NOT FOR THE FAINT OF HEART POV: IN THE NAME

India Today - - UPFRONT - By Devangshu Datta

Cryp­tocur­rency Bit­coin has cre­ated the big­gest bub­ble since the in­ter­net. There are 16.7 mil­lion bit­coins now in ex­is­tence, val­ued at over $267 bil­lion at their price at the time of writ­ing ($16,000 apiece). For per­spec­tive, the to­tal value of ru­pees in cir­cu­la­tion, as on De­cem­ber 1, was about $252 bil­lion (as­sum­ing Rs 65 = $1). In Jan­uary 2017, bit­coins were trad­ing be­low $1,000 and it crossed $20,000 in early De­cem­ber. The 2,000 per cent ap­pre­ci­a­tion has at­tracted huge trad­ing vol­umes, and there are now many In­di­ans in the game and many ex­changes that al­low ru­pee trades of bit­coins.

The bit­coin is mas­sively price-volatile—20 per cent swings are com­mon in a sin­gle ses­sion. By com­par­i­son, gold has moved about 8 per cent this whole year. The volatil­ity makes it a scary store of value and wildly vari­able unit of ex­change. To­day, you can buy a car with one bit­coin, next week it may be two cars or, per­haps, only a two-wheeler. So, if you are trad­ing bit­coin, you’ll be ill-ad­vised to risk your en­tire net worth on it. Play small.

For new­bies, a bit­coin is a string of unique com­puter code. New bit­coins are cre­ated (“mined”) by solv­ing math­e­mat­i­cal prob­lems. Each coin can be split into 100 mil­lion unique parts called ‘satoshi’, named so in hon­our of its pu­ta­tive in­ven­tor, Satoshi Nakamoto.

Bit­coin is built on clever cryp­tog­ra­phy. It uses an open, dis­trib­uted, elec­tronic ledger called the “blockchain”, con­tain­ing “blocks” of time-stamped trans­ac­tions. Ev­ery trans­ac­tion made with a bit­coin from its cre­ation is recorded in the blockchain, which is con­tin­u­ously up­dated. Any­body can down­load a blockchain copy and check trans­ac­tion his­to­ries for all coins.

Bit­coins are held in dig­i­tal wal­lets. Each wal­let has a pub­lic ID num­ber or pub­lic key. Each wal­let also has a

pri­vate key, known only to the owner. If the pri­vate key is lost (be­cause your drive is fried, or you’re hacked), the coins in it are lost with no re­course. Hang on to that key for dear life.

Trans­ac­tions are made by us­ing that pri­vate key along with the pub­lic ac­count num­ber to trans­fer ‘spe­cific coins’ to other wal­lets. Ev­ery trans­ac­tion cre­ates a unique “hashed” (en­crypted) mes­sage that can­not be tam­pered with. Any­body can au­then­ti­cate the mes­sage by run­ning the pub­lic key. When a trans­ac­tion mes­sage is sent, users can eas­ily check that: i) the wal­let ac­tu­ally con­tains those spe­cific coins and ii) no at­tempt at fraud is be­ing made by do­ing two trans­ac­tions with a sin­gle coin.

Once most users agree on au­then­tic­ity, the blockchain is up­dated by adding that trans­ac­tion to a new “block”. Ver­i­fi­ca­tion nor­mally takes 10 min­utes per trans­ac­tion. But there can be glitches. Traders are ad­vised to wait an hour or so be­fore ac­cept­ing a trans­ac­tion as gen­uine, even af­ter it is added to a new block.

Cryp­tocur­rency ex­changes en­able bit­coin trades in many cur­ren­cies. Ex­changes will de­mand KYC, as­so­ci­at­ing wal­lets with en­ti­ties. But off-ex­change deals are easy. Cre­ate a new wal­let, put coin in it and ex­change the pri­vate key for cash. Anony­mously trad­ing bit­coin in mul­ti­ple cur­ren­cies is an easy way of mak­ing cross-bor­der remit­tances—a fea­ture that can make reg­u­la­tors and gov­ern­ments le­git­i­mately ner­vous.

Few mer­chants ac­cept bit­coin. Only Ja­pan, Aus­tralia and a few other coun­tries recog­nise it as cur­rency. Most oth­ers (in­clud­ing In­dia) haven’t fig­ured out how to de­fine it, so it’s in reg­u­la­tory limbo. If more mer­chants like Alibaba or Amazon ac­cept it, util­ity will in­crease. If more na­tions recog­nise it as cur­rency, there will be more us­age—and likely greater reg­u­la­tion. NASDAQ and the Chicago Board of Trade are of­fer­ing fu­tures con­tracts on bit­coin, so there is a hedg­ing mech­a­nism, which could at­tract more in­sti­tu­tional in­ter­est.

It’s an at­trac­tive as­set to trade but it’s also very risky. Right now, we have a bub­ble, which could con­tinue to in­flate if trad­ing vol­umes rise. The prob­lem with bub­bles is that they burst. Dur­ing the sub-prime cri­sis, CITI CEO Charles Prince said, “As long as the mu­sic is play­ing, you’ve got to get up and dance.” The mu­sic’s still play­ing for bit­coin, but who knows when it’ll stop?

Bit­coin is in reg­u­la­tory limbo as most na­tions haven’t fig­ured out how to de­fine it

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