I first heard about Bitcoin, in Nov 2016, around 7 years after it has been in existence. I was mind blown by the underlying technology – BlockChain and also for the matter that it was totally open sourced and decentralized. But a month back, out of curiosity I invested some amount in Bitcoin. In this article, I will try to cover as much I know about the cryptocurrency and how I decided to finally invest in crypto-Tech; along with that I will discuss risks, bitcoin bubble, the legal status of bitcoin in India etc.
What is Bitcoin?
Bitcoin is the first cryptocurrency founded by an unknown person referred to as Satoshi Nakamoto. Unknown because it’s still quite unclear about who actually invented this Tech. It is the first decentralized digital currency which works on the P2P(Peer to Peer) network. In a conventional Banking /Finance system, there is a governing body, which oversees everything, and is involved in every aspect of any transactions we make, but for bitcoin, there is no governing body, its the end users who decide everything and anything, exciting right! Bitcoin doesn’t require your identity or any kind of documents, you’re completely anonymous and you can transact money (bitcoins) with anyone without disclosing your identity at all. For transactions, all you need is a Bitcoin Wallet. As the name suggests, the wallet is used to store payments that are being sent and received.
What is BlockChain and how does Bitcoin work?
Let’s look at this step by step:
Step 1: Let’s say Bob has 10 bitcoin in his wallet and he wants to send 5 bitcoins to Travis who has initially 0 bitcoins.
Step 2: Now, a transaction is generated containing the information, that Bob is left with 5 bitcoins and Travis has got 5 bitcoins.
Step 3: A wallet in a Bitcoin network is a combination of Public and Private Key. So now this transaction information (from Step 2) and the private Key of Bob create a Digital Signature using special Cryptographic Functions.
Step 4: This signature is then verified by other people in the network to make sure that the transaction really happened between Bob and Travis.
Step 5: After the verification that Bob really made the transfer, this transaction is submitted to a large pool of New/Unverified Transactions.
Step 6: Now parties in the network can choose one of the new/unverified transaction and try to verify it by solving a highly complex cryptographic puzzle. The cryptographic hash function used in the puzzle is SHA 256. What happens is, the hash function takes an input of variable sizes and generates an output of fixed size, and the parties have to guess the input by seeing the output. To actually solve this puzzle requires high computational power and the parties doing it are called Miners. On successful verification of transactions, Miners are gifted with Bitcoins as a reward.
Step 7: Now once a transaction is verified, it is added as a block to the chain of transaction blocks (Blockchain) and the bitcoins are successfully credited to Travis’s account and the Public Ledger Copy is updated to all the Miners distributed in the network.
Note 1: The Public ledgers(Bank statement of transactions) or BlockChain copy is maintained by all Miners across the world, so whenever a transaction happens, everyone in the Bitcoin network, updates their copy of ledger, but there is a possibility that same transaction is updated to 3 persons at 3 different time due to network delays and other reasons, So to make sure that a unique transaction is added once into the Blockchain, this Puzzle solving mechanism is used.
Note 2: Bitcoin also solves the double spending problem. Say suppose A has 100 Rs and he wants to send B & C both 100Rs each, but in our current banking system, A will either be able to send to B or C, but not both, as the bank won’t allow it. But in bitcoin, this becomes tricky as the whole system is decentralized. So a check is implemented in the system to verify all previously done transactions on the Bitcoin network for a particular wallet before any new transaction is to take place.
Videos on how Bitcoin Works.
Fun Facts about Bitcoin!
1. In all, there will be 21 million bitcoins that will be generated in its complete lifetime.
2. You can watch anybody’s transactions using their Wallet address as the ledger is public and is accessible to everyone in the Bitcoin network.
3. Anyone in the network can Mine or Transact bitcoins, that is the most impressive thing about the whole system.
4. You can’t reverse a transaction on Bitcoin Network.
5. On 22 May 2010, Bitcoin was first used to buy tangible products. 2 Papa Johns pizza was bought for 10,000 Bitcoins which estimated to about 41$ at the time.
6. For every 210,000 blocks added to the blockchain, the bitcoin rewards to the Miners get halved. So what started as 50 in 2009, decreased to 25 and currently it’s 12.5.
My Bitcoin Investment!
To invest in Bitcoin one needs to go to an exchange and buy bitcoin against INR. Basically, these exchanges will do a KYC and then you can directly debit the amount from your bank account to the exchange. I was into bitcoin solely because of the tech, but little did I knew that the bitcoin prices will shoot up like a Rocket. I purchased some bitcoins in Nov 1st week when the prices were around 4.89 Lakhs/BTC and as of today at the time of writing this article (12 Dec 2017, 08:52 PM) the price is 13.7 Lakhs/BTC.
Should You Also Invest?
The answer could be very tricky and depends upon a person’s risk-taking appetite. I invested in the tech because I am fascinated by the underlying technology, BlockChain, so for me making money will always come second as my main goal is to learn the Crypto market as it has the potential to revolutionize our Financial System.
Having said that, there is no denying the fact that, Bitcoin prices have gone up tremendously within a matter of few days/months. Around a year back, at this time only, the Bitcoin prices were around 50K, and today is has touched 1300K INR. So should you Invest? In the crypto market, the thumb rule of investment is Invest the money you’re ready to lose. As the entire system is decentralized, there are many ways you can get scammed. Eg. The bitcoin prices can go down tremendously and may never come back again to the price you bought them for, The bitcoin exchange gets closed and ran away with all your money etc.
Don’t get overwhelmed by hearing about others earnings, Do your Own research, Understand the risks and act accordingly. But first learn and research about Bitcoin if you’re really fascinated by the tech and also if you’re looking to make quick money, Knowledge is the key.
Is Bitcoin a Bubble?
You’ve probably heard this a lot in the News, about bitcoin being a bubble and to an extent its right as well. The price surges are exponential, like within hours the prices may jump 2 Lakhs or go down 2 Lakhs and it has all the qualities of a modern era bubble, which can burst anytime, resulting in the prices going down dramatically. Having said that, Bitcoin for the past few months have grown tremendously, and have resisted and survived the bad press. Do Your Own Research (#DYOR) before coming to a conclusion on investing.
Is Bitcoin Legal in India?
RBI(Reserve Bank of India) has said it loud and clear that Bitcoin is not a legally recognized tender and one should stay away from them, which is partially correct on their part because the risks are high. But there is another discussion that’s been taking place in the Indian Crypto scene, regarding the Legality of the Cryptocurrency. Some say, that since something which is not legally recognized cannot be Illegal; while some say that in coming days, Bitcoin will emerge as a Legal Tender etc. But contrary to this, with the prices surging and Exchanges getting more traffics, despite the warnings, suggests that more and more people are getting attracted towards Bitcoin.
Bitcoin is still in its baby phases and there is a lot to learn about the tech, but I hope in future Bitcoin will get the respect it deserves.