Thursday, May 24, 2018

What is Bitcoin and How Does It Work?

In recent times, Bitcoin has been making all the right noises in the financial market. Millions of people around the world are trading this digital currency and minting big fortune.

In India, the popularity of Bitcoin is growing at just as much pace. Thousands of Indians are joining this bandwagon every day.

And there’s a very good reason behind that.
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Learn Everything About Bitcoin India
While the price of 1 Bitcoin was approximately Rs 21,000 in 2015, in 2017 it is valued at more than Rs 3,90,000.

And you know the best part? Its value is expected to grow even more.

Also Read: Bitcoin Price Prediction 2018

Many analysts believe that in the next 10 years, 1 Bitcoin will be priced around Rs 6,50,00,000 (or $1 Million).

Isn’t that completely amazing?!!!!

So if you’re planning to invest in Bitcoin, it could possibly be one of your best financial decision.

Remember, the best time to invest in Bitcoin was yesterday; and the worst time would be tomorrow.

What is Bitcoin?

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What is Bitcoin?
Bitcoin is a digital currency, also called cryptocurrency. They are not printed like Rupee or Dollar. They are held electronically.

One of the best parts about Bitcoin is that nobody controls it. It is completely decentralized. The transactions happen directly between users without any institution acting as an intermediary. (So, NO CENTRAL BANK!)

The Bitcoin transactions are recorded in a public ledger. This public ledger is called Blockchain. The most recent transactions are recorded and added to this ledger automatically in chronological order as ‘block’.

On average, a new block is added to the blockchain every 10 minutes through mining (more on this later).

(Video By Mashable on What is Bitcoin)

How Bitcoin Works?

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Blockchain Technology
Let’s understand this with a simple example- Google Doc.

Traditionally, we would send a document (Microsoft word) to someone. That ‘someone’ would edit it, make some changes and then send that document back to you. Now you might make some changes, add new content and then send it back to that person.

This may continue back-and-forth. That’s how one used to collaborate online a decade back

However. Google Doc changed everything.

Using Google Doc, you can collaborate with the other person in real-time. The same copy of one document is available online to two (and more) person. Both individuals can access this doc together and make changes in real time. If you edit something on the document on your side, it will show to the other person live.

The blockchain is exactly like that.

Only, it’s not a shared document. It’s a shared ledger. And that millions of people around the world can access it.

Here’s Bitcoin Blockchain in real-time.

(Video by World Economic Forum on What is Blockchain)

History of Bitcoin

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Satoshi Nakamoto- Creator of Bitcoin
It is believed that Bitcoin is founded by Satoshi Nakamoto. However, the identity of this Satoshi Nakamoto is still a blur. Nobody knows who she/he is or is this a name of an individual or a group.

He is believed to be a man, born on April 5, 1975, living in Japan.

Bitcoin.org was registered on 18 August 2008. And the Bitcoin network came into existence in January 2009 after Satoshi Nakamoto mined the first ever block on the chain for a reward of 50 Bitcoins.

According to reports, in early days Satoshi Nakamoto estimated to have mined 1 million Bitcoins. Following, he disappeared from the scene, handling his establishment to other developers.

If this report is true and if Satoshi Nakamoto does own 1 million Bitcoins, he would now be a billionaire. And with the pace the value of Bitcoins is increasing, he might very well become the richest man in the world in the coming decade.

(Video by CNBC on The Mystery Founder of Bitcoin)

Bitcoin Terminology

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Bitcoin Terminology in India
Before we jump on to anything, let’s first understand few of the words you would come across very often here. Here are the most common Bitcoin Terminologies:

• Bit- A common sub-unit of Bitcoin. 1,000,000 bits = 1 Bitcoin.

Block- A record in the blockchain that contains and confirms awaiting transactions every 10 minutes.

Blockchain- A public ledger where Bitcoin transactions are recorded.

Block height- It’s a number of blocks connected together in the blockchain.

BTC- A unit of 1 Bitcoin. Also, can be considered as a short-form of Bitcoin.

Cryptography- It’s techniques that include mathematical calculations that provide a high level of security to the Bitcoin transactions/blockchain.

Double spend- It’s when a person tries to send a Bitcoin transaction to two different recipients at the same time.

Mining- It is a process of making computer hardware do mathematical calculations for Bitcoin network to confirm transactions and higher security. The people who do Bitcoin Mining are called miners. They get transaction fee for the transactions they confirm. Plus, they also get newly created Bitcoins in the process.

Private Key- It’s a string of data that shows you have access and right to Bitcoins in a specific wallet. You are not supposed to share this with anyone.

Wallet- It’s a wallet that can store your Bitcoins. It contains your private keys which allow you to spend the Bitcoins allocated to it in the blockchain.

How To Invest in Bitcoin?

There are multiple ways how you can acquire Bitcoins.
  1. You can mine Bitcoins yourself
  2. You can pay professionals to mine / you can contract these professionals to mine / you can crowdfund for Bitcoin mining
  3. You can buy sell Bitcoins i.e. you can trade Bitcoins

Let’s first understand what Bitcoin Mining is in detail…

BITCOIN MINING

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Everything About Bitcoin Mining
Bitcoin Mining is a process that does two things:
  1. It verifies and adds Bitcoin transactions to the public ledger or Blockchain.
  2. It releases new Bitcoins.
Bitcoin Mining includes compiling recent transactions and solving a computationally difficult puzzle. Whoever solves the puzzle first gets to place the next block on the blockchain and claim the rewards. The reward includes transactional fee and newly released Bitcoins.

The newly released Bitcoins are called block reward.

This block reward is halved every 210,000 blocks, which is roughly every 4 years. For example, the block reward in 2009 was 50, in 2014 it was 25. This will continue to decrease. And this will result in the total release of Bitcoins, which will be around 21 million in number.

At the beginning, regular CPUs were used to solve these puzzles. Then people started using Graphics Processing Units (GPUs). Now, people use specifically designed Bitcoin Mining hardware called ASIC or Application-Specific Integrated Circuit.

Bitcoin Mining is not encouraged as the right mean for the majority to acquire Bitcoins. Because, first, it’s too much of work. And second, the cost of energy consumption by hardware often exceeds the revenue generated. Meaning, Bitcoin mining is very costly.

(Video on What is Bitcoin Mining)


So the next best option to invest in Bitcoin is trading, i.e. buying and selling through an exchange. 

Buying and Selling Bitcoin On Exchange

A Bitcoin exchange is a digital marketplace where traders can buy and sell their Bitcoins. (Quite similar to the stock exchange.) You pick a nice exchange and then start selling Bitcoins.

Depending on the exchange, the transactional fee and the process to open an account can vary. In Indian, many Bitcoin exchanges have emerged in recent times. More on this later.

Bitcoin in India

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Bitcoin in India
Bitcoin has become a hot topic among Indians as of late. More and more people are investing in this digital currency in hope to make money.

According to a report in Economic Times dating May 17, 2017, every day 2,500 people are joining Zebay to invest in Bitcoins. Zebpay is a leading exchange in India.

Now, this is a figure that’s months old. And it’s just talking about one exchange. One can easily assume that more people are investing in Bitcoin. And here’s a data from Google Trend…

popularity-of-bitcoin-in-india
Bitcoin: Google Search Trend
In December of 2016, the interest for Bitcoins among Indians was mere 10. However, the popularity of this digital currency hit the peak in September 2017 with 100 points. Hey, that’s not me saying! That’s Google!

And the best part is that in coming days, Bitcoin popularity in India will only increase to new heights.

Is Bitcoin legal in India?

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Is Bitcoin legal in India?
Now comes the most important question—if trading Bitcoins is legal in India?

The sweet and simple answer is: Yes, buying/selling/mining Bitcoins under existing law is legal in India.

A research done by cis-india.org says that Bitcoin isn’t illegal under the current law and regulations. 

An exclusive report on MoneyControl.com said that Bitcoin is unlikely to be declared illegal in India.

According to a report on Inc42.com that dates back to June 2017, Indian Government is planning to give Bitcoin a legal status. Meaning, they are planning to regulate the digital currency under RBI’s 1934 Act, which includes taxing the Bitcoin investors.

All being said though…

The Reserve Bank of India has cautioned the enthusiasts. In its Press Release, it said, “The Reserve Bank of India has today cautioned the users, holders, and traders of Virtual currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to.”

Also adding, “The creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorized by any central bank or monetary authority. No regulatory approvals, registration or authorization is stated to have been obtained by the entities concerned for carrying on such activities.”

Even if Bitcoins are made illegal in India, you can still trade in the market. If such unlikely situation does arise, the Bitcoin exchanges will be asked to shut down. In that case, these exchanges will ask the users to store their private key in some other wallet.

You can easily keep these private keys in some other digital or hardware wallets and keep your Bitcoin safe and valuable. If you want to sell the Bitcoins, you can sell them in the international market and get the money through Paypal.

Read in Detail on This: Is Bitcoin Illegal in India?

Top Bitcoin Exchanges in India

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Bitcoin Exchange
In India, there are many good exchanges that facilitate Bitcoin trading. Each of them has their own set of regulations to add new users and have desired transaction fees.

To that, they have their own framework for fixing the buying and selling price of Bitcoins. So you will likely find big differences in their listing price.

So when picking your Bitcoin exchange, you’re advised to be careful. Look at their….
  • Fees 
  • Customer verification process
  • Trading platform (is the interface easy and user-friendly?)
  • Past record 
  • Reputation 
  • Spread (difference between buying and selling price)
  • Uptime 
  • Customer support
Note: Avoid the shady and less-known exchanges, regardless how lucrative their offers are. The chances of scam in the Bitcoin scene is high. And people are tasked to be very careful in how and where they invest their money in.

Here are 7 Best and most popular Bitcoin Exchanges in India:

1. Zebpay

  • Regulated company in India
  • Very easy to buy and sell
  • Have an Android and iOS app
  • Offers Bitcoin wallet
  • Requires KYC verification
  • 0% fee on trading (although it does charge a small fee in the transaction process that it doesn’t talk about)

2. Coinsecure

  • Regulated company in India
  • Can be confusing to buy and sell (confusing interface)
  • Have a (not-so-great) Android app
  • Offers Bitcoin wallet
  • Requires KYC verification
  • Charge 0.40 percent on every trade

3. Unocoin

  • Regulated company in India
  • Easy to buy and sell
  • Have an Android and iOS app
  • Offers Bitcoin wallet
  • Requires KYC verification
  • Charge 1 percent fee for every trade

4. BuyUCoin

  • Registered company in India
  • Not so difficult to buy and sell
  • Doesn’t have a mobile app
  • Offers Bitcoin wallet
  • Supports trading of multiple digital currencies
  • Requires KYC verification 
  • No trading fee

5. LocalBitcoins

  • Finland-based company—very popular in India
  • Confusing to understand
  • Includes in-person trading—so no KYC verification
  • Doesn’t have a mobile app
  • No Bitcoin wallet
  • Prone to scams
  • 1 percent fee if you’re posting an ad to buy/sell Bitcoins

6. Koinex

  • Registered company in India (still in Beta phase)
  • Difficult to trade for beginners (confusing platform)
  • Doesn’t have a mobile app
  • Offers Bitcoin wallet
  • Supports trading of multiple digital currencies
  • Requires KYC verification
  • Has a tiered fee structure. Base seller fees is 0.20% and base buyer fees is 0.25%

7. Coinmama

  • Based in the Slovak Republic, operating in 217 countries including India
  • A bit confusing for Indian users
  • Doesn’t have a mobile app
  • Doesn’t offer Bitcoin wallet
  • Supports trading of multiple digital currencies
  • For transaction less than $150, you don’t need to verify your identity
  • Fee of 5.50 percent include in their buy/sell Bitcoin price

How to Buy and Sell Bitcoin in India?

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How to buy and sell Bitcoin in India?
We’ve come a long way. Like mentioned already, buying and selling Bitcoins in India is much easier today. Here are 3 simple steps:

STEP 1- Find a good Bitcoin exchange

STEP 2- (Optional) If you’re planning to store your Bitcoins in some other wallet, find a nice digital or hardware Bitcoin wallet

STEP 3- Make an account in the exchange. Verify your identity.

STEP 4- Transfer money from your bank to that exchange via a suitable payment method

STEP 5- Buy Bitcoins

STEP 6- (Optional) Use the private keys to store the bought Bitcoins in your different wallet

STEP 7- Sell on few clicks when the price is high.

Told you, it’s easy!!!

Of course, trading Bitcoins is risky. The market is very volatile. And as this world of digital currency gets more and more exposure, Bitcoin will make more controversial headlines both in India and world.

However, as of now, with how the current trends are looking, buying and selling Bitcoin seems like a very profitable idea for the foreseeable future.

ALSO READ: Step-by-step How to Buy and Sell Bitcoin in India

And: Bitcoin Trading For Beginners

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