What is Bitcoin or Cryptocurrency and how does it work? 

Blockchain Image

    By this article, you will know what exactly is bitcoin, and more importantly whether you should invest in it or not?

    Recently, as an investment asset Bitcoin is popularly discussed as one of the top 3 searched keywords of 2020 on Google, 'What is Bitcoin?'

    And I will try to answer this question throughout this article.

    To understand Bitcoin, we will have to track back a little to the concept of money. 

    To understand this, imagine that there are only two people in the world, one harvests wheat, and other feeds so they have decided that whatever milk cow gives, the price of one glass of milk and one kilo of wheat is the same, so it's a barter system. When one wants to drink milk, he gives a kilo of wheat to the other, and when one wants a kilo of wheat, he gives a glass of milk and they are living peacefully.

    Then on another day, one person asks, 'Do you have butter?', then he says, 'I' don't have butter', the former says, 'Because I have milk but wanted butter, not wheat'. And now you can see, that this barter system where one kilo of wheat is equal to one glass of milk, will not work for long. so, there was a need for a standard, a standard that everyone understood, knew, and accepted. so then very quickly because of this barter,  different standards started evolving, and most of these standards were centered around metals. and suddenly, gold then became a default. that defines the price of everything else in the terms of gold. defined by gold. But that's also complicated. Why? it's difficult to carry gold physically,  it's even more difficult to make small pieces of gold, naturally, one glass of milk will not be equal to 10 grams of gold, it must be equal to a very small element of gold. so it became complicated.

    And then came the third revolution which is, no barter, no gold, but if you go to the government and say to them, 'I have a kilo of gold and you keep it in your locker, in exchange give me something that will tell people that you have my kilo of gold'. The government happily gave a receipt in exchange.  Now there were as many receipts in the world as gold. so, for a long time in the world, every government, every country's government had as much currency as the amount of gold they had and they had given out that many receipts. 


    Then at some point, the government felt that to grow the economy, to help the economy, Then we need more money and we have to ask for more gold from somewhere. So we need to have such a point, such a system that will help us to get out of this standard of gold and that's when the world was freed of the gold standard exchange. Ultimately, the government said that the receipt we have given you, take that in my name. if we are saying that you have a 100 rupee note, then we are giving you our word that it is a 100 rupee note. and that is why when you look at a currency note, it's quite interesting, don't know if you know about it, on every currency note, Here the photo of 10 rupee note, you can take any note, it's written, 'I promise to pay the bearer the sum of 10 rupees' signed by the Governor who is basically the head of the Reserve Bank of India, our country's central bank. the note that you have is simply a measurement of trust, and that is how the world functions. Imagine, the beauty of this.

    In fact, I would argue that money is perhaps the biggest product in the world which is driven purely by trust. 


    The conclusion of this discussion?

    There are certain challenges that are very visible in how this thing works. 
    Firstly, it is centralized and that means you don't have control over what the bank is doing with your money. All that you know is that you have the money but how is that money being used, you don't have that control because that is the right of your bank, not yours.
    Secondly, if the bank or government wants to demonetize this money at some point, they can.


    What happened to demonetization in India?


    The government said that we are demonetizing 500 rupees and 1000 rupees notes. And you don't have control over that. Government can void this value anytime and all its ledger details, accounting system, everything is maintained by the bank which gives them unnecessary and very high power over your money. And that's why the bank defaults, recently whatever has happened in India where bank gave bad loans, not bad loans but gave loans to people who couldn't pay back and hence public lost a lot of money, all such cases and we can't do much about it. And that's why Bitcoin, a currency that nobody owns, it's not centralized, it is decentralized and it is transparent. You are the only one who controls your money, you are the only one who knows who you can give it to and why and how and when and nobody owns it centrally. A man called Satoshi Nakamoto had written a research paper in October 2008. No one knows who is Satoshi Nakamoto. where does he live, is he even real or somebody has used an alias to write the paper? He was the first one to explain Bitcoin. A concept that would be decentralized and fully transparent. 

    And how will it work? 

    It basically says that just like you have a UPI address, it's your unique address, it has a pin or a password similarly you have a Bitcoin address, it is unique, it is attached to you and it has a password. And if you have a Bitcoin, then using that address and password, you can pay anyone with that Bitcoin at any point by transferring the Bitcoin to their Bitcoin address. Just as UPI works,  very simple. But the difference is that when you make that transaction, It's gets stored in thousands of computers around the world at the same time, which means there is no central authority who has a record of that transaction. Hundreds of thousands of computers in the world record that transaction in real-time. who made the transaction. which is you and your address nobody else would know. Anyone can access any transaction at any point of time. They can't do anything to it, they can't change it, delete it or edit it but they can see it. When they see it, they don't know whose is it who has it been transferred to a transaction is locked forever and ever, So Bitcoin is a very interesting currency and you see it as a currency only, just like US Dollar or Indian Rupee in the same way. But it is digital, it doesn't exist physically, and it is decentralized and it is completely transparent.

    Now the important question, that Why are Bitcoin prices so high?

    This is because of 2 reasons

    First, Bitcoins are limited. Bitcoin is only 21 million in number, meaning at any point there will always be only 21 million Bitcoins is in the world. The good thing is Bitcoin can be divided into very small parts since it is digital currency so you can transfer someone 0.0000072398 Bitcoin. Which means, 21 million is the limited number,  and it can be divided into small parts. at some point, if Bitcoin as a currency becomes something that is world used frequently, used at scale, then its value will increase, just like you observe daily that the price of US Dollar fluctuates, at some point, it was for 50 rupees and now it is for 75 rupees. In the same way, Bitcoin also keeps changing but because it is limited and it will never go beyond that number. 

    Second is speculation. 
    Speculation means that people think that its value will increase significantly. it's not like right now a lot of people are using Bitcoin, 
    Yes, there are a lot of businesses who have started accepting Bitcoin, many people are transacting in Bitcoin too. 

    In fact, this is a fun fact, I think it happened in 2009, there was a person named Laszlo and he wrote a post, you can see it on the given photo, in that post he said that 'I am ready to give 10,000 Bitcoin for a pizza'. Bitcoin had just started, it didn't have much value, so at that point, he gave 10,000 Bitcoin for that pizza. Today, the value of those 10,000 Bitcoin is 300 million dollars means 2100 crores, I will say it for the last time, two thousand one hundred crores.!!
    So there is speculation.

    Should you invest in Bitcoin or not?

    My suggestion is very, very clear. if you have just started to invest or you have limited funds, then Bitcoin is not the asset for you. It's very easy to get trapped by it, dear readers, that Bitcoin is a way to make quick money and in no time you will be very rich, it is absolutely the same mistake that people make with stock market. When you are investing somewhere, do it with the conviction that this asset will grow. Bitcoin has still not reached that level of conviction, definitely not for an early investor. So if you are an early investor, then my clear suggestion would be to invest in mutual funds, small cases, direct stocks, please don't invest in FDs. 

    If you have extra money, some surplus amount, then you can invest no more than 10% of your full portfolio in Bitcoin. That too, makes it periodic, because Bitcoin is a highly fluctuating currency. so don't try to time it, that 'I will buy it when the price will fall and sell when the price will increase.' or something. you have to be consistently disciplined about it. Every month when you invest, whatever is the price of the Bitcoin at that time, you will give your 10% allocation to it and you can buy it. 

    Where to buy Bitcoin from?

    Now it is ban to buy Bitcoin in India, but after few months it will be legal. There are lots of platforms, I personally using CoinSwitch Kuber. but here is not a paid promotion. so you can use several others. There is Wazirx, Nuo, I don't know anymore, if you know then please mention in the comment. it's very simple, you complete your process of KYC, then upload money through your bank because ultimately to buy Bitcoin, you of course need money, and then through that, you buy the Bitcoin. When you have bought that Bitcoin, then you have a unique Bitcoin address and you are the owner of that Bitcoin. Now your identity is anonymous in the world of Bitcoin, no one knows who this address belongs to, it is simply floating in the universe, every system in the Bitcoin network is aware of it, everyone has a copy of it and that's the beauty of it, that's the power of this decentralized currency. 
    If you have any questions about this mystery then write in a comment I will my try best to answer the question by research.

    Thank you.        

    Tags: #blockchain


    To add a comment, please Signup or Login