One of the most trending topic in business and economy today is bitcoin. Recently, the value of a single bitcoin has reached around ₹11 lakh. And at the time of writing this article, it has become one of the biggest things on the planet.
Here, I won’t repeat things people already seem to know. Neither will I comment on its future. I will just try to explain what a bitcoin is for those who aren’t too aware of the subject. It is a currency based on the technique of cryptography – the art of writing or solving any code. Bitcoin is just an uncontrolled public ledger (visible and shared with all) of account transactions between different parties.
Now, the question is that if a bitcoin is a ledger, where does the concept of currency come from?
Here, I will try to explain the concepts in a simple manner.
A ledger of people involved in transactions is broadcasted over the internet after every transaction. Each transaction between individuals is added to their previous transaction, and is secured by a password – thereby creating a chain of transactions. Each transactional ledger is called a block. And the record of all these transactions creates a block chain.
For reference, it looks something like this:
This transactional ledger is continuously broadcasted over the internet. The transactions of all the people are added only to a single ledger – yes, a single ledger, and that’s why it’s decentralised and public.
For every transaction, two keys are created – a public and a private key. Now, here comes the twist, which also happens to be one of the most important but unknown facts for the masses. After being recorded, the coded transactions are decoded and verified, often through a ‘trial-and-error’ method by really fast computing devices (bitcoin miners) which can match the public key of the transaction.
This is an onging process used by these machines. Whenever there is a match, a bitcoin is said to be mined.
It may be asked what miners stand to gain if they are able to match the keys for particular transactions. Here is the fun fact – an automated system (already fed in the initial code) awards some ‘credit’ to the miners. This, in turn, becomes a transaction which is added to the main public ledger – and again broadcasted, with a public and a private key. All said and done, the private key just nothing but a proof that a particular transaction took place between the individuals concerned.
There is another thing that needs to be noted. Any and all transactions happening at same time are added to the main public ledger. After the transaction has been recorded and verified by both parties and is added to the main ledger, the system deletes the individual ledger of the transaction. The system is designed to keep only the longest ledger, which is the public ledger.
When the bitcoin was introduced, the mining reward for miners was designed to be 50 bitcoins – a limit that would be halved for every 210,000 blocks mined. In fact, these rewards are halved every four years (the time needed to mine 210,000 blocks). This progression means that there will only be 210,000,00 bitcoin rewards. That’s how it is limited.
Till now, you must have understood a little about bitcoins. But, I would like to draw your attention to the fact that all crypto-currencies are developed on different codes and systems. The only things common between them are the underlying systems of block chain and public ledger.
I cannot answer this. In fact, I doubt anyone in the world can.
But, some things need to be kept in mind:
1. Block chain is the invention – not the bitcoin. Block chains will have a wide application in the future. Bitcoin is what you would call the ‘abacus of computing’.
2. The only value bitcoins have are for the people who decide to sell it and those who want to buy it.
3. One of the biggest questions is whether crypto-currencies are real or fake. In my opinion, this is something that can be understood only by those involved in the industry. In fact, many sites do look for proof before listing it as a valid currency.
4. The real value of bitcoins also lies in its virtual value. If someone cashes it out, it means that they can buy things of a similar value in bitcoin terms.
5. I also believe that it has the potential to destroy currencies. On the other hand, it would seem that if a government sticks to implementing taxes on various transactions, the basis on which bitcoins were formed is compromised – namely, the anonymity of transactions. After all, the anonymity offered by the private key is one of the prime motivators behind bitcoin transactions.
6. However, a system to implement taxes and fees on bitcoin transactions has not been developed yet.
7. Unfortunately, there’s also a high possibility that bitcoins may be used for shady and nefarious activities.
8. According to my reading, problems will eventually arise in the bitcoin world, when people starting to try and cash out. There’s a possibility that there may not be enough supplies when it happens.
After all, you only get paid the amount you have invested in the system. That’s why most exchange systems have a cap on both investment and ‘locking period’ for withdrawal and buying.
9. In my opinion, just as it was created, it’s also likely to end some day.
I am not here to answer the question of whether you should invest in bitcoins or not. For that, use your luck, knowledge – and of course, capital.