Bit by Bit, Coin by Coin

When Prime Minister Narendra Modi broke the news of demonetization to billions of Indians, many things happened. From lines gathering aroundATMs, mini protests outside banks to parties launching new e-wallet ventures. One thing nobody talked about was increase in price of Bitcoin by 10% overnight.

Bitcoins are the world’s first decentralized peer-to-peer currency, created and held electronically.Bitcoin was created by an anonymous person calling himself Santoshi Nakamoto. They’re produced (mined) by people and businesses using system created by Santoshi Nakamoto by solving some complex algorithmic equations. Every bitcoin transaction is recorded and verified in an open ledger called block-chains, thus preventing counterfeiting or double spending.

Who Prints It?

No one. The currency isn’t physically printed in the shadows of any Central Bank, unaccountable to the population and making its own rules. Instead, there are two ways of obtaining Bitcoin- either you ‘mine’ it or you buy it.

For mining, you will need mining software and some very heavy duty computing equipment and hardware as it is an intensive and tech-heavy proposition. Whereas, buying and selling can be easily done through companies- Unocoin, Zabpay, Coinsecure, BTCXIndia- which offer Bitcoin wallets and INR to BTC (Bitcoin)buying and selling.

Also, there are only 21 million bitcoins that the system has been programmed to allow. And as the number of bitcoins mined, reaches upper limit, their values are expected to shoot through the roof.

Bitcoins can be used to buy products and services from various websites including Microsoft and Dell. But if you think that bitcoin can be a substitute for your normal currency in future, think again.

Lack of Regulation

As there is no supervising authority price manipulation becomes common. If the user suffers a loss due to an exchange or the dealer deducting unfair transaction charges, he has no one to complain to. And if the bitcoin wallet is hacked into or some bitcoins are lost, there is again no recompense.

Price Volatility

There is sharp price volatility in this currency. On a certain date, the price being as high as $1140, can be seen to be down for more than 30%. The main reason for this is that there is no underlying to which the value of currency can be determined. Its price is determined by demand and supply forces around the world.

Faulty Price Discovery

Bitcoin prices are discovered through exchanges that are unregulated with very lax KYC compliance process. Wash trades, front-running and trading with insufficient funds is said to be common in many of these exchanges. In other words, the value of bitcoin is determined largely by unregulated pools of investors.

Apart from having various issues with bitcoins, it is still believe that digital currencies will exist, and thrive, in the future. What excites more about this is the building block technology behind them- the Block-chain.

The Block-Chain Revolution

Block-chain technology is where the ledger is distributed to peers across a network, promising enhanced security, trust and transparency over traditional bookkeeping systems. If data is spread to multiple entities, and each is maintained as an independent record of transactions, hacking and manipulation of such decentralized data becomes a task. It is thus already used in the financial services industry and is likely to grow popular in future.

Learn more about finance and accounting outsourcing, payroll services, virtual cfo at Aristotle Consultancy.

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