Answering all Bitcoins questions – What is Bitcoin, blockchain, and mining? How miners make money? How to trade in Bitcoins in India and is it legal in India?
Bitcoin was launched in 2009 by a person or by a group operating under the name Satoshi Nakamoto but it is quite unknown who was Nakamoto and where they have been since the launch of Bitcoin.
Mike Hearn was one of Bitcoin’s core developer. Still, there is some mystery about it but that is beyond the scope of this article. What is important is in January of 2016, on his blog he outlined why Bitcoin has failed and why he has cashed out all of his coins. Though he could have managed a better pricing for his currency, it is what it is.
After he left the Bitcoin community, the price of BTC has seen a sharp rise. The increase in price is more than 10 time since then.
I was following Bitcoin closely before Jan of 2016 but after reading his view, I stopped following it.
Optimists may look at it as an opportunity where there are a great demand and very less supply. Pessimists don’t understand a reason for the demand.
Though I am an optimist when it comes to investing in equities, I am a pessimist with bitcoins. The reason being a pessimist is, I don’t keep 2000 rupee notes in a locker as an investment and so why should I keep another such currency like Bitcoins in my account as an investment.
Money itself can’t be an investment. Either it is traded or it is used for an exchange with a purpose. As an example, I may not keep USD (assuming I am allowed to) just can go from 64 to 70. So why should BTC be kept that way?
Currency isn’t for investing till now and it can change in the future but I am not yet convinced.
I started gathering information once again when it showed some signs of correction and was hovering around $2000 mark but before the blip of an eye, it doubled. The other reason for me being to be a pessimist in BTC is the speed at which it is gaining value. (Angur Khatte hain)
What is a Bitcoin?
Bitcoin is a digital encrypted currency commonly known as Cryptocurrency which isn’t tied to any bank or government and so it allows people to spend money anonymously.
Though people can transact and earn coins people can also generate coins through mining which isn’t technically digging coins like gold mining but it means providing your computers computation power to authorize and verify other users’ transactions.
Bitcoin and Cryptocurrency transactions are anonymous but when you convert them into real currency, you may need to verify your identity with the exchanges. Often people avoid converting it to the real currency and prefer transacting online where Bitcoin is accepted as payment method.
What is Blockchain?
Blockchain in a very simple term is a digital account statement that records the transactions in chronological order for Bitcoin or any cryptocurrency and is available publicly for the cryptocurrency network.
Each block of data contains transaction details that are chained to the next block using a cryptographic signature creating a series of blockchain in the chronological order.
Understanding it from a banking perspective, it is similar to an account statement but it isn’t only an account statement for a particular account but for the complete banking system as a whole and is available in an encrypted format.
The transaction details in a blockchain can be verified and authorized by a computer program.
What is mining?
Bitcoin is decentralized and it isn’t linked to any bank or government, so it needs a process that can validate and confirm the payment.
Mining is a process to validate, authorize and confirm a transaction from the information available in a blockchain.
Anyone can participate in the process of mining by running a computer program. In addition to running on the traditional computer, there is Bitcoin mining hardware available that can process transactions much more efficiently than a regular computer.
The major expense to mining is the uninterrupted power supply and a high bandwidth Internet connection.
How miners make money?
Mining is a process where the computer needs to solve the complex encryption problem associated with each of the unverified transaction in the blockchain.
Each miner competes to solve the puzzle first and one who correctly solves it first is rewarded for it with the needed bitcoins to successfully validate the transaction.
Initially, the reward for mining was 50 bitcoins. The calculations are such that the reward reduces as more and more bitcoins are mined. It was reduced to 25 on 28th November 2012. On June 9, 2016, the last reward decreased was from 25 to 12.5. Though the reward of bitcoins has reduced, the real value has increased due to increase in the price of bitcoins since June 2016 and it is the main reason for the much popularity of Bitcoin mining now.
As on Aug 19th, 2017, the reward to mine a single transaction successfully is over 3 lakhs INR.
How to Trade in Bitcoin in India?
There are numerous Bitcoin exchanges in India and you can see the major Bitcoin exchanges in India at BTCRates.in
Note1: I personally don’t trade or invest in BTC nor recommend it to others and so you have to use your own due diligence before trading with any of these exchanges.
Note2: There is no governing body to validate these exchanges which mean any exchange can vanish from the Internet on any given day.
So if you plan to trade in Bitcoin, do with the money that you are ready to loose.
Are Bitcoins Legal in India?
Japan and Russia have legalized the use of Bitcoins but India is yet to officially accept cryptocurrency. In fact, RBI had cautioned Bitcoin and cryptocurrency traders but it hasn’t banned Bitcoins or made it illegal in India.
Here is an article on Business Today on bitcoins legality.
There are Bitcoin exchanges in India as of now which means it isn’t illegal but you have to keep your eyes and ears open as and when any new rule or amendment comes from RBI.
Being in the technology field and tracking Cryptocurrencies and Bitcoin for some time now, I believe it is surely in a euphoric phase creating a bubble.
Blockchain can hold a certain amount of transaction data. There is more demand than supply for bitcoins which is constantly driving the per dollar value higher. The reason for the higher demand is purely for stocking of Bitcoins as there is assumed to be a limited supply of it in the future. The flipside of it is, more than 300,000 transaction happens per day on Bitcoin network. So more and more bitcoins are being rewarded to the miners.
When Bitcoin investors will liquidate their investments, you never know what may happen. The worst part is, you will never know when they start liquidating and move to something else.
The best aspect of Bitcoin is the blockchain technology. It is the technology of the future and other cryptocurrency are being developed using the technology and eradicating the issues that are seen in the Bitcoin currently and Indian banks are making a move to the blockchain technology.