Whenever nature encounters a problem, a propelling force comes to the rescue. Well, it’s the same with the financial industry. Inflation, government control and manipulation, and security are threats to everyone’s savings. To abate it, nature sent its own crusader with unknown identity, going by the name Satoshi Nakamota. He brainstormed the idea of bitcoin and presented it in his paper “Bitcoin: A Peer-to-Peer Electronic Cash System”. The implications of this invention are far-reaching than the realms of economics and finance.
What is Bitcoin?
For starters, it is not the physical coins you are seeing in the websites and journals. It has no physical backing.
The word Bitcoin refers to two things.
One– the decentralized digital currency used in peer-to-peer transactions.
Second – the protocol, the network, the open-source software that maintains the ledger of the bitcoin(referred to as the ‘one’ above).
What does the term ‘decentralized’ mean?
Bitcoin is neither issued by a government nor has a single adjudicator. The system comprises several nodes, which are interconnected with a network, known as the Blockchain. Moreover, the system uses complicated cryptography techniques for authentication of transactions.
In theory, each node in the blockchain verifies each transaction. So, if a node is infiltrated and an unscrupulous transaction takes place, other nodes disregard it, upholding the integrity of the system. However, in practice, the network takes confirmation from 6+ nodes before deeming it irreversible. So, it isn’t anarchy either.
So, who sets the price for Bitcoin?
When it comes to pricing, bitcoin becomes a commodity. The supply and demand for the asset determine its price in the open market.
What is bitcoin mining?
Bitcoin has a public ledger system, Blockchain. For every transaction done, the system has to get assent from 6 different nodes. The confirmed transaction is then formed into a block and inserted into the network. Since the bitcoin has no centralized server, the blocks are stored in the nodes attached to the network. The nodes which store get bitcoin rewards as remuneration. And the entire process is referred to as mining since it is the process through which new bitcoins are created.
Anyone can become a miner. There are no specific criteria. However, the network chooses the fastest node that can complete this process. So, it usually tends to be the high-end systems that usually bag the reward.
The current mining reward for every stored block is 12.5 bitcoins. The rewards halve every 4 years. And it is the only way through which new bitcoins come into the world.
The creator has also set a capping limit of 21 million bitcoins to only be produced.
Where can I buy bitcoin?
You need a wallet to buy bitcoins or any other cryptocurrency.
The wallet is a secure application through which you can send, receive or store your bitcoin.
Some of the crypto wallet providers in the market are Trezor, Exodus.
Alternatively, you can also buy bitcoins from the crypto exchanges like Coindesk, Kraken, etc.
The peculiar feature of bitcoin is its divisibility. It is divisible up to eight decimals.
The smallest unit of Bitcoin is satoshi, named after its creator.
Can the government shut it down?
Yes, the government can shut it down. Yet, it can continue its operation without deterrence owing to its decentralized nature.
The records and data are not stored in a server but every node. So, unless the people involved let go of the bitcoin network, it is impossible for the government to shut it down.
Most nations around the world are working out a way to legitimize the cryptocurrency and bring them under their wing rather than shutting it down.
Do I have alternatives?
Yes, bitcoin is the just granddaddy of the crypto family. And it has spewed many children like ethereum, litecoin, and ripple. In fact, there are more than 1500 altcoins. There are more to come as well.
What is a Bitcoin CFD? Is it the same as owning a Bitcoin?
CFD means Contract for difference.
It is a derivative instrument through which you can realize gains/losses of the underlying asset although you won’t own it, technically.
Market participants use CFD to wage their bets. The brokers hold only a margin of your funds to give ownership of the CFD. Further, they offer high leverage for the CFDs and so it attracts only a low capital.
Further, you can short sell when it slides down and make profits with CFDs. Hence, trading bitcoin CFDs has garnered more support than owning them.
Is bitcoin a legal tender?
Technically, it isn’t an illegal tender, as per current laws. So, it makes it legal. Many online stores accept bitcoin as a mode of payment, including the tech pioneer Microsoft. And e-commerce sites are leaning towards cryptocurrencies as it significantly cuts down their transaction costs. Further, many of the top tier companies have invested in cryptos and so they are likely to promote it for payments as well.
Can I evade tax with the help of Bitcoin?
Bitcoin is no tool to go around Uncle Sam, although it was, initially. Government agencies across the world have taken stringent measures of late. Though the user’s privacy and integrity of the system haven’t been tampered, governments hold a firm grip on the middlemen — wallet providers and crypto exchanges. They monitor what comes in and goes out of them. And so tax evasion isn’t going to be the best choice of the reason for opting it over fiat currencies.
Why should I use it then?
International Money Transfers: It has been the go-to reason for many. Fund transfers between different payment systems have always been cumbersome. But bitcoin makes it easy and in a jiffy.
Cheap: Online fund transfers, especially offshore transactions, attract too much levy. Even the local credit card transaction attracts a significant cost, which is borne by the merchant usually. Whereas, the cost of a bitcoin’s transaction is nimble if you compare it to any of the above, especially to the former. Further, as years roll down, the transaction cost does go down as well, due to halving.
Investment: Cryptocurrencies are gaining traction with the Millenials each day. The number of users is only increasing in number. And, as per the design, bitcoin trickling is going to stop one day (the expected year is 2140). So, bitcoin will be a scarce commodity in the future, as some experts opine. Hence, it provides a good investment avenue.
How can I predict the future price of Bitcoin?
Market participants speculate the market using any one of the two ways. Fundamental or Technical Analysis. One can use the same techniques to forecast cryptocurrencies as well. If you want to know which is best among the two, then head here.
Whenever a change happens, the natural human tendency is to resist it or fear it. However, when it becomes the new order of the world, people regret failing to figure it out at its inception. Likewise, though the financial industry initially despised cryptocurrencies, large players are slowly creeping in and playing catch up.