All you need to Know about Bitcoin’s & why should you care !!!
- Dr. Navin Punjabi, Assistant Professor & Director Placements H. R. College of Commerce & Economics, Mentor – Board of Industry Academia Partnerships (BIAP). The author can be reached at firstname.lastname@example.org
- The author would like to thank his Research Assistant Krish Jain a student of Third Year Financial Markets at H R College of Commerce & Economics.
Bitcoin is in the news from the last four to five years & is becoming a dinner table & networking conversation for people. I realised its popularity when I was travelling to Ajmer just 2 weeks ago to attend my sister-in-law’s wedding and at the platform I met one of my ex-student Naved who was planning to visit the ‘Darga Sharif’ at Ajmer to seek the blessings of almighty. He was delighted to bump in to me at Bandra Terminus and we had conversations regarding college, careers, jobs, his batch-mates and lot of other interesting topics. Since the journey was long the topic slowly moved to stock markets and the budget and then moved to the talk of the town ‘Bitcoins’ I didn’t participate much and shared my opinion on Bitcoins not being recognized as legal tender. We continued our journey and me and my family attended the wedding, it was interesting for me to learn the extent of curiosity my relatives had regarding bitcoins my aunt from Jodhpur showed very keen interest in this topic as her son had requested her to invest 3 lakhs in Bitcoin & she wanted my opinion if she should invest in Bitcoins at $25000 dollars. She is an investor in stocks & mutual funds and understands markets. What was interesting is my aunt was trying to find a fair value of a bitcoin & how to buy one or should her son get in to mining a bitcoin.
So that’s what motivated me to write the article since investor have made bitcoin a topic of discussion at dinner table, networking meets and academic gathering & this bitcoin wave is catching attention of many with limited understanding of the underline concept of cryptocurrency and bitcoins, in my humble opinion it’s more of a herd mentality. The objective of this article is to move the conversation from fair value of bitcoins to discussions like Is Bitcoin legal or illegal? Will it be accepted universally or not? Is it a medium of exchange? Are there other cryptocurrencies? I strongly believe life is all about asking the right questions so wanted to motivate the readers to ask these questions as reflection of their thoughts on the subjects or ask these question to their peers at cocktails meets and dinner table to get a better understanding from the ones propagating buying Bitcoins.
A form of digital money, Bitcoins existence traces back to January 2008. Then inventor of Bitcoin is ‘Satoshi Nakamoto’, this name is used by the unknown creator of the protocol used in the bitcoin cryptocurrency. Satoshi Nakamoto is closely-associated with Bitcoin and the Bitcoin blockchain technology.
There is lot of speculations with the inventor some believe its an individual some believe it’s a group of men under the name of ‘Satashi Nakamoto’ who invented it. Satoshi Nakamoto means “Central Intelligence” in Japanese. In a web search, you’ll find out that Satoshi is usually a name given for baby boys which means “clear thinking, quick witted, wise,” while Nakamoto is a Japanese surname which means ‘central origin’ or ‘(one who lives) in the middle’ as people with this surname are found mostly in the Ryukyu islands which is strongly associated with the Ryūkyū Kingdom, a highly centralized kingdom that originated from the Okinawa Islands. So combining Nakamoto and Satoshi can be loosely interpreted as “Central Intelligence”. The principle motive of this invention was to have a medium of exchange that was beyond the reach of rules and regulations of any government or institution. A deregulated currency, bitcoins may be used for illegal transactions on the dark web as all transactions are irreversible.
Bitcoins can be stored in e-wallets that are specially designed programs. The smallest amount one can buy is a Satoshi which is 0.00000001 bitcoin or one hundred millionth of a bitcoin. Nakamoto was the first person to mine 50 bitcoins back in 2008. The first transaction involving bitcoin was reported on May 22, 2010, when Laszlo Hanyecz, a programmer paid 10,000 bitcoins for pizza.
Pricing of Bitcoins
Bitcoin’s price is determined by the market forces of demand and supply. The supply of bitcoins is limited to 21 million. At present, 16.7 million bitcoins are in use. The increasing demand, combined with the limited supply of bitcoins has forced the prices to go up. For example. A bitcoin was worth hundreds of USD in 2015, but today it is trading at $18,000 levels (as on January 2018).
Every bitcoin has a unique address. Creating a bitcoin address is nothing more than picking a random valid private key and computing the corresponding bitcoin address. One can keep a track of the bitcoin transactions as every transaction is seen by the entire network in a matter of seconds and is recorded in the worldwide ledger i.e. blockchain. A blockchain cannot be manipulated since a number of users maintain it leading to a multiple check.
How to Get Hands on A Bitcoin
There are number of ways how one can get his/her hands on a bitcoin.
One can accept bitcoins in exchange for goods and services provided.
- Bitcoins can be bought directly from certain websites, called ‘Exchanges’ in exchange of regular currency. CoinBase (based in San Francisco) is one such website.
- One can obtain bitcoins through the process of mining.
Mining is the process wherein the miners dedicate their computers to verify transactions on the peer-to-peer network. Every 10 minutes a new block of 12.5 bitcoins is added, which is then verified by these miners. In return for donating their processing power, the miners are given a proportionate number of bitcoins as a reward. In recent times, one would need a specialised hardware to maximize the efficiency of computers or a super computer.
Miners keep the block consistent and complete by verifying and collecting newly broadcasted transactions into a new group of transactions called a block. Each block is connected to the previous block through a cryptographic hashtag using the hashing algorithms, thus giving it the name of a blockchain. Every time a new block is solved, one receives the reward of 12.5 bitcoins.
Initially, a bitcoin miner was rewarded with 50 bitcoins in 2008. Every 4 years, this reward is slashed into half. The reward post 2020 will be 6.25 bitcoins.
|Year||2008 – 2012||2012 – 2016||2016 – 2020|
|Reward||50 bitcoins||25 bitcoins||12.5 bitcoins|
Should a Retail Investor Invest in Bitcoins?
“Stay away from it. It’s a mirage, basically” – Warren Buffet
A few reasons why Warren Buffet made such a statement:
- Extreme volatility: Bitcoins are extremely volatile. A live example of this can be sson On the 7th of December, 2017, the price of bitcoin passed the $19,000 level for the first time in the history. On the same day, within a couple of hours, it plunged 25% to $14,000 levels. The next day, i.e. the 8th of December 2017, the prices crossed the $16,000 mark again.
- Deregulated: Bitcoin has no central bank backing it and it isn’t regulated by any state, thus making it a very risky investment.
- Valuation: One cannot derive the fundamental value of bitcoin because it came into existence through the use of technology and is not based on anything.
- Bubble Burst: Experts have warned everyone about the possible bubble burst. Earlier, in 2017, Ethereum – the second biggest cryptocurrency after bitcoin lost its value from $317/coin to $0.1/coin in a day.
- Bitcoin whales: 1,000 people own 40% of the market share. These people, also known as bitcoin whales are capable of manipulating the market by heavy selling and buying of bitcoins. Some believe it cannot be manipulated. However the sheer concentration of the assets being closely held by new ultranet worth individuals is an alarm in fundamentals of finance to stay away from such assets.
- Thefts: In the past 8 years, there have been a lot of hacks. Many wallets have been hacked and bitcoins worth millions have been stolen.
Recently Citibank, Bank of America & J P Morgan barred customers from using their debit and credits cards for purchasing bit coins online.
“Given concerns, both globally and locally, including from the Reserve Bank of India, cautioning members of the public regarding the potential economic, financial, operational, legal, customer protection, and security-related risks associated in dealing with bitcoins, cryptocurrencies, and virtual currencies, Citi India has decided to not permit usage of its credit and debit cards towards purchase or trading of such bitcoins, cryptocurrencies and virtual currencies.”
“At this time, we are not processing cryptocurrency purchases using credit cards, due to the volatility and risk involved,” a J.P. Morgan Chase spokesperson said in a statement to CNBC.
A Bank of America spokesperson also said in an email that the bank has decided to decline credit card purchases of cryptocurrencies.
Citigroup said in a statement that “We have made the decision to no longer permit credit card purchases of cryptocurrency. We will continue to review our policy as this market evolves.”
What does government and experts have to say
“Investors and other participants therefore deal with these VCs (virtual currencies) entirely at their (own) risk and should best avoid participating,” said a finance ministry release on Friday, Dec 30th 2017.
Opinions are sharply divided on cryptocurrencies. Bitcoin sceptics include JP Morgan chief executive Jamie Dimon who described anyone trading in it as “stupid” and warned that it would “blow up.” But while Warren Buffett has dubbed it a “bubble,” Microsoft founder Bill Gates has said “bitcoin is better than currency”. CME Group and Cboe Global Markets Inc introduced futures contracts on bitcoins earlier this month.
Ministry of Finance said that virtual currencies (VCs), including bitcoins, are not currencies. “VCs are not currencies. These are also being described as ‘coins’. There is however no physical attribute to these coins. Therefore, VCs are neither currencies nor coins,” the ministry said in a press statement. It further clarified that virtual currencies are not backed by government fiat. “These are also not legal tender. The government or Reserve Bank of India (RBI) has not authorized any VCs as a medium of exchange.” With this statement, there is finally some clarity on how India plans to treat bitcoin.
In mid-January, many Indian banks suspended or closed the accounts of crypto exchanges, citing a risk for “dubious transactions”.
Cryptocurrency is not legal tender in India but the government will explore its underlying technology, called blockchain, to usher in the digital economy, finance minister Arun Jaitley said on Thursday while presenting Union Budget 2018.
One can conclude that it is better for the retail investor to stay away from bitcoins and it is a very risky investment and can lead to complete loss of capital.
Just because something doesn’t do what you planned it to do doesn’t mean it’s useless.
For now, educate oneself on the blockchain technology as the blockchain technology can do amazing work however, it has to be recognized by RBI and government and used in a manner which protects the interest of the investor and the users of virtual currency. With no regulator for virtual currency and all the above factors, retail investors should invest in educating themselves to prepare for a probable new age currency in its regulated, transparent and effective form in the near future.
Disclaimer – The view & opinions expressed in this article are personal and do not reflect the views of the authors employer or any other institution that the author is affiliated to. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.