Understanding Bitcoins

Bitcoins

All you need to know about this online currency

In the year 2009, a person with the pseudonym Satoshi Nakamoto created an online currency in the form of bitcoins. Bitcoin is a currency designed for  electronic use only. There are no physical coins or banknotes associated with bitcoins; they exist only as a series of ones and zeroes zipping through the ether of cyberspace.  There has been a drastic change in the value of a bitcoin. While at times there was an  astronomical rise, there was also a fall. This rise and fall in bitcoin’s value says a lot about the current state of world economy.

Rather than counting on the governments or central banks to secure the value of the currency and guarantee transactions, the founder of bitcoin ensured that the bitcoin places its trust in maths. This rebellious internet currency has been in demand because of the events that have shaken public’s confidence in government-issued currencies.

Have a look at this minute-long video describing bitcoin.

After the Cyprus Bailout; which said that the government would start taking money from people’s bank accounts; there was a massive need to have a place where the public money remained untouched. In fact, people in Cyprus were running to ATMs to take out their savings before the deposit levy kicked in.

And then, bitcoin’s media coverage went viral, increasing its value drastically in days. A week before Cyprus Bailout, you could buy one bitcoin for about 45 dollars. A week after Cyprus, it cost 100 dollars.

It’s been going up and down for the bitcoin since then; as of January 2013, one bitcoin was worth 13.51 dollars. Earlier last week, it went up as high as 266 dollars. And on Thursday, it plunged to less than 100 dollars. In Indian Rupees, it would mean starting at 737.11 rupees, then rising to 14,512 rupees and then plummeting to 5,456 rupees. Imagine how many people made a quick buck and how many people lost their livelihoods in a matter of days.

What could cause all this? The answer is pure speculation among the people. People are obviously buying it, knowing that its value will rise, not because they want to use it as a normal currency but more like shares. Admittedly, this bitcoin system is much more stable and properly designed than any other online currency in the economic history.

By attaching a transaction history to each bitcoin, despite retaining users’ anonymity, counterfeiting becomes much harder. You can’t create fake transactions, can you?

The supply and productions have also been strictly regulated. While the relatively small supply of such hard currencies means that the inflow and outflow of hot money can make them highly volatile, bitcoin is still the first well-designed online currency. Its volatility isn’t as bad as Cyprus’ economic conditions and it will most likely get modified and re-introduced.

A creative way to move money, bitcoins can insulate people from high inflations in their countries, dodge international approvals and reach markets which were earlier out of reach. Black Market transactions also may become easier. You can deal in anything— recreational drugs to paper currency, songs to survival gear, cars to consumer goods —no borders, no change fees, no closing hours, and no one to tell you what you can and can’t do with your money.

And despite the recent crash, bitcoins remain hugely popular among drug dealers and buyers. And why wouldn’t they be? They’re getting websites like Amazon, where they can advertise their wares in a consumer-friendly atmosphere. The same goes for the buyers, they could buy LSD as if they were buying headphones on Flipkart.  All this is even easier with a decentralised system because then detecting suspicious activity, identifying users and obtaining transaction records will be problematic for law enforcement authorities. This could worsen if illegal activities involving terrorism, child trafficking and pornography start happening.

Despite this bad side, bitcoins have its defenders, especially with more and more enterprises accepting bitcoin payments. Easy access of this currency is another thing users love, saying they’d rather keep their money in the cloud than in a bank. And with the worsening conditions in Cyprus and Europe, they do have a point.

But what if your bitcoins are stored in an online wallet?

The website itself could be compromised; if they’re stored in a desktop client, the integrity of the machine is all that stands in the way of a theft. Here, the facelessness becomes a downside: any thief can create a new address, send your money to their account, and use the web of anonymity to send the cash around the world before you might even notice that it’s missing.

Like any other thing, bitcoin has its pros and cons; I am sure it will not become an everyday currency, but it just might become the international trade currency.

The longer this currency stays alive; more people will continue to believe in it. It’ll vary from person to person; risk-lovers won’t mind getting in on this, while risk-averse people will be too fearful to recognise the idea of “online currency” especially after that monumental fall (losing 80 per cent of its value). Nevertheless, internet will surely start to offer such currencies in the future. The government on the other hand, won’t back it or approve it, and they’ll have to control it by imposing harsh taxes.  Bitcoin’s value may have risen and fallen, and it’s not guaranteed to be the future currency, but there is a slight chance that it might.

Akhil Thakur

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