All that you ever wanted to know about bitcoins
Whether you go for a game night at your friend’s house or are relaxing with friends after work, invariably someone will be talking about the next big investment option. In the past, these discussions were around real estate, stocks, even gold. Now, all such talk is about cryptocurrencies. To be more specific, all such talk is around bitcoins. There is good reason for this interest, every alternate month in 2017 has seen the value of bitcoin hit all time highs. On October 31, bitcoin breached the ₹5 lakh mark, giving speculator returns of 844% in the last one year. Let’s find out about cryptocurrencies and bitcoins.
CRYPTOCURRENCY Cryptocurrencies are a subset of digital currencies. “Unlike other digital currencies that can be centrally issued, circulated within a community or geographical location, or tied to fiat currencies or organisations issuing them, a cryptocurrency has very different characteristics,” said David Lee Kuo Chuen, economics professor of fintech, Singapore University of Social Sciences.
“It is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units,” said Sumanth Neppalli, cryptocurrency and blockchain analyst at Zebpay, an app-enabled bitcoin exchange in India. BITCOIN
“Bitcoin was created in 2009. Since then, numerous cryptocurrencies have been created. These are frequently called altcoins, as a blend of bitcoin alternatives. Bitcoin and its derivatives use decentralised control as opposed to centralised electronic money or centralised banking systems,” said Neppalli. It was created by an anonymous person, or persons, called Satoshi Nakamoto. “It has a limit of 21 million and there were 16.4 million bitcoins in circulation as of June 2016. It has the largest market capitalisation,” writes Lee in his paper ‘Cryptocurrency: A New Investment Opportunity?’ published in Journal of Alternative Finance, which he has shared with Mint.
But what is the underlying asset? “Cryptocurrencies derive value from use. As they are accepted by others as a medium of exchange, as they gain more acceptance, they gain more value,” said Lee in the paper.
ACCESSING BITCOIN
You can either buy it or mine it. “Bitcoins can be obtained by accepting them as a payment for goods and services, and by buying from other people or directly from an exchange or vending machines. Bitcoins can be transacted via software, apps and various online platforms that provide bitcoin wallets. Another way to obtain bitcoin is through mining,” said Lee.
CREATING BITCOIN
The process of creating bitcoins is called mining. “In simple terms, bitcoin mining is the process by which miners who leverage highpowered computer software verify transactions by solving complex math algorithms. Miners compete to solve these math problems and the winner receives a reward of a specific number of bitcoins. Miners are also constantly validating transactions that are taking place on the bitcoin network,” said Benson Samuel, chief technology officer and co-founder, Coinsecure. Individuals are involved to build the hardware and to set up the machine. Technically, it is the machine that uses its computing power and electricity to solve the complex algorithm and then gets bitcoins as reward for solving the puzzle. Nobody controls the algorithm and the process.