Bitcoin: The next big thing?
Emerged as the cash for digital transactions, Bitcoin has become a household since its birth over a decade ago. Its inconsistent prices have kept it in the news over the years. The growing popularity of this digital currency leaves many of us curious about investing in it. Young professionals and students are enticed to it owing to the ease of accessibility, technology backing, and value packaging. Bitcoin is termed as ‘digital gold' when compared to traditional assets. Though the return on investment is exciting, most countries haven't yet legalized it as a form of currency. In this article, we will discover all about bitcoins and explore if it is worth the risk.
What is bitcoin?
Bitcoin is a completely digital currency that is not controlled by any government or financial institution. Based on the concept of cryptocurrency, it is a decentralized online payment system. The first Bitcoin was created in 2009. Its first lines of code were described in a white paper published under the pen name Satoshi Nakamoto, but he is not the owner of Bitcoin. It was designed to function without any interference from the government or any regulatory body. It is not controlled or produced by anyone in the world, not even the one who created bitcoin. All Bitcoin transactions are conducted on digital signatures and digital coins while being maintained on a ledger. They are maintained through publicly accessible blockchains to ensure transparency and prevent hacking. Its decentralized nature requires all nodes handled by individuals across the globe to verify each transaction.
What is Blockchain Technology & Bitcoin mining?
Blockchain is a distributed ledger to maintain the transactional data of a digital asset. Each transactional record is called a block and the public database. where it is stored simultaneously are known as a chain. The transactions are approved through a peer-to-peer network instead of a central clearing authority. It is a complex technology offering accurate tracking of all transactions through a permanent ledger. Blockchain technology is an efficient way of recording information permanently. At present, it is almost impossible to hack or change the system, and it seems considerably difficult to do so in the future as well.
Bitcoin mining is a voluntary practice of reviewing transactions. Individuals known as ‘Miners' invest their time and computing power to inspect the authenticity of the transactions. For each authentic transaction that is added to the network, they are rewarded in Bitcoin. Besides, they can also contribute to the new protocols of the network.
How are bitcoins generated?
Bitcoins are generated by a reward-based process called Mining. This competitive process of cryptocurrency mining engages technologically sound individuals known as Miners. They process transactions and ensure the security of the network in exchange for new bitcoins. The process takes place through powerful computers, needs high-level technical competence, and consumes a lot of energy. Miners solve complex mathematical problems related to the Bitcoin algorithm to generate a reward.
New Bitcoins are generated in accordance with the network protocol at a decreasing rate. The number is halved each year to restrict the total number of bitcoins in existence at 21 million bitcoins. Bitcoin mining a very competitive business as making profits against the increasing number of miners is tough. Miners may not even be able to efficiently cut their operating costs most of the time. As the system is decentralized, there is no central authority with the power to control the system and make it profitable. Once Bitcoin mining comes to a halt, the network contributors may be supported through transaction fees.
What's the real value of a bitcoin?
Bitcoin is incredibly volatile, which is one of the main reasons it makes news headlines every other day. The valuation of a bitcoin can be adjudged based on the following theories:
The demand for bitcoin as a currency decides its value when calculated based on this theory. An increase in its popularity and usage will increase its value. But the valuation cannot merely be attributed to demand and supply, as the total number of Bitcoins that will ever be available is limited to 21 million.
2. The Lindy Effect
This theory is similar to the earlier one, the valuation is based on the optimism and longevity of the digital currency. So, if Bitcoin is being traded confidently and isn't hacked over time, its value is bound to rise. On the other hand, if people lose interest in the currency or consider it as a risky investment option, its value will begin falling.
3. The Gold Comparison
Bitcoin is also compared to gold in terms of its properties as an asset. Both are considered valuable, as they are rare and valuable mediums of exchange. They are great to own and can be easily valued against other resources, but they don't generate income unless someone else buys them. Still, if you compare them, investing in Bitcoin is risky at the moment, as it is just 5% of the Gold available. Gold has built its popularity among investors over centuries and is considered superior.
Can we buy bitcoins in India?
The facility to buy bitcoins is now available in India, however Reserve Bank of India (RBI) expressed concern about cryptocurrency in 2018. Regulated entities such as banks and financial institutions were instructed to restrain from dealing with Bitcoin. The decision was favored by the Supreme Court (SC) of India, back then. Last year, the ban was revoked by SC to allow trading by bitcoin companies only for business purposes. But possessing Bitcoin for individuals is still illegal in the country.
You can buy bitcoin in India through online platforms like Zebpay, UnoCoin (India-based company), CoinSwitch Kuber, and CoinSecure. It is a high-risk investment owing to the volatile trading prices and absence of regulations. There are no guidelines for resolving any related disputes which add to the precariousness of dealing in bitcoins. RBI however is researching digital instruments backed by plans to launch a native digital currency.
The price of bitcoin in India is around INR 40 Lacs, however, as discussed earlier the rates are highly unstable. You can initiate a bitcoin investment by buying even a fraction of it, the minimum amount being INR 500 only. KYC (Know Your Customer) verification is mandatory to initiate bitcoin trade. It includes a PAN card and a valid address proof along with a bank account of the buyer. Document verification takes around 2-3 days, post which you are required to set up a bitcoin wallet. Bitcoins can be stored in online or offline wallets known as hot and cold wallets, respectively. The possibility of hacking hot wallets makes them vulnerable, and most investors prefer storing them in cold wallets. Besides buying bitcoins through crypto exchanges, you can also trade bitcoins through P2P (person-to-person) transactions. These are also carried out through crypto exchanges, but they take more time to be processed.
Experts Talk: Warren Buffett on Bitcoin
Bitcoin has drawn the attention of tycoons from across the world. While most of them find it attractive, others are skeptical about it. Warren Buffet is one of the toughest critics of cryptocurrency. He believes it doesn't have any inherent value, as it doesn't generate any earnings, and compares it to the Tulip craze of 1637. In accordance with his investment principles, Buffet invests only in businesses and sectors he understands. He prefers investing in stable companies over those based on headlines. Companies that grow steadily top his preference list and he doesn't support unpredictable investments.
Are bitcoins the real next big thing?
Bitcoin is becoming increasingly popular among students and young professionals as an alternate asset to hedge market volatility. Though it is now two decades old, you should be mindful while investing in Bitcoin. Consider purchasing cryptocurrency and bitcoin through legitimate exchanges and ensure they follow KYC and AML guidelines.
Mutual Funds, small cases, and ETFs are better options in India for students and young professionals. Millennials have invested heavily in stock markets in the past year and have gained good returns. To plan your investments, you can direct a percentage of your earnings towards savings each month. While mPokket has your back in case of any emergency. Download our instant loan app for students and young professionals to apply for a personal loan whenever needed. The seamless process of availing a personal loan from mPokket allows you to receive money right into your bank account or Paytm wallet.