Bitcoins come from the fascinating world of Cryptocurrency. Cryptocurrencies are an open source digital currently that are based on computer codes, created digitally, by a community of people that anyone can join, known as miners of that currency. Miners, just by using an internet connected device which can be any smart phone or computer are people who are the very centre of all financial attention now.
These currencies are decentralised i.e., there is no central regulatory authority like in case of other commonly used fiat currencies like dollar and INR regulated by Central Bank of USA and Reserve Bank of India respectively. This kind of digital currency is kept in and transacted through digital wallets and as the value of these currencies are not regulated by any central authority, the value of any major or minor currency is totally influenced by its market demand and supply – if the supply of any particular currency is more than it’s demand the prices will fall and if demand is more than supply than the prices will increase, depending upon the magnitude of difference between the demand and supply of the currency. Crypto currency is nothing but a computer code that is sent and received and stored as money.
So how can a particular amount in the current be secured from being spent twice or more by using the same code again and again? This is prevented by a block chain system. A Block Chain is a generalised ledger that exists with each and every user of the digital payment system. Each and every user records all the transactions going on in the particular currency without knowing who is transacting with whom. This block chain system is the safety system used by the developers of the first crypto currency and is now used in all the existing crypto currencies.
There also arises a question as to why why crypto currency should be used or what do they offer that we cannot get from the existing fiat or paper currencies? The answer is not far to seek. The difference between the fiat or paper currency currently used and crypto currency system is that there is no regulatory authority that has a direct control over the crypto currency system and crypto currency transactions also take place without the involvement of any intermediate body like any bank or any payment bank system. Therefore, cryptocurrency can be used to make any transaction of any amount form any place in the world to any other and the identity of the person making the transaction remains completely anonymous with a minimum transaction fee unlike the current transaction process involved in the existing banking system where high charges are levied. Besides, it takes only a few seconds for a particular transaction of any amount to be completed in a crypto transaction.
Bitcoin is the first successful decentralised crypto currency, that was created in 2009 by a person or a group of people under the name of Satoshi Nakamoto. Although the real identity of the person who created bitcoin is unknown, it is acknowledged as the first after which many similar currencies have emerged with different concepts but based on more or less the same principles. There are currently more than 1300 crypto currencies in the world among which Bitcoin is the most valuable with over 60% of the total market capital as of Dec 2017. Bitcoin was initially introduced as an electronic payment system though now it used more and more as an investment opportunity due to its immense increases in value form the initial stage to the current time. Initially offered at a price of about Rs 0.2 in 2009 to the present time where its value is above 1000000 in 8 years and a 1300% increase in the value since the last one year due to the attention it is generating.
It is not necessary to buy a complete bitcoin. Bitcoin can be purchased in fraction also that is upto 7 decimal places, which is known a one Satoshi named after its founder. This currency has a high volatility due to its dependence market demand and market supply and not being backed by any authorised financial institution who step in to curb the wild swings as Central bankers do with flat, conventional currencies. There are a number of small and big business enterprises who accept bitcoin as a mode of payment and receiving money. Some the big companies that accept bitcoin are Microsoft, Virgin, Expedia, Subway, Tesla to name a few.
There is a common misconception among people that bitcoin and other major and minor crypto currencies are declared illegal by the Reserve Bank of India. It is completely a legal business for now to trade in bitcoin or any other crypto currency in India. Although Bitcoin has not been declared by the Reserve Bank of India as either an illegal or a legal tender, still RBI gives out warnings regularly through circulars as it considers crypto currency trading / investment inherently risky due to the high volatility.
As people making transactions by using bitcoin or any other crypto currency can have a complete anonymous identity profile, it can be used for many illegal activities such as purchasing and selling various commodities form the dark web like drugs and arms and even funding terrorist organisations. These illegal activities can all be conducted very simply covered by an antonymous mask and a digital device like a computer or a smartphone. Moreover, various multi-level marketing companies have used this digital currency in order to operate scams. The whole system of open source payment can be very dangerous in the hands of the wrong people which is why the apex financial institutions of the country like have not yet confirmed (read legitimised) their being. I the absence of complete, established and binding sets of Rules and Regulations, it will naturally be difficult for the regulators to allow a free run of such formless currencies.
And in the absence of a clear go-ahead from the country’s regulators, I personally feel that we should hold our guns, however tempting the prospects of making millions may be.
Raja Dey is a day trader, a reader of fortunes in charts. His reigning passion and means of sustenance is technical analysis, based on which me takes and liquidates positions. He is a keen watcher of everything digital, including crypto currencies.
The piece was originally written for the Financial Express BFSI 2017