Last updated on June 22nd, 2024 at 11:51 am
1. What is bitcoin?
Bitcoin is a digital currency created by a mysterious and untraceable Satoshi Nakamoto. The footprints of the existence of Bitcoin can be traced to the year 2009 when the code for the Bitcoin blockchain was implemented. However, the identity of the creator Satoshi Nakamoto is still a mystery. Whosoever he or she is has preferred to remain untraceable.
Utility of Bitcoin
The primary benefit of making transactions through Bitcoin is that the fees charged are considerably low. This is in contrast to high transactional fees charged by banks and other financial institutions for processing transactions. Unlike in the case of Banks and other Financial Institutions, the control of currency does not rest with any Government or organisation or authority.
As far as the introduction of new Bitcoin i.e. Bitcoin’s mining (similar to printing of traditional currencies) and processing is concerned, it is done by a decentralized authority. Decentralized Authority means there is no or limited control of Countries, Governments and their organisations.
Since Bitcoin is a digital currency, it doesn’t exist in a physical form. There is no physical Bitcoin that can be counted by hand. The total amount of Bitcoin that one holds is reflected on a public ledger and can be viewed by anyone.
Storing of Bitcoins
One can store their Bitcoins in a Digital Wallet (like Metamask, Trust Wallet), Hardware wallets (like Ledger or Trezor) or on accounts with Cryptocurrency exchanges like Binance, WazirX, CEX.IO, Bybit amongst others. All transactions of sale or purchase are undertaken through Bitcoin are verified by computer nodes (or miner rigs). These miner rigs use massive computing power to verify transactions on Bitcoin blocks.
2. What is blockchain?
The Bitcoin system is a collection of all such nodes or miners mentioned above which run Bitcoin’s code and store its blockchain on their computer systems.
Let’s take an example to understand what a blockchain means. We are all aware of Spreadsheets, everyone amongst us has worked on them. A spreadsheet can be used to store, update, process and find data. This data is stored in form of tables.
Likewise, data is even stored in a database. The primary difference between a spreadsheet and a database is storage, updating, processing and retrieval of information through a database is faster and more structured. Easy enough!
Now we come to the blockchain. In the case of a blockchain, the data is stored in form of blocks (chunks) that are chained together, instead of tables (like in databases). Each time a transaction is complete and verified it is stored in a block termed as ‘Bitcoin block‘. A block has a limited storage capacity after which another block would be required to store further data.
Any block would contain a reference to the previous and the next block. This reference is a link between different blocks thereby forming ‘a chain’ connecting various blocks. And that’s how the term block-chain was coined, “Chain of various Blocks”. For information purposes all blockchains are databases but all databases are not blockchains.
Since each block has a reference to the previous block and the next block it is practically impossible to change the data in any of the blocks. Further, each block would have a timestamp when it gets added. This is how blockchain technology is inherently secure. The data is engraved forever once the next block is added.
3. How to buy Bitcoin?
The easiest way to buy Bitcoin is through Crypto Exchanges. There are a number of Crypto exchanges these days like
Binance
CEX.IO
WazirX
Bybit
Kraken
You can create your account at any of these exchanges and buy Bitcoins or other cryptocurrencies (often termed as ‘Altcoins’). You would be required to provide your KYC details apart from your email address and phone number. The process typically takes a few minutes to 2 days at maximum.
4. Can I buy a part of Bitcoin?
I had the same question when I started my Crypto journey. For that matter consider that we are in the same boat. When I learnt about bitcoin I was scared of its soaring prices and always thought if I had learnt about it earlier I could have afforded a Bitcoin. Not in the wildest of my imagination did I know that one can buy a part of Bitcoin as well. So here is some good news for you, you can also buy a fraction of Bitcoin.
These fractions are normally designated as ‘Satoshis’. Satoshi represents BTC to its eighth decimal place i.e.
1 Satoshi ~ 0.00000001 BTC or ;
100,000,000 Satoshi = 1 BTC
You can think of Satoshis as Cents in Dollar terms or Paisas in INR terms. Hence, unlike Real Estate investing, a fraction of Bitcoin is also available for purchase. You can even buy bitcoin worth $5. In India, you can even buy bitcoins worth Rs. 100/-.
5. Why is the value of Bitcoin ever-increasing? Is the value going to grow over time?
We need to refer to the basic concepts of ‘Demand-Supply’ that we studied in our Economics lectures in middle and/or high school. Understanding it from the supply point of view, the rarer a commodity higher would be the price and vice versa.
Limited Supply
Let me mention that the maximum supply of Bitcoins can be 21 million (21,000,000) only. You read that right!. The mysterious Satoshi Nakamoto had put a limitation on the supply of Bitcoin in Bitcoin’s code.
Furthermore, the existing circulation of Bitcoin (already mined Bitcoin) at the time of writing this blog stands at 18,804,943~ 19 million. This figure of circulating Bitcoins in percentage terms would be a whopping 90%. This infers, around 19 million Bitcoins are already held by people who may even want to HODL (Hold on for Dear Life) Bitcoin.
Considering that Bitcoin already has a huge utility in terms of fees saved. Adding to it the limitation of restrictive supply makes Bitcoin dearer thereby pushing the value up. With an increased number of people wanting to buy Bitcoin and transact through it, its value would keep increasing in the future as well. You should further count the factor that many Governments are now accepting Bitcoin and other cryptocurrencies as legal modes of making transactions in their countries.
Quickly reiterating major factors which are responsible for increasing the value of Bitcoin:
- Utility of being a low transaction fees currency;
- Limited Supply;
- Acceptance of Governments to monitor & regulate Bitcoin;
- Faster transaction speed compared to traditional Banking
6. How can I send and receive Bitcoin?
As mentioned in the beginning that Bitcoin can be stored in Wallets. In the digital world, everything can have a digital address for identification. For example, your computer has a MAC address, the phone has an IMEI, SIM has a unique number.
Likewise, a cryptocurrency wallet has a unique address. We will go into the depth of various crypto wallets and their addresses in later posts. But this address is used for transferring Bitcoins from one person to another.
7. How can I earn Bitcoins? What is Bitcoin Mining?
There are a lot of ways by which one can earn Bitcoins. Though this is not our primary area of focus in this article, let’s get to know a bit about a few of them.
- Mining: Bitcoin mining is the process by which new Bitcoins come into circulation or enter the market. It is a complex, painstaking, expensive process that uses high computing power. It is critical for the maintenance & development of the Bitcoin system. Hence, anyone who takes part in it and successfully mines it gets a reward.
- Interest on Bitcoin: Many wallets, exchanges and independent companies pay interest to holders if they HODL their Bitcoins with them. This means your Bitcoins earn more Bitcoins just by keeping them in the custody of such organisations. However, it is advisable to undertake proper due diligence of such companies before handing over your Bitcoins to them.
- CoinBase Earn: A good opportunity to earn Bitcoin is at Coinbase. They have a ‘Learn to Earn’ hub. In this hub, when you learn about Cryptocurrencies by watching videos, participating in quizzes and you can earn Bitcoin in return.
- Exchange Sign-Ups and referral bonuses: Many exchanges pay you in Bitcoin if you sign up with them like Binance, WazirX, CEX.IO, ByBit etc. There are other exchanges that also provide you with referral bonuses if you refer a friend to them.
- Shopping Rewards and Credit cards: You can get cryptocurrency rewards at selected outlets or online shops if you pay through Cryptocurrencies. Similarly, you can get rewards for using and paying through many Crypto Credit Cards.
- AirDrops: Certain cryptocurrencies give their denominations for free to initial users. Such users have to complete simple tasks like filling a form, posting about cryptocurrencies on their social media. This is a good way to earn cryptocurrencies without spending anything
8. Can I also use Bitcoin to make payments for buying things?
With passing time more and more online and offline stores have started accepting Bitcoins.
There are websites like CoinPayments that help you make payments in Cryptocurrencies. CoinPayments is a Crypto Currency Gateway just like PayPal which can be used for both making and collecting payments.
There are plugins and extensions that you can be used to accept payments through Bitcoins on your online store as well.
9. What are the risks associated with Bitcoins?
Cryptocurrency does come with several risks as well. When it comes to Integrity, Authenticity and genuineness of people and assets involved. We can categorize them under different types like regulatory, security, fraud and market risk to name a few.
Regulatory Risks: Bitcoin and its uses are restricted by Governments at present. Since Bitcoin is a decentralized currency it gives a head to head competition to traditional currency. Such a currency would not make any Government comfortable.
Secondly, there are loads of questions that need to be answered while drafting a legal framework for its circulation and use. It falls in a grey area. Due to the complexity of underlying technology Governments are still taking time to accept it as a legal mode for financial transactions.
Security Risks: Since the currency is digital in nature it is vulnerable. As a result, it is easy for hackers to steal Bitcoins from improperly protected crypto wallets. This is one of the leading reasons why most of us are apprehensive about investing in Bitcoin. Though, there are highly efficient ways to protect digital wallets these days still the risk cannot be ignored.
- Fraud Risks: There are several Ponzi get rich schemes that lure new investors. Unfortunately, many unaware investors fall bait to such schemes thereby losing their money. Many so-called investment experts have approached me during my investing journey. I have come across schemes assuring me to double, triple or quadruple my returns. Such schemes sound very attractive but are just modes of cheating novice investors.
I remember one of the instances when I was randomly added to a WhatsApp group. Participants in the group kept trading Bitcoin and many would share screenshots of getting hourly returns using certain investment portals. Had it been such a cakewalk, everyone would leave their normal work and start trading like them to earn hourly profits. - Market Risks: Bitcoin prices are inherently volatile. Certainly more volatile than the prices of stocks or shares. On the flip side, due to this high volatility & risk, the returns are also high and quick.
Bitcoin was valued at $1 when it was introduced in 2009-10. In 2021 the value touched $64,895 (all-time high). Imagine you invested a mere $100 in 2009 in Bitcoin. At its peak, it would have become a staggering $6,489,500. You, my friend, would have become a millionaire with $100 without working and just HODLING this asset.
Conclusion
It is pretty explanatory that investment in Bitcoin has risks associated with it, especially the volatility which is inherent. There are risks of fraud, theft, regulations etc. However, if you dive deeper into the technology it becomes quite clear that it’s a technology of the future. A revolution like E-Commerce created giants like Amazon. Cryptocurrency has already created many billionaires and there are a lot more to come. It is apparent that sensible investment in this asset can help you get exceptional rewards.
