Bitcoins are a cryptocurrency or a decentralized digital currency through which anyone can send or receive any amount of money at any part of the globe. It follows a peer-to-peer system which means that users can undertake transactions directly without any intermediary like a bank or a credit card company.
It made headlines when the Wana Cry software hackers demanded to be paid in Bitcoins. Bitcoins make use of the Blockchain technology that allows two parties to anonymously make transactions. This would make it difficult for the hackers to be tracked down. Once they have the bitcoins, they can convert it into cash using any app that allows them to do so. PayPal is one such app.
1. Bitcoins, like shares, are volatile in nature:
The Bitcoin market is deeply affected by daily transactions, i.e., daily buying and selling of bitcoins, a phenomenon similar to the stock market. Bitcoins cannot be regulated by any monetary policies.
A daily fluctuation in Bitcoins is considered standard, unlike in other currencies. This is because only a limited amount of this currency is available. By default, it always will be an unstable currency since it has no real value. For instance, today, if you spend x amount of Bitcoins in purchasing product A, tomorrow the same product A could be available at x/2 amount. People who invest in Bitcoins should keep track of its value at all times. There are many sites that help keep track.
In India, there are various secure websites from where you can buy and sell the currency like Zebpay, Coin secure and Unocoin.
2. Bitcoin transactions are stored in a vast digital ledger called ‘blockchain’.
In our day to day transactions, we trust third parties like the government, the banks, etc. to facilitate and approve our transactions. No transaction is open to the public domain.
Bitcoins, however, maintain a collective book-keeping of all the transactions. All these transactions are public and available in one digital ledger distributed across the network. This is called a blockchain. This is where mining comes into play. Bitcoin miners keep this public ledger up to date, complete and verify the transactions understaken by the users. Further, the Bitcoin miners solve a mathematical problem with a known partial input. It could take several combinations to get to the actual input. The first miner to solve the problem wins and is rewarded in Bitcoins.
3. There are only 21 million bitcoins in the world.
Bitcoins are not like paper currencies that can be printed and regulated. They need to be mined via digital means, just like gold is mined out of the ground.
The more they are mined, the fewer there are in the market. When the algorithm was formulated by Satoshi, it was estimated that there will be only 21 million such coins. Today, about 16 million dollars’ worth of bitcoins have already been mined.
4. Once purchased, securing your bitcoins is of paramount importance.
As we discussed, these coins are a hacker’s favourite. This makes them prone to malware and hence, should be stored securely. Experts advise the use of paper wallets and hardware wallets.
Paper wallets contain data necessary to generate Bitcoin private keys. A private key is a secret number that allows Bitcoins to be spent. A hardware wallet, on the other hand, is another type of bitcoin wallet which stores the user’s private keys in a secure hardware device. It is considered better than paper wallets mainly because the private keys cannot be transferred out of the device.
For making transactions, you will need a wallet address of the recipient. Bitcoins allow users to transfer and make payments in any part of the globe. There is no governmental monitoring for these transactions. That does open the doors for underhand transactions in the dark web.
5. Investing in bitcoins has its own risk
India has a major population investing in Bitcoins. This makes it important for us to know some of the risks associated with the use of Bitcoins and its ilk. One of the major concerns is that Bitcoins are not formally recognized by our government.
This means that if you lose your money in Bitcoins, there is nowhere to go. Also, keeping your Bitcoins safe is a major concern and not an easy task. Paper wallets come with their own set of risks. Another point of concern is the rise of fake currencies. Before investing, one must look into the market cap and the past performance. And of course, most importantly, Bitcoins have no fixed market value and depend entirely on daily buying and selling. Just how a person welcomes risks by investing in stocks, a person welcomes greater risk by investing in Bitcoins.
The RBI has constantly warned the Bitcoin users against potential security threats. Considering how the user base is increasing, they sat down a committee to regulate the cryptocurrency. However, they have not reached any agreement yet.
Also read a quick rundown about cryptocurrencies to clear your biggest doubts.