First things first — Bitcoin is a digital or virtual cryptocurrency that can be exchanged between people or businesses that accept them. Cryptocurrencies aren’t a very modern concept — they have been around since the 1980’s, and as of today, there are hundreds of them.
But Bitcoin is special.
Bitcoin became the world’s first first decentralized cryptocurrency in 2009. It is the world’s first free market global currency, and offers much more than standard currencies.
It’s decentralised — which means no bank or government controls or regulates it, or even facilitates its transfer. It is transferred person-to-person. Hence, decentralized.
One of the biggest problems with prior cryptocurrencies was the “double spending” problem. This means that if someone would spend a unit of the currency, it was possible to manipulate systems in such a way that he would still be able to keep that unit with himself, allowing him to spend that currency again. Bitcoin solved this problem through its distributed peer-to-peer network called the Blockchain.
The first Bitcoin was issued and created by someone who goes by the name of Satoshi Nakamoto, which later turned out to be a pen name of the real anonymous programmer(s) involved. His identity remains unknown — no one knows who invented Bitcoin, despite lots of intense speculation that we’ve dedicated an entire article to here.
The blockchain is a unique way of storing and recording bitcoin’s transactions, and is arguably bitcoin’s biggest contribution to our world. It’s very much like a traditional database, except that the blocks are linked together cryptographically in sequence. Each block in a blockchain contains some information (proof of transaction in the case of Bitcoin). The sequential linking, or chaining, is done via a digital signature. As new information is added, the length and complexity of the blockchain increases, and the database gets bigger with more and more people becoming a part of it.
To make sure the blocks are tamperproof, and that no one can ‘fake’ a transaction on the blockchain, bitcoin requires all computers connected to its network to ‘verify’ and decipher these blocks. Since information is publically visible, if someone makes an unauthorised change, everyone else in the chain can see where it happened, and agree by majority on whether the change is valid or not.
Thus, the blockchain is a distributed ledger — it allows us to produce a tamper-proof records of transactions on the network. It’s very similar to how an accounting ledger works, but the idea behind the distributed ledger is we get rid of the middle man. Everyone can have an identical copy of the distributed ledger, and this database of assets is shared across multiple sites.
Since there’s no central location that’s governed by any specific country or body, Bitcoin’s blockchain network is incredibly strenuous to hack, and rather expensive at that. Let’s say you had a distributed ledger with a 1000 computers on it. If someone wanted to hack into it and change some of the information on there, they would have to hack every single other person’s computer at the same time (or atleast, 51% of the computers in order to ‘verify’ the blockchain by a majority) and change exactly the same piece of information.
The network is essentially controlled by the consensus of the market participants, and so there’s a lot of trust on the bitcoin protocol and the network. Blockchain technology is at least as significant as the development of the Internet. If the Internet brought us near instant digital communication, the blockchain brings us near instant digital asset transfer, asset movement and security of data. That is why it massively changes the concept of ownership and trade in today’s economy.
All of this makes sense. But why would computers connect to the bitcoin’s network and help verify transactions? What’s in it for them?
Computers connected to the bitcoin network are caller ‘miners’. Bitcoin mining is the process of adding transaction records to Bitcoin’s blockchain. Miners use special software to solve math problems and ‘decrypt’ the blockchain blocks, and are issued a certain number of bitcoins in exchange. This creates incentive for more people to mine.
As more miners join, the network becomes more secure. This is because miners they are approving Bitcoin transactions on the blockchain.
The Bitcoin blockchain network automatically changes the level of complexity of the math problems, depending on how fast they are being solved. It is programmed such that there will actually only ever be 21 million bitcoins in circulation, and there is a predetermined amount of bitcoins that are released every ten minutes.
When a block is discovered, the discoverer is awarded a bounty of bitcoins (12.5 as on today), which is agreed-upon by everyone on the network; this value will halve every 210,000 blocks, which is approximately every 4 years.
Where will these miners store these bitcoins? How do they transfer it to others? This brings us to the next important concept.
To be able to store bitcoins, you’ll need a wallet — which can be in your computer, smartphone or even the web. You can backup the wallet at another location so that you don’t lose data if your hard drive crashes. Depending on your requirement, you can set up a wallet in the following ways:
- Software can be installed on your computer’s hard drive and you can therefore store it offline.
- Multiple iOS or Android applications are available on your phones where you can manage your bitcoins. These wallets are very convenient but might not be the most secure way for keeping larger amounts.
- Hardware wallets like Trezor and Ledger. These wallets are not as convenient as apps but are the most secured options to keep your bitcoins and cryptocurrencies.
- You can combine your bitcoin storage by using a wallet from your exchange, such as Zebpay. Speaking of exchanges — here’s how you can transact bitcoins:
Buying and Selling Bitcoins
Although mining can land you free bitcoins, the complexity is extremely hard, and the hardware and electricity costs that it will entail makes it pointless in that sense. You need very powerful machines to mine bitcoins and are unlikely to be able to pull it off using consumer grade equipment.
You can buy bitcoins from anyone else who has some. This could involve a direct meeting, or even any electronic transfer. But you may want to skip this, as we’ve detailed in the next section.
A much better way to buy bitcoins is on exchanges like Zebpay. Exchanges let you link your bank account for quick transfers. Alternatively, you can make a payment to bank account or withdraw the money to your bank account, and track data on bitcoin valuation in the country. There is a KYC requirement, and you will need to verify your ID by simply clicking a photo of your PAN card.
Selling Bitcoin, again, can be done either online or in person. Each has its own distinct advantages and disadvantages. Selling online is the more common way of trading bitcoin, because the entire Internet is your potential buying market. There are three main ways to go about selling bitcoin online:
- Through direct trade with another person. You find a buyer, you accept your payment, and you then transfer the bitcoins to the individual. This should be your least preferred method of selling since it is inconvenient and unsafe.
- Through an online exchange, in which you trade with the exchange itself, rather than another individual. Like direct trade, you will have to register by verifying your identity, but the sales are not as arduous because you are selling directly to the exchange. Payments and receipts are instant, as long as you’ve picked the right exchange.
- The most relevant method of the will vary from person to person depending on the interests of the seller.
The bitcoin hype train isn’t stopping anytime soon. Having already appreciated more than 10,000 times in less than a decade, you’d be forgiven for assuming its run is over.
But you’d be wrong.
With the number of bitcoins having a fixed limit while more and more of the world joins in, the law of demand and supply will dictate the price continues to rise. However, this is still relatively a new technology and does pose technical and legal challenges. In the end, one should not invest in anything one does not understand.