needed in this regard. Few businesses accept Bitcoins as currency.
Bitcoins are volatile because of their limited number of circulation over the network. With the demand now increasing over time, the number of Bitcoins is also increasing.
Bitcoins are not a fully developed product. New features are being developed regularly with cryptocurrency being made more accessible and secure.
Litecoin was one of the first cryptocurrencies after Bitcoin and tagged as the silver to the digital gold – Bitcoin. It was developed to introduce new innovations including faster payments and processes. It also possesses a new mining algorithm. It facilitated the emergence of smaller cryptocurrencies such as Dogecoin and Feathercoin, which make use of Litecoin’s codebase.
Born from the mind of a young crypto-genius named Vitalik Buterin, Ethereum has moved onto the second place in the hierarchy of widely used cryptocurrencies. Ethereum not just processes transactions but also calculates complex contracts and programs. This flexibility of Ethereum makes it perfect for Blockchain application. If Bitcoin is for Bitcoin, Token is for Ethereum.
Less popular to its more illustrious cousins, Ripple’s XRP is a cryptocurrency that doesn’t really serve as a medium to store or exchange any value, but is more of a protection to the network against spam. The Ripple network was created by Ripple Labs. It is dissed for not being a real cryptocurrency.
Monero is an example of a cryptonite algorithm. These algorithms were invented to add to the privacy features that Bitcoin was lacking.