Bitcoin are the talk of the town, and I am not talking of investment bankers or the B-school graduates; Homemakers, local shop owners, and young college kids seem to know a lot about the mystic cryptocurrency.
The recent surge in the Bitcoin price from few 100 dollars to 16000 dollars (Rs. 10,36,362) for a single Bitcoin has caught the interest of general public.
Media Channels and mainstream news publications are also more interested in the Bitcoins than what is happening to the poor farmers or women rights.
The lure of making quick money without lifting a finger and how quickly the investment of Bitcoin millionaires is souring is a thing to envy.
Bitcoins are the most explosive and debatable topic currently.
I read on Facebook yesterday a post which was shared multiple times, said “The only advice I would give to my 18-year-old self, seven years back, was to stop wasting the Rs. 500 pocket-money and start investing in Bitcoins”.
Popular Stats Bitcoin
The enticement is real, it is tempting, it can make huge money for you, but should you invest?
Let’s find out some answers, but if you are not familiar with the Bitcoin here is a concise article to understand all the basics of Bitcoin.
Bitcoin Origin
Satoshi Nakamoto is an urban legend, the father of Bitcoin, the person or a group of people who created Bitcoin (an Open Source Software) in 2009.
Satoshi Nakamoto was involved in Bitcoin creation and implementation till December 2010 after which the Bitcoin Core and the network alert key to Gavin Anderson who later became the authority at the Bitcoin Foundation (is a nonprofit corporation founded in 2012 to promote cryptocurrency usage worldwide).
It is reported that Satoshi Nakamoto mined 1 million Bitcoins in the early days, you can do the math to calculate the present value of his fortune, it is bewildering. (15 Billion Dollars).
Also, no one knows who is Satoshi Nakamoto, not even the people who were working online with him on the project in the initial days. The mystery Bitcoin founder has kept his identity secret so far, and there are many theories why he has not come forward.
The theories suggest that the man wants to live without all the media hype and want to keep his fortune safe from the prying eyes of hackers and antisocial elements and the government and the secret service agencies.
What is BitCoin?
Bitcoins is a cryptocurrency and worldwide payment system that allows you to transfer digital payment to any individual having a cryptocurrency account.
Bitcoins are the most disruptive form of digital currency which has challenged the centuries-old banking and payment transfer system.
A notable difference between Bitcoin payment Vs. Digital payments are that Bitcoins are peer-to-peer transactions (from one person to another) while digital currency transfer involves a third-party like a bank to work as an intermediary.
Bitcoins are called as decentralized digital currency. Also, long before the Bitcoin came into the picture a computer scientist Nick Szabo invented a decentralized cryptocurrency in the year 1998, called “Bit Gold.”
Bit Gold is a precursor to the Bitcoin technology and contribution of Nick Szabo is worth mentioning here.
In standard money transfer process, the sender sends money to a third-party (a bank or exchange) which then settles the payment with the receiver. In Bitcoin, there is no intermediary, but the transaction is recorded on a publicly distributed ledge called “Blockchain.”
Latest Price of Bitcoin
The blockchain is sizeable public ledger which records every Bitcoin transaction details to prevent double spending of the digital currency and consists of blocks of information.
New Blocks of information is added to the blockchain when new transactions are done, and the previous records are secured cryptographically in a manner that they are tamper proof.
Bitcoin Technology
The Bitcoin as mentioned above is a cryptocurrency that in simple words means a secured currency that uses cryptography to handle transactions, create more units and verify the transactions.
It may sound a bit confusing, but the cryptography uses a technology SHA-2 (Secure Hash Algorithm 2), developed by NSA (National Security Agency).
The SHA-2 uses a pair of public and private key to authenticate the transactions like we use the signature on a cheque to authenticate a transaction or use our MPIN or Password for digital cash transfer.
However, the SHA-2 is far more secure than the traditional signatures.
As mentioned above all the transactions are stored in the blockchain that is a ledger which stores the details of all the transactions.
Bitcoin Mining & Transactions
You may have also come across the term mining and how graphics cards are used to mine cryptocurrency.
Mining is done to maintain the blockchain and process transactions/ create new Bitcoins with the help of powerful computers by solving mathematical functions.
The Bitcoin Mining uses a proof of work system, and it is very energy intensive.
The Below Diagram shows the complete life cycle of how a transaction is initiated and completed.
Whenever a new set of transactions need verification and addition to the blockchain, they are bundled in a unique Block. To add this block to the existing blockchain, a mathematical problem is required to be solved by the miners to provide the proof of work.
The below diagram shows how the Bitcoin Transaction Takes Place using a Block Chain Diagram:
This proof of work requires the miners to find a number called nonce which is very difficult to find and uses a powerful computer or a group of computers called as mining pool.
Once the proof of work is found the new block is added to the chain and is sent to different nodes (miners), who can easily verify this and the blockchain is updated.
The minor who is successful at finding the nonce is rewarded with newly created Bitcoins and also gets transaction fees.
Initially, 50 bitcoins were rewarded to the successful minor, which dropped to 25 in late 2012 and then to 12.5 in the year 2016. It will continue to reduce to 6 and 3 and 1.5 and finally to Zero, and only transactions fees will be given to the minor as a reward.
The reward gets halved after every 210,000 blocks are created, and it will take close to 4 years for doing this. Also as we know the total number of Bitcoins are limited to 21 Million, the mining rewards will end by the end of the year 2140.
Minors Revenue Trend
This the only way new coin creation process takes to please, and new coins are added to the system.
The difficulty of finding hash is adjusted every two weeks depending on the number of nodes participating in mining and the hardware prowess of such nodes.
The hash difficulty is increasing with time, and more and more powerful computers are required to mine.
Besides, a mining pool is created by minors where several computers work together to find the hash, and the reward is split between them based on the work done by each participant.
Bitcoin Core Wallet
Several hardware companies have launched unique motherboards and miners are using the high-end graphics cards and processors to mine the cryptocurrency, which in turn has increased the demand for these parts.
However, this has caused the prices of high-end graphics cards to rise, a pain for the regular PC gamers looking for more computing power to play the latest games.
Energy Concern With Bitcoin Mining
As stated above a huge number of resources are employed to create the blockchain and find the hash to add a new block.
The actual power that is productively used is the winning computer’s while the rest of the power consumed is a waste.
As per a Citibank report, the mining operation will consume as much power as a whole of Japan in the future and according to a survey done in Oct’17 suggested that the Bitcoin mining consumed 624 Megawatts power.
It is said that each Bitcoin transaction takes about 300 KWH of electricity which is sufficient to boil 36000 kettles.
Also, the Guardian reported that the consumption of electricity by the Bitcoin mining operation is more than the energy consumed by the whole of Ireland.
The amount of energy consumed is very high, and the wastage is ridiculous which is even harmful to the climate and is the most significant drawback of this technology.
Bitcoin Units and availability
The term Bitcoin came into existence when Satoshi Nakomata first published a whitepaper on 31st August 2008. Bitcoin has small denominations, and the smallest Bitcoin unit is called as Satoshi to honor the founder and has a value of 0.00000001 bitcoin.
A millibitcoin is 0.001 bitcoin, so you don’t need to buy a Bitcoin which is currently priced at $15000 or Rs. 1,000,000.
Bitcoin availability is limited to a maximum 21 Million coins out of which about 1 million coins are with Satoshi Nakomata.
Bitcoins can be lost, if the person holding the private key to the Bitcoin wallet loses the key, the Bitcoins can be locked forever and will be out of circulation.
There have been incidences of people losing the private key and also losing the bitcoins forever; the need is to keep 1-2 more backups of the private key in a pen drive or SSD to keep it secure for years.
What is a Bitcoin Wallet?
A bitcoin wallet stores your public and the private key to transact and also has the record of how much Bitcoins you own.
Lightweight Client Apps are available which can help you transact in the bitcoin without a need for having the entire blockchain on your machine.
The size of complete Blockchain is close to 136 GB which is usually downloaded and kept by the minors, and most people just use the lightweight clients to transact.
Frauds and Hacking in Bitcoin World
As per a research was done by Carnegie Mellon University (CMU) up to 9% of the transactions done in 2012 was used for the drug trade, weapons purchase and child pornography and other shady deals.
Furthermore, Bitcoins are considered safe due to the cryptography, but there have been incidents of hackers stealing a fortune from individuals as well as currency traders which also is seen as a security risk by many people.
There have been malware attacks which steal the private key stored on the computers and then used to steal the Bitcoins and also in 2014 Bitcoins worth at 220,000 were stolen by using a botnet based virus.
Unauthorized mining is another issue associated with Bitcoins, and hackers have used others computers to use for Bitcoin mining without computer owners knowing that their PC’s and servers are used for the mining work.
In December 2013, 2 people were arrested by the German police who were accused of mining close to 1 Million dollars worth of Bitcoins using others computers with a customized botnet software running in the background without the knowledge of owners.
So, next time you see your PC usage going bonkers for no reason, you may want to look deeper. You can use No coin chrome extension to avoid any hacker to mine cryptocurrency using our PC or Laptop.
Also in November 2013, about 100 Million Dollars of Bitcoins were stolen from illicit goods online market called as Sheep Market Place.
The theft led to the closure of the company in December 2013 and later one person was arrested by Czech police who bought an expensive house paid fully in Bitcoins and then was estimated to have over $800,000 Bitcoins.
Biggest Bitcoin Fraud
Later on, about 200,000 bitcoins were recovered but the company that was a leading exchange handling 70% of the Bitcoin trade worldwide, filed for bankruptcy and closed down operations in 2014.
Reported in 2017, a cryptocurrency mining company Nicehash lost 4700 Bitcoins (worth more than 70 million dollars). The company shared the news on their Facebook page and stated that this was a professional attack and they are investigating how it happened.
Bitcoin Acceptance By Merchants and Steam Refusal
Typically credit card processing fees of 2-3% are charged by the merchants, and in case of Bitcoin, the fees for accepting payment is less than 2%.
A lot of companies like Microsoft, Dell, NewEgg, and Paypal accept payment using Bitcoin also you can easily transfer the payments to any of your client or supplier who accepts payment using Bitcoins.
One key advantage of peer to peer payment is that you may not need to disclose the amount to the government and can even bypass the GST (tax) as the government has no way of finding out about these payments.
The use and acceptance are limited for Bitcoins currently, and there have been cases like the recent episode with the famous Gaming service Steam stopped accepting payments in Bitcoins.
Steam Stops Accepting Bitcoins
Steam is a popular platform to purchase games, and they were accepting payments with Bitcoins, but the recent volatility in the Bitcoin has led them to stop allowing the payments.
Moreover, steam has shared in a statement that there is so much volatility that between the time a transaction is initiated and completed, the value of the Bitcoin changes, which leads to either overpayment or underpayment by the buyer.
Then a secondary transaction is required to settle the balance which is leading to issues for them.
How to Invest in Bitcoins in India
So how can you get started with investing in Bitcoins in India? There are several Bitcoin exchanges which allow you to purchase bitcoins online like Zebpay, Unocoin, Coinsecure, Coinmania, and Localbitcoins, etc.
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There are also several local exchanges set up by individuals who accept cash and create a wallet for you, but they will also take the documents like Aadhaar and Pan card if you don’t want to go the online route.
We recently spoke to one such exchange owner who is running it in Delhi, and he shared with me the business is booming and with the recent surge in the Bitcoin price and media popularity lot of retail investor want to try their luck in this business.
Who are the Major Investors in Bitcoins?
The bitcoin transactions are anonymous, but each transaction comes with a coded address which leads to the tracking of major investors, but their exact details are not known.
Aforementioned, the founder of Bitcoin Satoshi Nakamoto has 1 Million Bitcoins which is estimated to be worth 15 Billion dollars.
As per a Bloomberg article, 17.3% of the total Bitcoins are controlled by top 100 investors.
The Winklevoss Twins (from whom Mark Zuckerberg stole the idea of Facebook) invested about 11 million dollars in Bitcoins in 2013 and owns about 1% of Bitcoins in the world, worth more than a Billion Dollars based on current valuation.
Trends and Fluctuations Bitcoin Value
Market Capitalization of Bitcoins in US$ is More than Visa Over 250 Billion Dollars
Bitcoin Futures Trading
On 10th December 2017, the CBOE (Chicago Board Options Exchange) has allowed investors to take bets on the Bitcoin futures. The price for Bitcoins increased by almost 10% to a peak of $18,700 and then settled at $17,800.
The CBOE website almost crashed with the volume of traffic it got and trade for futures was suspended twice by the circuit breakers due to excessive volatility in the Bitcoin value. Bitcoins Future trading is seen as a positive step and listing on a regulated exchange makes the Bitcoin more mainstream but at the same time more opportunity for speculators to gamble on this volatile digital currency.
Is Bitcoin a Bubble: What Experts Say About Bitcoins
Many authorities have labeled Bitcoin as a speculative Bubble, Fed Chairman Alan Greenspan and economist John Quiggin are few people who have criticized the Bitcoins for being a pure speculative instrument.
Robert James Shiller who is a noble prize winner and economist has said that Bitcoin “exhibit many characteristics of a speculative Bubble.”
Also, it is said that if Satoshi Nakamoto started selling the Bitcoins in the market, this could lead to the crash of this speculative bubble but others believe that it is not going to happen as he knows well that the cryptocurrency value is going to surge.
On 14 March 2014, Warren Buffet, (one of the worlds greatest Investors has said: “Stay Away from Bitcoins, it is basically a mirage.”
What is RBI saying about Bitcoins?
Indian Reserve bank on 5th December 2017 has also cautioned Investors to stay away from the Bitcoins and warned about the risks of investing in any form of cryptocurrency. RBI says that cryptocurrency has operational, economic, legal and customer protection risk.
RBI has also said that they have not given any special license to any company for running a trading license in India or operate in such schemes.
Historical Investment Bubbles
Bitcoins are compared to previous such schemes where investors have lost huge sums of money. Ars Technica spoke to two experts in the field from the University of Maryland and MIT Brent Goldfarb a business professor, and William Deringer a historian.
Both the professors have researched in the field of financial bubbles and said that they see similar trends with the Bitcoin. The previous investment bubbles like the Great Briton Railroads in 1840 or the internet companies bubble in the 1990s have similar characteristics.
They have also drawn an analogy to the Tulips Mania which happened in the Europe in which happened in 1630. Tulips were a rarity in Europe then and were imported from the middle east.
There was a demand for colorful and beautiful tulips in Europe and which shot up the prices by 20 fold in the late 1636 and after a couple of months crashed to a normal level.
Back then they were cross-breeding the tulip seeds, and new colored tulips were developed. There was a lot of excitement as no one was sure what will be the final color when the seeds were sown. The added mystery enticed the investors and also created the hype.
People are not only buying Bitcoins for the economic value of the currency but also it brings a lot of coolness factor, it is a bold statement which tells who you are, how aware and futuristic you are compared to your peers, in the same way, the exquisite Tulips would have made people feel superior in the 1600 century.
Is Bitcoin a Good Investment opportunity?
So even after reading a lot about the Bitcoin still leaves some doubts about the technology or how the Bitcoin work, you are not alone.
The underlying technology is cutting edge, and if you are new, it will take some more thorough reading to understand some of the concepts.
But do you need to understand every part of Bitcoin technology to become an investor, the answer is No.
As a lot of people use the internet every day but they don’t understand the underlying technology, how it works, how the web pages are generated, what is the role of Java, CSS, HTML or the web server in offering the internet pages.
Same way it may be difficult for everyone to understand the Bitcoin technology in depth, but we will suggest you do a lot of reading, watch videos before even thinking about investing in the Bitcoins.
Also, there are lots of misleading Ads which promise you quick money by investing in Bitcoins, humble advice, just stay away from them.
We am not a financial advisor to tell you whether you should be investing in the Bitcoin at this point of time or wait for the market to get corrected.
You will find rare advice from prudent investors to put money in Bitcoin. Mark Cuban, the Billionaire investor said that you could invest upto 10% of your saving in Bitcoin, though you should be prepared to risk your investment for the gains.
Bitcoin is a new phenomenon, and some believers think the value of Bitcoins will rise exponentially with time and others who believe it is a bubble like the tulips bubble or the technology stocks bubble which can burst anytime.
The thing is, Bitcoin Boom is real, and the lure to make money in Bitcoin is real too, but can you risk your hard earned money?
Bitcoins Explained in Videos
Mystery Founder of Bitcoin
What is Bitcoin by Bitcoin.org
Bitcoin Transactions Explained Technical
How the Blockchain is Changing Money and Business – TED Talk
Additional Resources
You can check some latest Stats on Bitcoins on Bitcoin Info. Also, can read more on Bitcoin on Wikipedia. Also, share your thoughts in the comments below, or your experience if you have invested in the Bitcoins. We will update this post with more latest developments so you can come and check it in coming days.
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