Cryptocurrency

Everyone is excited about cryptocurrencies (and bitcoin especially) these days. We would have heard stories about people multiplying their money many folds in very short span of time. In-fact I also multiplied my money 6 times within a month. Here is the detailed account of how I made Rs. 3 Lacs (300,000) from Rs. 50K.

Even though there is enough literature available online on how to start investing in cryptocurrencies but still questions are abound as the information is distributed across. Since the time above post was published I have received numerous queries on the topic. So I thought of compiling a list of Common Questions which would help any person to get started asap.

1. What is a Bitcoin?
2. Who controls bitcoin?
3. What is Blockchain?
4. How is Bitcoin Generated?
5. What is the total supply of bitcoin?
6. How can I invest in bitcoin in India?
7. Is it legal to invest in bitcoin in India?
8. What are the tax implications?
9. Is it safe to invest in bitcoin?
10. Why does bitcoin prices vary so much?
11. How do I transfer bitcoin from one address to other?
12. I can buy stuff with currencies like INR. Can I do the same with bitcoins?
13. Are there any other cryptocurrencies other than bitcoins?
14. What is the view of financial companies on cryptocurrencies?

 

What is a bitcoin?

Bitcoin is just like any other currency like INR, USD etc. But it is a digital currency which means there are no printed notes or coins. Think of it as having money in an online wallet.

This digital payment system was invented by an unknown programmer (or group) by the name of Satoshi Nakamoto and was released in 2009. It allows for Peer to Peer fast transactions.

It is denoted by the symbol BTC and are further divided into smaller units (just like Rupee is further divided into paisa or Dollar is divided into cents) called –

• Millibitcoin – Thousandth piece (1/1000) of a bitcoin. It is denoted by mBTC
• Microbitcoin – Millionth piece (1/1000000) of a bitcoin. It is denoted by µBTC
• Satoshi – 1/100000000 part of a bitcoin. Represented as Satoshi

 

Who controls Bitcoin?

This is where things start to get interesting. Currencies around the world are generated by central banks for example INR is generated by Reserve Bank of India. Central Banks (along with consultation with governments) controls the supply of currency.

Bitcoin is hugely different in this regard. Bitcoin is not controlled by any central bank or government. It is regulated by the network. Confused?

Let’s take a minute to revisit the last line –

Bitcoin is regulated by the network

There are 2 aspects to it.

1. First is Generation which we will cover in Bitcoin Mining
2. Second is transaction settlement. Let’s have a look at this one.

In normal currency transfer, how does a transaction gets recorded? For example I send money to you, how does the transaction gets recorded at the backend? Here are the steps involved.

1. Money is deducted from my account
2. My bank intimates your bank that such a transfer is going to happen
3. My bank credits the money to your bank which in turns credits to your account

Now this entire mechanism works on consensus which means that there is an agreement between all the parties on how would settlement at each step would happen. And each bank maintains a ledger where they document the transaction. This ledger is a private ledger where only that particular bank has the access to.

Now assume that there are no banks and no private ledgers. There are public ledgers which is not with any one entity but is available to thousands of people (servers). And these ledgers are secured by highly complex keys. There are also well defined rules on how would settlement be reached hence consensus mechanism is in place.

If all these things constitute the network, then wouldn’t it be right to say that the Network regulates/controls Bitcoin?

 

What is Blockchain?

In earlier answer, we talked about public ledgers which is available to thousands/millions of people (servers). This is called Blockchain. It has 2 key aspects –

1. Its public nature which means that no single party has a claim to it. Everyone can access it albeit is secured by very strong digital signatures.
2. Its Distributed Nature – This means that the public ledger is not kept at one server but is also replicated at different servers. This ensures that even if one server has any problem, the network doesn’t go down. It is still up and running.

Both these aspects are absolute mandatory for bitcoin to work since the network (which is FREE of any intermediary) has to up and running all the time and has to be accessible all the time.

Note: Blockchain is a technology which has far reaching usages than just bitcoin. Bitcoin is just one implementation of this technology. There are many start-ups which are using Blockchain in other sectors.

 

How are Bitcoins Generated?

So in earlier answer we saw that it is the network which regulates bitcoin and an important part of this regulation is making sure that transactions are settled. This in turn entails these 2 steps –

1. Verifying whether the transaction was correct
2. Adding that transaction to the public ledger

But with so many servers (remember public and distributed nature of the network), who gets to do it? Hence every server who wants to do it has to solve very hard mathematical puzzles. The one who does it first gets the opportunity to settle the transaction.

Since these puzzles are very computational heavy and sufficient expenses are borne for it, network rewards the winner. This reward is nothing else but in the form of bitcoin. And this is how bitcoins are generated.

And this process is called Bitcoin Mining. Now you must be wondering why is it called Bitcoin Mining? Why such a weird name?

The answer lies in understanding how gold is created. One generates gold after digging in mines. In the same fashion bitcoins are generated after digging in computational power to solve very hard mathematical puzzles. Hence the name Bitcoin Mining.

 

What is the total supply of Bitcoin?

We all know that if currency gets keep on printed, its value will decline therefore there has to be a limit on how much it can be printed/generated?

The way the system is designed, there can ever be only 21 Million Bitcoins in existence. And every year, bitcoin generation rate will be halved till the time the total supply touches 21 Million.

At the time writing, total supply in circulation is 16,967,560 i.e. 16.9 Million. It is estimated that entire supply of 21 Million will be out only by 2040 which proves that mining a bitcoin is getting difficult with each passing day.

 

How can I invest in Bitcoin in India?

Till some time ago it was difficult to buy bitcoins in india but with companies like Zebpay, Unocoin life has become easy.

I personally buy bitcoins on Zebpay. Here are the steps you need to follow –

1. Download their app from Google Playstore. If you are an iPhone user, download their app from here.
2. You will have to verify your Identity by uploading a photo of your Pan Card.
3. Once identity is verified, make payment to their bank account which once reconciled, you will be able to see it in your Zebpay app.
4. Buy Bitcoins.

Though they maintain that verification might take upto 3 days but my personal experience has been good. In my case, verification happened within 12 hours straight.

I have not tried Unocoin personally but would assume that steps would be more or less same.

Note

If you would have visited both these sites, you would have noticed one thing peculiar.

Buying and selling prices of bitcoin are different on both these platforms

There is nothing to be surprise about; this is pretty normal in bitcoin world. Different exchanges have their buying and selling prices. Since buying prices are always higher than the selling prices, instant arbitrage opportunities are not possible. However it is quite possible that buying happens from one platform and then sold on another once price movements are favourable.

 

Is it illegal to invest in bitcoins in India?

There is no law which says that bitcoin is illegal in India. One can safely invest in bitcoin from legal perspectives.

What is the main apprehension though is conversion of black/terrorist money into white money through bitcoins. Since we would not be involved in any of such activities, we don’t need to be worried about it.

 

What are the tax implications?

The income earned from any profit will get added to your “Income from Other Sources” and will attract income tax as per your slab.

 

Is it safe to invest in bitcoin?

Bitcoin is a new age digital currency which the world is slowly adopting. Recently Japan legalised the currency and there are millions of merchants who accept bitcoin as a valid payment method. Therefore people and economies are adopting bitcoin.

Now coming to the question of safety. Whenever an investment is made, one always run the risk of capital loss (equity is being talked about in this context). And here bitcoin is no different.

But with bitcoin, there is one additional risk – Risk of platforms/wallets going kaput. There has been one very infamous instance in the past where the biggest bitcoin exchange Mt GOX filed for bankruptcy when it reported that some 850,000 bitcoins worth $450 Million have been stolen.

Since exchanges are more prone to hacker attacks, it is best advised to keep your bitcoin in wallet apps like blockchain.info rather than with exchanges.

Note: I keep my bitcoins with Blockchain. There are different kinds of wallets but I guess that’s a topic for some other post.

 

Why do bitcoin prices vary so much?

It’s a valid concern. A currency which is aiming for wide adoption should not exhibit such wide price variations. Here is the chart for last one year.

If one carefully see the price rise, it happened around April after Japan legalised the currency. After touching the high of $3000, it is now trading in the region of $2500-2600. Therefore in the short term, price variation is fuelled plainly by the news.

 

How do I transfer bitcoin?

Before talking about the transfer, we will have to understand wallets. So just like you keep your money in purse/wallet, in the same manner, bitcoins are stored in digital wallets. There are many types of wallets available in the market.

1. Software Wallet
2. Hardware Wallet
3. Online Wallets
4. Paper Wallets

I will write a detailed post later on each type of wallets therefore let’s return to the main question.

Now each wallet has 2 keys. Think of it as digital lockers where we keep the jewellery. The difference is that in digital lockers there is only one key (password) whereas in bitcoin wallets (online) there are 2 keys –

1. Public Key
2. Private Key

Private key works in the same fashion as digital locker’s key. It allows me to access my account.

Public key on the other hand is the address of the wallet (technically wallet address is a hashed version of the key). With public key we send/receive bitcoins.

Therefore in order to transfer bitcoins to someone, here are the steps –

• Enter the address where you want to send the bitcoins. You will have take this address from the person to whom you are transferring the bitcoins. Screenshot from my Zebpay account looks like this –

• Enter the number of bitcoins you want to send and boom! You are done.

Note: Some wallets also allow you to decide how much you are willing to pay to miners to settle that transaction. Remember bitcoin mining? If you are willing to pay more, your transaction will be settled faster and hence you will be able to transfer bitcoins faster. Zebpay doesn’t allow this facility where blockchain.info does.

 

I can buy stuff with currencies like INR. Can I do the same with bitcoins?

Yes you can. In-fact big companies like Microsoft, Subway, Expedia, CheapAir, WordPress all accept bitcoins. Everyday thousands of merchants are enabling themselves to accept payments via bitcoins. List of some of the global merchants is present here. In-fact in India also, there are quite a few merchants which accepts bitcoin payments. Some of the merchants are listed here.

 

Are there any other cryptocurrencies other than bitcoins?

Yes there are more than 700 cryptocurrencies available in the market. Some of the prominent ones are –

• Ethereum
• Ripple
• Litecoin
• Dash
• Monero
• Stellar Lumens

In recent times, there is a lot of talk about Ethereum and Ripple. In-fact I was lucky to make small fortune by trading Ripple. Read about how I made Rs. 3 lacs from Rs. 50K within a month.

 

What is the view of financial institutions on cryptocurrencies?

With times, everyone has to change & banks and other financial institutions are no different. Though ideologically, cryptocurrencies came into existence to cut the middlemen (banks essentially) but now banks are experimenting with this technology (blockchain) to offer better services to their customers and at fraction of cost.

For example in India –

• SBI has already announced that it will launch bankchain. Read here
• Axis Bank has tied up with Ripple. Read about it here
• ICICI ties up with Stellar
• Yes bank ties up with Uphold. Read about it here.

In nutshell, financial institutions have already started experimenting with the technology and in not so distant future, a time will come when blockchain will become the core of banking.

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I have tried to answer all the common queries pertaining to bitcoin. I hope these will clear all your doubts. If you still have any question to be asked, feel free to ask in the comments.