Whether you go for a game night at your friend’s house or are relaxing with friends after work, invariably someone will be talking about the next big investment option. In the past, these discussions were around real estate, stocks, even gold. Now, all such talk is about cryptocurrencies. To be more specific, all such talk is around bitcoins. There is good reason for this interest, every alternate month in 2017 has seen the value of bitcoin hit all time highs. On 31 October 2017, bitcoin breached the Rs5 lakh mark, giving speculator returns of 844% in the last 1 year. Let’s read about cryptocurrencies and bitcoins.
Q. What is cryptocurrency?
Cryptocurrencies are a subset of digital currencies. “Unlike other digital currencies that can be centrally issued, circulated within a community or geographical location, or tied to fiat currencies or organizations issuing them, a cryptocurrency has very different characteristics,” said David Lee Kuo Chuen, economics professor of fintech, Singapore University of Social Sciences.
Cryptocurrencies have become one of the most pressing topics in the financial industry. “It is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units,” said Sumanth Neppalli, cryptocurrency and blockchain analyst at Zebpay, an app-enabled bitcoin exchange in India.
Q. What is bitcoin?
“Bitcoin was created in 2009. Since then, numerous cryptocurrencies have been created. These are frequently called altcoins, as a blend of bitcoin alternatives. Bitcoin and its derivatives use decentralized control as opposed to centralized electronic money or centralized banking systems,” said Neppalli. It was created by an anonymous person, or persons, called Satoshi Nakamoto. “It has a limit of 21 million and there were 16.4 million bitcoins in circulation as of June 2016. It is...the most popular cryptocurrency and has the largest market capitalization,” writes Lee in his paper ‘Cryptocurrency: A New Investment Opportunity?’ published in Journal of Alternative Finance, which he has shared with Mint.
But what is the underlying asset? “Similar to the fiat money that we use, cryptocurrencies have no underlying assets. Fiat money has no intrinsic value and is backed by the full faith and credit of the issuing government. Cryptocurrencies derive value from use. As they are accepted by others as a medium of exchange, as they gain more acceptance, they gain more value,” said Lee in the paper.
Q. How to access bitcoin?
You can either buy it or mine it. “Bitcoins can be obtained by accepting them as a payment for goods and services, and by buying from other people or directly from an exchange or vending machines. Bitcoins can be transacted via software, apps and various online platforms that provide bitcoin wallets. Another way to obtain bitcoin is through mining,” said Lee. He further added that bitcoins are created as an incentive for solving the cryptography puzzle using the transaction data, and thus successful miners are rewarded with the newly created bitcoins, on top of transaction fees.
Q. Who creates bitcoin?
The process of creating bitcoins is called mining. “In simple terms, bitcoin mining is the process by which miners who leverage high-powered computer software verify transactions by solving complex math algorithms. Miners compete to solve these math problems and the winner receives a reward of a specific number of bitcoins. Miners are also constantly validating transactions that are taking place on the bitcoin network,” said Benson Samuel, chief technology officer and co-founder, Coinsecure. Individuals are involved to build the hardware and to set up the machine. Technically, it is the machine that uses its computing power and electricity to solve the complex algorithm and then gets bitcoins as reward for solving the puzzle. Nobody controls the algorithm and the process. Samuel said that with more competition, bitcoin mining hardware has become more advanced. “Mining ensures that the bitcoin ecosystem is self-sustaining. There are various types of mining and mining hardware.” According to the white paper producted under the name Satoshi Nakamoto, only 21 million bitcoins can be created.
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