Bitcoin,
a revolutionary decentralized virtual currency, abbreviated as BTC, is a crypto
currency that was launched in 2009, by an individual with the pseudonym Satoshi
Nakamato. Its USP is the fact
that it is decentralized i.e. it is not governed by a central governing
authority, it has no issuers and is usable by any accepting user. The premise
on which it was conceptualized was to have a digital currency i.e. online cash,
which will enable payments across various
e-commerce platforms, eliminating financial intermediaries who tend to be costly
and also have regulatory compulsions.
What gives it an edge over traditional forms of payment?
Bitcoins provide
the flexibility
to make payments for online purchases anywhere in the world,
irrespective of time, holidays and it eliminates exchange rate hassles. It also
enables one to process transactions at lower costs and no personal information is tied to the
transactions which provides complete anonymity. Transactions once recorded
cannot be erased and hence are not subject to manipulation as they are
cryptographically secure. Currently, on account of its uncertain legal status,
it is viewed more as an alternate investment asset class rather than a pseudo
currency to transact online.
How does bitcoin function in the
absence of a central governing authority? How will a user be assured that the transaction will be
completed without any glitches? Here is
where the technology comes into play.
Blockchain
technology is the foundation on which bitcoins function. Blockchain is a
‘digital ledger’ which will record and track all transactions in ‘blocks' through
a public ledger. This activity of processing transactions and updating the
ledger in real time can be done by any user utilising computing power of specialized hardware and they
would earn bitcoins in return for their services. These users are called miners
and the activity is called bitcoin mining.
Every
single transaction is authenticated by every single user making fraudulent
transactions difficult. The public ledger contains each and every transaction
ever processed allowing a user’s computer to verify the validity of each
transaction, all done in real time. The authenticity of each transaction is protected by digital
signatures corresponding to the sending addresses, allowing all users to have
full control over sending bitcoins from their own Bitcoin address.
Despite being transparent in recording of transactions, why have
bitcoins remained contentious?
Regulators are wary because of the anonymous structure and
cross-border transaction capability of bitcoins. They fear it will be used for
illegal activities like drug trafficking or even sponsoring terrorism. Therefore to mitigate this,
a number of countries have
begun to recognize bitcoins and have bought it under the regulatory purview by
legalizing it – Japan being the most recent example. The new
law recognizes bitcoin as a payment method but not a legally recognized
currency. It will be treated as an asset and will be subject to tax.
The recent developments worldwide, coupled with the surge in
demand for bitcoins in India, where local volumes were $300,000 in the first
week of April alone, has attracted the scrutiny of Indian regulators. India’s parliamentary
inter-ministerial committee held its first meeting to discuss the use virtual
currencies in the country. Market participants are of the opinion that the government
will come out with tax laws on bitcoins. In order to assist the government, Bitcoin start-ups such as
Zebpay, Unocoin, Coinsecure and Searchtrade have collaborated and created a
group called “Digital Asset and Blockchain foundation of India (DABFI) to
liaise with the government and regulatory authorities to increase its
acceptance, visibility and push
to give it a legal status.
The likelihood of the Indian government
banning the use of bitcoins which was a distinct possibility at one point in
time is now highly unlikely as more and more countries are getting it under
their legal ambit and purview. One can sense a paradigm shift in the attitude
of the government and regulators in India towards this digital phenomenon - the
initial sense of skepticism and perhaps even hostility has been replaced with a
sort of quasi-acceptance that digital currency is here to stay and legislation
needs to evolve to keep pace with this.
With this interesting backdrop, we come to
the moot question, how does one buy or earn a bitcoins?
The
easiest way is to register yourself on a bitcoin exchange and buy one. The
other mode would be to sell your products online to a buyer who is willing to
pay you in bitcoins. If you want to earn your bitcoins by looking at it as an
alternative business, you can enter into bitcoin mining. It requires hardware
tools, electricity and high internet speeds which is a challenge in India. Easier
still would be to invest in a company that is into bitcoin mining and earn a
10% return on your investment for eighteen months.
To
store/transact in bitcoins, one needs to have a bitcoin address. How does one
get it? In order to have a bitcoin address one needs to buy a bitcoin wallet
which is available online. The wallet has only one private key in the
possession of the owner and one or many public keys which can be given to other
users to receive payments. When one user A transfers the bitcoin to another B,
he needs to know the public key of person B which tends to be between 27-51
characters long. The private key is not to be disclosed to anybody and incase
the private key is lost it is almost impossible to retrieve or replace the
bitcoins.
Why
should you exercise caution before
taking the plunge?
As is the case with any
innovation, bitcoins too come with its own set of challenges which should be taken
into consideration. In its existence of 8 years, bitcoin prices have been highly
volatile gyrating from $13.36 in January 2013 to $1,124 in November 2013 then
falling to $445 in in April 2014 to $1,622. More often than not price
movements tend to mirror any positive or negative moves on the regulatory front
and thus the price movements tend to be speculative. In the absence of a
central governing body, the possibility of market rigging and price
manipulation is a distinct possibility. What
doesn’t help its cause is the bankruptcy of Mt. Gox, the world’s largest
bitcoin exchange in 2013 when half a billion dollars’ worth of Bitcoins
‘disappeared’ after a hacking incident. Also as mentioned earlier transactions
are not tied to anyone’s identity so bitcoins can be used for illegal
transactions.
So what does the future look like?
Bitcoin is synonymous to crypto currency on account of its popularity,
but it would be interesting to note that, it is just one among the more than
750 crypto currencies currently in existence.
The online
market has been expanding at a fast pace with more and more consumers having
access to the internet. Directionally we are moving to a virtual economy and
therefore virtual currency or digital money has opened up a new avenue for seamlessly
transacting online.
Irrespective of whether bitcoins eventually survive
because of uncertainty on its legal status and/or technological glitches,
digital currency is here to stay and regulators can ignore this only at their
peril. As Mark Twain so presciently once
said, “The more things are forbidden, the more popular they become.”