What is Bitcoin?
Bitcoin is a digital currency
released by Satoshi Nakamoto which is used to make payments of any value
without fees. It runs on the block chain, a decentralized ledger kept running
by “miners” whose powerful computers crunch transactions and are rewarded in
bitcoins.
Understanding bitcoins
A bitcoin is a virtual medium of
exchange, a type of cryptocurrency, which is created and tracked online and is
secured using cryptography. It is based on blockchain technology, which makes
the transactions irreversible, decentralised and publicly verifiable.
Blockchain maintains an audit trail, making the transactions quite transparent.
A key feature associated with bitcoins is the absence of a centralised
authority to issue, exchange, monitor and regulate the currency.
These also offer anonymity, as
the currency holder is known by her account ID (wallet ID), and the
know-your-customer (KYC) processes may not always be implemented. The
transactions done are faster and not bound by geographical limitations, which
can help in cost savings on currency conversion charges and other transaction
fees. All these aspects create a unique position for bitcoins, possessing both
pros and cons, depending on the consumer’s point of view.
Bitcoins versus digital
currency
Currently, there is a fair amount
of ambiguity around the terms ‘virtual’ and ‘digital’, with many often using
them interchangeably. However, the distinction between both these terms can be
explained, taking into account some key parameters.
Transparency in
transactions:
There is more transparency in
digital currency as compared to cash, but tracing source of funds and
historical transactions can often be cumbersome. Bitcoins offer higher transparency,
with the chain of historical transactions available.
Potential fraud risks:
Digital currency has higher
susceptibility, if key information is compromised. In case of fraud, banks may
sometimes offer protection of assets. Bitcoins are comparatively less prone to
fraud loss. The risk lies at the user’s end, unless the wallet is compromised
by hackers.
Speed of execution:
Digital currency transactions
tend to be quick but adding the beneficiaries may take some time. Bitcoin
transactions are relatively quicker.
Volatility in value:
The value of digital currency is
mostly stable and is determined by macroeconomic factors. For bitcoins, it is
very volatile as it is not backed by any reserves.
Supply:
While it may seem that there are
no limits on currencies like bitcoin (as they are not backed by national
governments), there is an ultimate cap: the way bitcoins are structured, it is
expected that their numbers will not exceed 21 million.
Point of possible failure:
Loss in value of a digital
currency could be due to geopolitical and country-specific issues. Bitcoins are
decentralised, so there is no single point of failure.
Accessibility:
Digital currencies are accessible
through mobile phones and credit or debit cards. Bitcoins are largely
accessible using the internet, credit or debit cards and ATM machines.
Global Usage
Many countries—including the US
and the UK as well as many companies operating internationally—have already
started accepting bitcoins as a medium of exchange. Emerging markets such as
China have adopted them more aggressively, with the total trade value estimated
to be close to Rs10,000 crore per day. Increased usage can make such currencies
relatively more stable over time and offer opportunities for add-on services
such as ATMs, credit and debit cards, insurance against fraud, and loyalty
programmes.
In India, the initial adoption of
bitcoins has been slow but there is an increase in awareness. The value of
transactions per year in India is presently pegged at Rs500 crore, which is led
by around 50,000 bitcoin wallets and close to 700-800 bitcoins being traded
every day.
Today, India is also one of the
largest global remittance markets, with a total value of more than $70 billion.
In this, a majority of remittances are of around $200 value, for which users
typically pay up to 15% in bank charges and conversion fees. Bitcoins could
provide an alternate channel for financial inclusion in India, where close to
60% of the population is unbanked and credit and debit card penetration is in
single-digit percentages.
These factors can raise the
popularity of bitcoins, but could also lead to more risks. As the adoption rate
increases over time, consumers can follow certain measures to protect this form
of currency, such as by using wallets from reputed providers and storing the wallets
in mobile phones that are not jail broken or rooted. Users should also avoid
sharing the wallet password or leaving their mobile phones unattended. They
should also enable two factor authentication for access.
They can also transfer a smaller
amount (a small fraction of a bitcoin) for confirmation, before making a larger
transfer.
Consumer vigilance is critical
here, as the future of bitcoins could change with innovations in technology.
Since Bitcoins are being pushed in India with a lot of vigour, an
inter-ministerial committee in India has been set up to study the legality of
Bitcoins in the country but until now nothing conclusive has come out.
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