Cryptocurrency – B of Bitcoin – in layman’s terms

Bitcoin is a digital currency. The charm of bitcoin lies in the following factors:

1. It is not controlled by any government. 

In India, RBI restricted banking access to dealers in cryptocurrencies. It is based on the premise that GDP calculations of a country are disturbed, if money circulates in circles not regulated by the Government of India. However, Supreme Court overruled the decision stating that it was beyond their purview to issue such a diktat.

 The judgement eliminates fears about so-called ‘illegality’ of the trade.

2. Scarcity

Bitcoins are created by a very complex computer program. The creator of bitcoin, Satoshi Nakomoto, has declared that the number of bitcoins in the world will never exceed 21 million.

Think why gold is considered a precious metal, or why have the prices of platinum dipped? It is all about scarcity and availability.

BITCOIN AND BLOCKCHAIN

Many a times, we mention both the terms in the same breath….

Bitcoin is a computer program, as we have mentioned above and Blockchain is the framework on which it rests.

Blockchain is secure, because every transaction is split in three parts.

Blockchain is a technology, which is increasingly being used by business and financial institutions to secure transactions. It is considered to be the ‘internet of the future.”

Let us introduce Blockchain to clarify why is it considered so secure, and why are institutions using it to build a strong foundation for the future.

Blockchain operations can be described in short, as follows –

1. A transaction is requested and authenticated

2. A block representing that transaction is created

3. The block is sent to every node in the network

4. Nodes validate the transaction

5. Transaction is complete

6. Update is distributed across the network

7. The block is added to the existing chain

8. Nodes receive a reward for Proof of Work

Source: euromoney.com

The secret lies in steps 3 and 4. Since validation is required from all nodes, fraudulent transactions done by manipulating one node are not possible.

The simplest possible definition of Blockchain is

Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.

BACK TO BITCOIN …

Is bitcoin the only cryptocurrency in the world?

No. The well-known cryptocurrencies are listed below.

• Ethereum
• Ripple
• Bitcoin Cash
• Ethereum Classic
• Cash
• Stellar Lumen

1. How do I get bitcoin?

Mining will take several days and hours and deep knowledge of the procedures.

One can buy it from bitcoin dealers or miners. There are cryptocurrency exchanges where currencies are bought and sold, just like shares in the stock market.

Related post: Bitcoin Simplified

WHAT DOES ONE DO WITH BITCOIN?

• Buy goods/services where dealers accept payment in bitcoins
• Trade bitcoins on the exchange
• Sell when you want to book profits
• Buy other cryptocurrencies with bitcoin

ARE THERE CASH TRANSACTIONS IN CRYPTOCURRENCY?

Yes. The use of cash or fiat money arises at 3 points in cryptocurrency transactions.

1. Purchase of cryptocurrency with money from your bank account.
2. Proceeds of sale of cryptocurrency being credited to your accounts
3. Taxes paid from the crypto-investor’s accounts

IS IT TAXABLE?

Yes. Income earned on trading cryptocurrencies is taxable, just like income earned from any other source.

Taxable income =

Value received on exchange of cryptocurrency – cost of acquisition of cryptocurrency

Taxable events

Conversion of 

1. Crypto to fiat money
2. Crypto to crypto
3. Crypto to goods/services

Non-taxable events

• Fiat to crypto
• Crypto-wallet to crypto-wallet

WHAT ARE PERCEIVED BENEFITS OF CRYPTOCURRENCY?

1. A blockchain base eliminates chances of fraudulent transactions.It makes financial transactions immune to theft

2. Near instantaneous settlements

3. Cross-border payments at high speed

4. Being an international structure superimposed on national economies, the impact of political changes on your wealth is minimised.

RISK INVOLVED IN BITCOIN

I came across an interesting quip, and I reproduce it here.

“You say that you do not believe in paper money or governance systems, and would like to take care of your own money. You are strong enough to bear the risk.”

The least one can say is stock investors too play at a certain level of risk.

WHAT ARE GOVERNMENTS DOING ABOUT THE NEW TECHNOLOGY WHCH THREATENS TO DILUTE THEIR CONTROL ON WEALTH AND MONEY?

A decentralised peer-to-peer network, powered by users and which allows no intervention from state authorities threatens governmental control on money. Hence, the responses are less than enthusiastic. 

However, governments across the world have come to accept the inevitable. Hence, they are using blockchain technology to build a cryptocurrency above it. China has taken the initiative of doing a digital yuan.

Since information available in public domain is limited, further discussion on the subject is not warranted at this point of time.