Story Of The Week

…And the award for best performing currency in 2016 goes to “Bitcoin”

Recently, the Bitcoin made into headlines as the value of bitcoin surged above $1,100 on Thursday and thus making it the best performing currency in 2016. This articles primarily aims at understanding what bitcoin is, how does it work, where is it traded, who regulates it, is it even a real money and finally its current economic scenario.

Introduction

Bitcoin is a cryptocurrency. So what exactly is a cryptocurrency!
Is it really a currency, an investment or is it another technological breakthrough?

It is simultaneously all of them because just like any other currency, it has a value and can be exchanged for goods or services or as investment. It is a digital currency created and held electronically. It is traded on world wide web digitally.

It was developed by anonymous software developer or group of software developer known by the name Satoshi Nakamoto in 2008. It is an open source computer program backed by strong coding and complex mathematical logic which run continuously to produce bitcoins.

Growth and the Dark Side of Bit Coin

bitcoin

Since its inception it has been growing exponentially. Essentially because

  • It’s a currency as well as a payment system which is independent of any central authority like bank or govt. It makes it secure as it doesn’t come under scrutiny of any “Trusted Third parties”. It is completely decentralized and has no middle men to oversee the transactions. But if that’s the case, how does it ensures legitimacy of the transaction? The answer lies in the breakthrough blockchain technology.
  • Blockchain technology makes every transaction on the bitcoin network completely transparent. The blockchain is a public ledger that records every bitcoin transaction.
    But who maintains the public ledger and why?
    The usual currencies are printed but bitcoins are mined. Miners are the record keepers who constantly broadcast the transactions on the bitcoin network via blocks which are further verified by all the network nodes. Each broadcast is linked to the previous block and hence making a chain. In return, miners get bitcoins for running complex blockchain programs on their system. Thus this public ledger contains the detail of every transaction which can’t be counterfeited or changed.
    So does that mean one can have infinite supply of bitcoins?
    The answer is No. The program is designed in such a way that only of total 21 million bitcoins can ever be mined. Currently, around 16 million are in circulation.
  • It has very low transaction fees.

The inevitable dark side of the bitcoin is that it has been used extensively for trading in Silk Road. As all the transaction on the bitcoin network are anonymous thus it has become a medium of exchange of illicit trade. Silk Road is an illegal online market place to sell guns, drugs, child trafficking etc. It has been used in money laundering, funding terror groups etc. Therefore, the economies worldwide have shunned its use.

But now when the world is moving positively towards the digital economy, the concept of bitcoins is not a ‘shady secret’ anymore. It has seen exponential growth since its inception. It can be observed that when it first came into existence it was worth a few US cents. Its price topped out at $1,165.89 on the Bitcoin Price Index(BPI), an average of major exchanges, in 2013. And on Thursday, a single bitcoin was worth about $1,140 on the BPI.

Impact of Bitcoin

Economist believe that this sudden rise in the value of the bitcoin is because it has turned into a virtual safe haven at a time of global economic uncertainty sparked by factors such as Donald Trump’s US election victory, as well as country-specific issues such as the chaotic withdrawal of high-value notes in India, and Chinese controls on the purchase of foreign currency.
Also, Trump’s perceived friendliness towards the Russia (the second largest market for bitcoin after China) has supported the bet big on cryptocurrencies in the New Year.

In India, after demonetization the transaction happening over the bitcoins have increased. People have become more aware of the bitcoin and its uses. Many startups have ventured into this space who have tied up with over 2 lakh merchants worldwide to initiate transactions through bitcoins. These startup acts like payment gateway where people can buy flight tickets, bus tickets, shopping vouchers of big giants like eBay, Flipkart, Snapdeal etc. in exchange for bitcoin.
Going by broad estimates, combined bitcoin trading volumes (at all exchanges) in India could be in the range of Rs 150–200 crores per month. Roughly Rs 1,200-1,500 crore worth of bitcoins are traded in the country every year.

Conclusion

Bitcoin has also seen an increase in investment (like Gold) after demonetization. Many investors now see Bitcoin as instrument for storing value. But as bitcoins are not issued or backed by banks or governments. Nobody knows how investments in bitcoins can be taxed. Also, the absence of a regulator makes legal recourse almost non-existent. Most bitcoin users are worried about the legality of using digital currencies and no prescribed laws or guidelines around cryptocurrencies in India, makes it even a more riskier and far-fetched reality.

References:

http://economictimes.indiatimes.com/magazines/panache/bitcoin-heres-all-that-you-need-to-know-about-the-virtual-currency/articleshow/56369446.cms

http://economictimes.indiatimes.com/news/economy/policy/bitcoins-hit-a-3-year-high-more-indians-take-to-cryptocurrency/articleshow/56369289.cms

http://economictimes.indiatimes.com/news/economy/finance/demonetisation-effect-why-cryptocurrency-is-gaining-currency-in-cashless-times/articleshow/55861664.cms

http://www.academia.edu/8080162/BITCOIN_ITS_ECONOMIC_IMPACTS

https://internationalbanker.com/banking/impact-bitcoin-central-banks/

http://news.nationalgeographic.com/news/2013/10/131014-bitcoins-silk-road-virtual-currencies-internet-money/

https://www.bitcoin.com/you-need-to-know

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