Everything you want to know about Bitcoins
Advantages & Disadvantages of Bitcoins:
You have probably been hearing a lot about bitcoins, but largely clueless about what it is. Knowledge about “digital gold”, as bitcoins often referred to, is still at a rudimentary stage in India. Towards that end, let’s find out what bitcoins are and their relevance to our country.
What are Bitcoins?
Bitcoins are probably the best-known cryptocurrency. You can use it for payments without any third party involvement such as the government, bank, or a market regulator. Consider bitcoins like a big ledger shared by several users. When you pay for a product or service with bitcoins, or get paid, the transaction is entered into a ledger. Computers, using complex mathematical equations, compete to confirm the transaction. The winner is awarded more bitcoins. The process is called “mining”. But don’t get trapped into it. Only the computer geeks get their coins this way. Bitcoins are electronically converted to long strings of code having monetary value.
What’s the point?
Bitcoins have populist roots. It debuted in relative obscurity in 2009, at a time when the financial crisis was still underway. The idea was to take power out from the hands of governments and bankers that usually control the flow of currency.
Who regulates Bitcoins?
The bitcoin currency is completely decentralised and unregulated. There’s no national bank or government mint, and neither any depositor insurance coverage. The currency is self-contained with no collaterals, which means there’s no precious metal behind bitcoins. The value of the currency resides within the currency itself.
Bitcoins are stewarded by “miners” i.e. a massive web of people contributing their personal computers to the currency’s network. The miners act both as ledger keepers and auditors for the transactions. They are paid for their work via new bitcoins for every week they work for the network.
Once you own bitcoins, the currency behaves just like physical gold i.e. they have value and trade almost like gold nuggets in your pocket. The bitcoins can be used for purchasing goods and services over the internet, or tuck them away and hope their value increases over time.
What’s so great?
Listed below are some of the advantages of using bitcoins:
Freedom of payment: With bitcoins it’s possible to send and receive money to and from any corner of the world. You don’t need to worry about crossing borders, changing plans for bank holidays, or other limitations that come in mind while transferring money. You can control all your bitcoin money. There’s no central authority to intervene.
No counterfeiting: Since there is no physical form of the currency, bitcoins are free from counterfeiting. There are no risks of a country’s economy losing crores in this regard.
Control and security: Allowing users full control in their transactions help keep bitcoins safe for the network. Merchants can’t levy any extra fees on anything sans being noticed. They have to seek customer approval before adding charges. Payment via bitcoins can be made without any personal information tied to the transactions, which in turn, protects from identity thefts. Besides, bitcoins can be encrypted and backed up to lend safety to your money.
Transparent information: All finalised transactions can be seen by everyone, with the personal details hidden. Only your public address is visible. Anyone, at any time, is free to verify the bitcoin blockchain. Also, the bitcoin protocol can’t be manipulated by any government, organisation or person because the currency is cryptographically secure.
Low fees: Bitcoins may have very low fees or no fee at all. Users may include charges to process the transaction faster. The higher the fee, the more priority it attracts on the network and quicker is the processing time. Digital currency exchanges help merchants process transactions by converting bitcoins into flat currency. These services usually have lower fees than credit cards.
Less risk for merchants: Bitcoin transactions are irreversible. Merchants are thus protected from potential losses. They can also do business where fraud rates are high because it’s extremely difficult to con or cheat anyone due to the public ledger (blockchain).
What’s not so great?
Bitcoins are not entirely void of disadvantages. Here are few of them:
Lack of awareness: Most people are still unaware of the cryptocurrency. Proper information is required in this regard. Networking is important to spread the word. The list of businesses accepting bitcoins is still only a handful. A company should also have knowledgeable staff handling digital currencies, and how they help people use the digital currency.
Risk and volatility: Bitcoins are volatile largely because there’s a limited number of coins with the demand increasing with each passing day. But it’s expected that the volatility will decrease with time.
Still developing: Bitcoins are still in their infancy, with incomplete features at various stages of development. New features are being developed to make the cryptocurrency more accessible and secure.
What’s the controversy?
Several reasons have converged over the past few years that have made Bitcoins quite a sensation for all the wrong reasons. From 2011-13, illegal traders made the digital currency infamous, by buying them in batches of millions to siphon money beyond the eyes of law. The value of bitcoins, subsequently, breached the $1,000 per coin mark in late 2013. With no government monitoring, banks and financial organisations are unnecessary for the digital currency to move. Bitcoin accounts can’t be frozen or examined. Bankers and law enforcement officials see bitcoins as “gold nuggets of the wild west”, beyond the control of financial institutions and the traditional police.
Investment or speculation?
It’s best to consider bitcoins as an alternative investment that includes objects like antiques, wine, art, and even commodities. The reason being that the value of these investments is not related to the stock indices and rises when the market falls.
But that’s always not the case. For instance, in 2008, all commodities tanked in tandem with the stock market, except gold, which gained a modest 5.8%. The US dollar also took a hit as did several other major currencies.
While alternative investments like these—under normal circumstances—are a decent short-term hedge, they usually make a poor long-term investment. In the US, the iShares S&P GSCI commodity-indexed ETF (GSG) that tracks the performance of all major commodities, lost 35.5% against a 43.7% rise in the S&P 500, over the past 10 years. The PowerShares DB G10 Currency Harvest Fund that tracks the value of all major global currencies, also lost to the S&P 500, gaining a mere 1.8% during the same period.
Wealthy individuals usually have about 10% of their net worth in alternative investments. But one has to keep in mind that high net worth individuals can afford to expose themselves to greater risks than an average investor.
If you are a high net worth investor wanting to invest in bitcoins, and despite indications that bitcoin speculation could be risky, would like to keep your exposure to the minimum. Invest no more than 2% of your holdings in alternative securities, all the time keeping in mind that you are just another speculator.
The Indian scenario
RBI, in June 2013, finally touched upon virtual currencies in a report on the financial sector infrastructure and regulations. It mentioned about virtual banks and digital currencies and said: “…these developments pose challenges in the form of regulatory, legal and operational risks.” It further added: “The regulators are studying the impact of online payment options and virtual currencies to determine potential risks associated with them.” The central bank’s stand became more rigid with time. It issued an advisory titled “RBI cautions users of virtual currencies against risks” in a December 2013 press release.
It is often alleged that bitcoin trading practices violate FEMA rules. The BuySellBitcoin portal soon read: “Post the RBI circular, we are suspending buy and sell operations until we can outline a clearer framework with which to work.”
A similar notice appeared on the INRBTC website. It said: “In light of RBI’s notice, services of INRBTC.com are being suspended indefinitely… all pending orders will be cancelled and the deposits on those orders will be refunded 100 percent to the users.”
It was the darkest hour for Bitcoins in India. But things have become relatively better ever since. RBI Governor Raghuram Rajan, in a December 2014 TV interview, said that he has no doubt about the society moving towards cashless transactions where currencies like this (bitcoins) will be at work. Digital currencies, he said, will get much safer over time and emerge as the preferred form of transaction.
The nascent bitcoin industry in India continues to fight odds. There are many Bitcoin exchanges and service providers that operate in India and tries to be on the right side of the law abiding by the self-regulations. These include exchanges like Unocoin, BTCXIndia, BuySellBitcoin and others. The last named, rebranded as Zebpay, recently made headlines when it raised $1 million to promote bitcoin transactions.
The RBI, in a December 2015 report, endorsed and praised the blockchain technology. It said that with the potential to prevent counterfeiting, cryptocurrency is likely to usher in significant changes in collateral identification e.g. land records, financial markets, and the payment system.
RBI’s statement was much cheered by the bitcoin community.
India, in August 2015, had around 50,000 bitcoin enthusiasts, including about 30,000 owning the currency. The figures are slightly higher now, but India still isn’t a major contributor to the digital currency revolution. Given its population and increasing internet penetration, India could be just poised for, is a great leap in virtual currency usage. But regulatory uncertainty is a big hindrance. The real growth can be achieved only when these uncertainties are ironed out. The biggest challenge is to tackle the illicit practices in the name of virtual currency. But a digital currency future is largely inevitable. And when the time is right, India will arrive in a big way.