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Posted at: Aug 12, 2017, 1:56 AM; last updated: Aug 12, 2017, 1:56 AM (IST)

Cyber mining virtual money

A peer-to-peer cryptocurrency, bitcoin is said to be the future of money. Is it really or just a speculator’s dream?

Vaibhav Sharma

There is nothing wrong with online money transfers, and they are convenient for the most part. You can pay with your credit or debit cards, banks accounts and even digital wallets like PayTM that simply let you scan a barcode and transfer money. With things like Samsung and Apple Pay, it seems that the world is headed towards an even more seamless future where all you will ever have to do is wave your phone. But apart from cash transactions, in all these modes of payment there is a middleman who is taking a part of the spend as fee for his efforts in delivering the money, ensuring there is no misuse, and for bookkeeping.

With credit cards, you have companies like Visa and MasterCard taking up to almost 3 per cent of the transaction value as fee, and the situation is similar with players like PayTM and Mobikwik. More often than not, this cost has to be borne by the seller. So, is there something that could remove the middleman altogether, but at the same time ensure security and accuracy?

What is it?

It is described as a peer-to-peer cryptocurrency that is completely decentralised and operates without an intermediary. But what does that really mean?

Let’s look at it this way. If you give someone cash, you cease to have that banknote in your possession any more. But that isn’t the case with digital currency. What if you made two copies of the same and sent it to different people. What if you made 100? That would make any digital currency a non-starter. So perhaps there could be a ledger maintained that would keep a track of what you had, and what was sent. The question would then be twofold: Who would maintain such as a ledger, and could that person be trusted? Bitcoin answers all these questions with a remarkably simple, yet secure setup.

There is such a ledger, but instead of trusting one person with the bookkeeping, a copy of this ledger is shared with everyone. Whenever bitcoin is spent, a corresponding entry is made in everyone’s ledger and this ensures that no one can cheat the system. The code on which this ledger runs is open source — which means that it is maintained, secured, improved and checked in the public domain under everyone’s watchful eyes.

How can you acquire one?

There are a number of ways you can come into possession of bitcoin; the first method is to devote a considerable amount of your computer’s resources to keeping a copy of the ledger described above, and as reward for the same you would be awarded bitcoin. In fact, this is the only way bitcoins can be created.

The second and easiest method is to simply buy it from an online bitcoin exchange. If you wish you can also sell something and accept bitcoins as payment, or simply trade your local currency with someone offering bitcoins as barter. To store them, you’ll need something known as a bitcoin wallet. 

The risks

The manner in which its founder, Satoshi Nakamoto, envisioned bitcoin puts a cap on their total number at 21 million. The greater the number of bitcoins in circulation, the lesser will be the speed at which they can be mined/created. While this means inflation will not be an issue with Bitcoin, it does have its own set of challenges. 

Since it is divorced from the governments or central banks, it is not backed by anything. If you lose a bitcoin because of a hack or for other reasons, there is no getting them back. Further, as they have no inherent value of their own, their worth exists only because there are people willing to accept them. 

In April 2013, bitcoin went from trading at $266 to about $50, and then rose to $100. In October of the same year, when the dark web portal The Silk Road was seized by the FBI, the price crashed from the $140 region to about $110. When people attempted to capitalise on the fall, the price rose to about $200 in a few weeks. By November 2013, it was trading at over US$1000 at a famous bitcoin exchange called Mt. Gox. By April 2014 the prices fell again to about $400, and even fell as low as $200 in early 2015. However, in the last few months, bitcoin has really rallied to climb to over $3000 in August 2017.

The reward

In addition to being quicker, cheaper and more reliable, bitcoin also eliminates the middleman and thus provides a layer of secrecy to the transaction. In fact, it lets you remain largely anonymous, and this is one of the reasons why it was so popular on the dark web. People used it to buy drugs, arms and even services of hitmen on The Silk Route before it was shut down. Even when demonitisation hit the country, a number of people turned to bitcoin in hopes of staying outside the tax net. 

Things like these make it clear that bitcoins will never been favoured by the government, but if you have the appetite for risk, bitcoins are something that may grow in value even more, after all, there can only be 21 million of them in total, ever. From $50 in 2013 to over $3000 currently is an exponential rise that has made many millionaires. Bitcoin’s acceptability is also growing rapidly with mainstream companies like Expedia getting onboard. Digital currencies are so hot right now, that an offshoot of bitcoin called Bitcoin Cash that was only created on the 1st of August 2017 crossed a valuation of $7 Billion in a day.

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