Bitcoins first caught my fancy when some of my friends revealed the huge profit they were making by trading in them. Being a speculator at heart (the heart gets reigned in by the brain mostly) this got me interested. My interest further shot up when I discovered the returns were like 25000 times in three years..Which asset class gets you that kind of returns today..I was hooked..My interest went up further when I read the news about hackers being paid in crypto currencies..
So what are these crypto currencies?
Crypto currencies are digital currencies, so there are no coins to mint or bills to print. There is no government, financial institution or any other authority that controls it, so it’s decentralized. The owners who have Bitcoins in the system are anonymous—there are no account numbers, names, Aadhar numbers or social security numbers or any other identifying features that connect Bitcoins to its owners. Scary isn’t it but yet how is it so popular
Bitcoin uses block chain technology and encryption keys to connect buyers and sellers. And, just like diamonds or gold, a Bitcoin gets “mined”. Cryptocurrency is digital money created from a code. It is an encrypted string of data or a hash encoded to signify a unit of currency.
History
On 18 August 2008, the domain name “bitcoin.org” was registered. In November that year, a link to a paper authored by SatoshiNakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. Nakamoto implemented the bitcoin software as open source code and released it in January 2009 The identity of Nakamoto remains unknown. In January 2009, the bitcoin network came into existence after Satoshi Nakamoto mined the first ever block on the chain, known as the genesis block. Few people know, but cryptocurrencies emerged as a side product of another invention. Satoshi Nakamoto, the unknown inventor of Bitcoin the first and still most important cryptocurrency, never intended to invent a currency.
In his announcement of Bitcoin in late 2008, Satoshi said he developed “A Peer-to-Peer Electronic Cash System.“ These are called Cryptocurrencies because the consensus-keeping process is secured by strong cryptography. Cryptocurrencies are built on cryptography. They are not secured by people or by trust, but by math. Crypto currency mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hash cash proof-of-work function. The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a “subsidy” of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.
Key properties are as listed below:
Transactional properties:
1). Irreversible: After confirmation, a transaction can‘t be reversed. By nobody. And nobody means nobody. Not you, not your bank, not the president of the United States, not Satoshi, not your miner. Nobody. If you send money, you send it. Period. No one can help you, if you sent your funds to a scammer or if a hacker stole them from your computer. There is no safety net.
2).Pseudonymous: Neither transactions nor accounts are connected to real-world identities. You receive Bitcoins on so-called addresses, which are randomly seeming chains of around 30 characters. While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real world identity of users with those addresses.
3). Fast and global: Transaction are propagated nearly instantly in the network and are confirmed in a couple of minutes. Since they happen in a global network of computers they are completely indifferent of your physical location. It doesn‘t matter if I send Bitcoin to my neighbour or to someone on the other side of the world.
4).Secure: Cryptocurrency funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers makes it impossible to break this scheme. A Bitcoin address is more secure than Fort Knox.
5). Permission – less: You don‘t have to ask anybody to use cryptocurrency. It‘s just a software that everybody can download for free. After you installed it, you can receive and send Bitcoins or other cryptocurrencies. No one can prevent you. There is no gatekeeper.
Monetary properties:
1). Controlled supply: Most cryptocurrencies limit the supply of the tokens. In Bitcoin, the supply decreases in time and will reach its final number somewhere in around 2140. All cryptocurrencies control the supply of the token by a schedule written in the code. This means the monetary supply of a cryptocurrency in every given moment in the future can roughly be calculated today. There is no surprise.
2). No debt but bearer: The Fiat-money on your bank account is created by debt, and the numbers, you see on your ledger represent nothing but debts. It‘s a system of IOU. Cryptocurrencies don‘t represent debts. They just represent themselves. They are money as hard as coins of gold.
Some of the key crypto currencies other than bitcoin are as below
1). Litecoin (LTC) Litecoin, launched in the year 2011, was among the initial cryptocurrencies following bitcoin and was often referred to as ‘silver to Bitcoin’s gold.’
2). Ethereum (ETH)…
3). Zcash (ZEC) …
4). Dash …
5). Ripple (XRP)…
6). Monero (XMR)…
Some of the popular crypto currency exchanges globally are
1. Okcoin,
2. Poloniex
In India, you can purchase Bitcoin from Zebpay exchange. Zebpay has Android and iPhone app which lets you link your bank account for quick transfers. …
Unocoin, another India-based exchange, lets you trade Bitcoins. They can help you buy, sell, store, use and accept bitcoin.
So to conclude lets look at cryptocurrencies from two different perspectives
From a technology point(block chain technology) of view crypto currencies are here to stay. But their wider usage will happen when they become recognised by goverments and government bodies and becomes accepted as a legal tender. The issue here is the basic logic for creation of crypto currencies was that they wouldn’t be controlled by anyone else..So lets see how this pans out.Today stock markets and commodities exchanges which all started out in the same way are recognised so we do we have reason to hope for the best
Now from a investment point of view
One of the primary reasons attributed to the spike is the maximum number of any crypto currency is capped at the beginning itself.So using the basic economic principles a product with limited availability but unlimited demand has to grow in value.
But the technology used for bitcoins is under open source ,so anyone can use the technology to develop similar products like bitcoin or any other cryptocurrency. So just like we buy different medical pill made from the same compound if the original one is not available the technology can easily be used to produce similar products thereby taking care of the limited supply.
From a safety point of view
Bitcoin exchanges like Mt Gox in Japan have been hacked into so the safety of the investment is yet to be fully established
So till the time crypto currencies achieve the following
1.Easy trading between people
2.Wide acceptance for all private and public debts
3.A stable value
Their chances of replacing the present currencies are remote
So while the speculator in me is pushing me to try my luck by investing in some cryptocurrencies, for those of whom whose brain doesn’t keep their speculative streak under check its better to keep a safe distance from any of the crypto currencies as of now..
