13Jan
bitcoin

Bitcoins – Emerging Digital Currency

Bitcoins!!! On reading the term, many of us will guess that “It is a coin made up of ingot like gold ,silver and can be used for purchase/transaction like dollar,rupees ”. If so, you are partially right 😉 Then your question would be, “In which case I am right and in which case i am wrong ?”. It is used for purchase/transaction similar to currency/credit card/Debit card. But, its not  a physical item. To be precise, It’s a “Digital currency”!! Now, your mind will pop up with questions like, “If it is a digital currency, How they are created? How can i acquire it? What’s the value of it? Is it legal to use it ? How can i pay with bitcoin pay? ”

Before answering those questions, let us start with the question,”What is Bitcoin?”. It’s an innovative idea that brings the concept of decentralizing the financial system. It is the first  implemented digital cryptocurrency. “Bitcoin is an innovative payment network and a new kind of money”, says Bitcoin official site. If it is payment network, then “Who is controlling this bitcoin network?”. It is open-source and its design is public. It is controlled neither by government nor by any other banks/organisations but by all the bitcoin users in a distributed manner. It doesn’t have any central authority. It’s a open source maintained by the community of developers. ”If it is open source, what if someone makes changes in the Bitcoin protocol?” is what you think of next. Bitcoin restricts that by the condition, the new commited code should be compatible with all other Bitcoin software.

Bitcoin transactions are recorded in a public ledger called Block Chain. Yes, your instinct is right.. “How the hell it is being accomplished without central authority?”. Each and every accepted transactions are broadcast to the nodes of the distributed network. Approximately six times in an hour, block chain broadcast will be done and each node will update its local ledger. An obvious question i need to answer is, “What happen if your bitcoin wallet/system is not online as it don’t have central server?”. Once your bitcoin wallet back to online, it’ll download all the blocks in the block chain before it starts any new transaction. You can see each and every bit coin transaction at blockchain.info .

If it is controlled by bitcoin users, then you may rise up question, “Who is creating bitcoins? “. For other currencies such as rupees, dollars, the government decides when to print and distribute money. As Bitcoins don’t have a central government, they are created by the process called “Bitcoin Mining” in which miners are awarded with bitcoins for helping bitcoin network to solve complex calculations during bitcoin transaction. We’ll see more about the Bitcoin Mining in future article.

If you ask, “I am not the bitcoin miner, Can i buy/acquire it?”, the answer is YES. In almost all countries, you can buy it on a trusted bitcoin exchange like Bitstamp , Coin.mx, Virwox. You can even get from /transfer to friend using bitcoin wallet. Bitcoin wallets are available in web,desktop and mobile versions. You can download it from Bitcoin Website.

“Fine. I have 100 bitcoins with me, what’s the real value of money i’m having ?” will be your next question. The basic unit of bitcoins is “Satoshi” which is one hundred millionth (1*10^-8) of a bitcoin. To know who/what is satoshi, we have look back through the history. In 2008,  research paper called “Bitcoin: A Peer-to-Peer Electronic Cash system” was published under the name called “Satoshi Nakamoto” in “The Cryptography Mailing List” at metzdowd.com. Till date, No one knows who Satoshi Nakamoto really was – but we know he was the inventor of the Bitcoin protocol. The name is assumed to be the collective pseudonym for a group of people. Investigations to find the real identity of Satoshi have been attempted by “The New Yorker and Fast Company”  which ends in failure. In paying homage to the inventor of bitcoin, his name is assigned to the smallest unit of bitcoin.

Back to the question, Other currencies such as dollars, rupees are fiat currencies whose value are determined by Market Sentiment, Speculation, Import/Export, Public Debt blah blah blah. Whereas the price of a bitcoin is determined by supply and demand. When demand for bitcoins increases, the price increases, and when demand falls, the price falls. Currencies such as dollars, rupees are called Fiat Money. Since there is only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate, the demand must follow this level of inflation to keep the price stable. Because Bitcoin is still a relatively small market compared to what it could be, it doesn’t take significant amounts of money to move the market price up or down, and thus the price of a bitcoin is still very volatile. You can find the value of bitcoin here.

Last but not least, “Is it legal to Use?”. Unfortunately, this is not an yes/no question to answer 😉 It depends on who you are, what you are doing with it and of course where you live 🙂 The main problem why bitcoin facing legal issues is its anonymity. Due to its anonymity, people might use this for money laundry (i.e. converting black money to legal ones). In the context of bitcoins, there are three categories of people. Users, miners, Exchanges. Users are the people who obtain bitcoins and spend them simply to buy good and services. According to FinCEN (the Financial Crimes Enforcement Network) of US, “A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter”.[ To the people who can’t understand even after reading that 2 or more times, it states that the users who use bitcoins for purchase are using it legally 😛 ] And people creating bitcoins and exchanging them for fiat currency is considered to be illegal. And miners are the one who fall in this category. FinCEN also mentions that “In addition, a person is an exchanger and a money transmitter if the person accepts such decentralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”

The legality status of bitcoins varies from country to country. Countries like Bangladesh, Ecuador, Iceland, Kyrgyzstan prohibits the usage of bitcoin completely. Whereas in USA, Australia, UK, Japan legalized its usage. In countries like India, China, Russia, Indonesia, Taiwan it is not completely legalized but with restricted access. You can check the Legality status of bitcoins by country here. Even some billion dollar companies like Microsoft, Dell, Reddit, Expedia, PayPal started accepting bitcoin as a payment.

Bitcoin is in experimental stage that is in active development. Although it becomes less experimental as usage grows, you should keep in mind that it’s an innovative idea that have never been attempted before. and is exploring new ideas too. As such, its future cannot be predicted by anyone.

2 comments

  1. Very interesting and nice article on a trending topic …thumbs up for the clear explainations..

  2. Thanks da 🙂

Leave a Reply

Your email address will not be published. Required fields are marked *

*

© Mathan Kumar, All Rights Reserved