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Understanding BitCoin in Today’s Context

December 23, 2016 by Mainak Biswas under Technology565 views
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Bitcoins have been around for over eight years and their price has observed dramatic fluctuations over the years.  In the beginning of 2016, one bitcoin was valued at $434 and as of Dec 2016 it is hovering around $780.  Bitcoin hit an all-time peak on Nov 29, 2013, with its value at $1,137.

Global cryptocurrency has grown rapidly in the year 2016.  As of mid-June, the value of all blockchain-based currencies in circulation was pegged at $14.37bn. And the total value of active bitcoins as of July 1, 2016 was $10 bn.

What does this high market capitalization of popular cryptocurrency bitcoins signify? For sure, bitcoins are becoming popular source of investment despite its volatility. The following blog will help you to understand bitcoins, what drives people to invest in bitcoins, some myths regarding them and finally what future they hold.

 

What is a bitcoin?

Bitcoin is a cryptocurrency introduced in 2009 by unidentified programmers under the name of Satoshi Nakamoto.  Cryptocurrency is a digital currency where encryption techniques are used to regulate the generation of currency units and verify the transfer of funds.

Bitcoin is a decentralized digital currency.  It means unlike physical currencies, bitcoins don’t fall under the ambit of regulatory authority and operate as an independent virtual currency. And your digital account can’t be controlled by banks or any other legal agencies.

Bitcoins are transferred from one computer to another with a verified transaction. Bitcoins can be used anywhere across the world for making online transactions like purchasing video games, gifts, books, servers, etc.

 

How does it work?

Bitcoins are generated all over the internet by running a free application called a bitcoin miner. Mining requires some amount of hard work for generating each block of coin. Bitcoins are automatically transferred to miners’ account after verification. The total number of bitcoins will always be predicable and limited because the system is designed in such a manner that it can’t exceed a limit of 21 million units.

Bitcoins are stored anonymously in the network. They run on open-source software where anyone can review the code.  There are many currency exchanges that can trade your bitcoins for dollars and euros.  One of the most popular digital asset exchange companies is Coinbase. Coinbase facilitates buying and selling of bitcoins.  

Bitcoins transactions are backed by blockchain technology. Blockchain is a public ledger of all transactions in the Bitcoin network. It allows you to navigate the bitcoin blockchain.

 

Reasons to invest in bitcoin

 

  • Growing adoption

 

 

Bitcoin market was highly speculative in its early days and there were limited areas where you could use this virtual currency except grey market. Today it is widely used to carry out real-world transactions in place of debit/credit card. Because many merchants are accepting bitcoins to sell goods, it makes a lot of sense for investors.

 

 

  • Decreasing volatility

 

 

Bitcoin has witnessed a gradual upward curve in 2016. The amount of volatility on a day-to-day basis has significantly reduced because people and vendors have to come to realize its real value.  It is true that bitcoins are still far from being a stable currency as compared to physical currencies; the trends reflect that degree of volatility has reduced over the years.

 

  • Security against economic uncertainties

 

 

People as a habit have preferred to invest in gold in terms of uncertainties. However, events in the recent past have shown that investors are turning to look at Bitcoin as a safe haven. Whether it was Cyprus’s economy crash, yuan’s fall, Brexit or India’s demonetization currency reform, all these events witnessed a high surge in demand for bitcoins. Bitcoin is not connected to traditional financial system. It is an exciting option for investors to reduce their liability in government currencies amid weak monetary policies.

 

 

  • Trading bitcoin is not rocket science

 

 

Like other online transactions, you need a bank account, credit card or a PayPal account to trade bitcoins. There are many currency exchanges like Coinbase, BitQuick, Blockchain Wallet to help you do so. It is as simple as trading stocks.

 

Bursting myths about bitcoins

 

 

  • Bitcoins are gold coins

 

 

Many people who are unaware about bitcoins’ virtual nature have actually tried to purchase bitcoins on online shopping websites.  It is not a physical currency but a cryptocurrency that only exists as an entry on a ledger held in the Bitcoin network.

 

 

  • Bitcoin wallets are physical wallets

 

 

Because there is no tangible item to store, the storage medium can’t be physical. Yes, bitcoins can be stored in offline wallets where a miner stores bitcoins in an offline app in computers. However, owing to safety issues that practice has plummeted and bitcoins today are stored in encrypted Bitcoin wallets that hold your private and public keys used to sign off transactions.

 

  • It is free to trade bitcoins

 

 

The fact that bitcoins are not regulated by a formal authority does not mean that they are free to trade. Bitcoin miners are nodes on the decentralized network and they charge a small amount on transactions. Nonetheless, bitcoin transactions are far cheaper than banking transactions.

 

Future of bitcoins

 

Bitcoins don’t have constraints of netbanking transactions and can be transacted 24 X 7 via the internet. It serves as hedge against currency risks, inflation, or disaster insurance. The future of the bitcoin market ten years down the line depends on how its usage evolves and how many people actually start using bitcoin.

If people use bitcoin to buy a cup of coffee, grocery etc and becomes a regular way of transaction in place of dollars as a cost-efficient means, its usage and value is definitely inclined to surge.  Otherwise, it can simply operate as a better alternative of investment like gold.  And investors would like to spread their risk by adding bitcoin to their investment portfolio.  

Many leading banks and financial institutions are beginning to invest in their own cryptocurrency and blockchain technology. As a consequence, bitcoin could have a significant impact in terms of innovation in payment technology.  
Apart from that, there is lack of market regulation among bitcoin companies which may hurt market sentiment and its long-term viability.  If companies bring in regulation, the sheer cost of regulation may be unfeasible because it affects operating profits. So far, so good.

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