Here’s why you need to Stay Away from Bitcoin Bubble:
Bitcoin is a cryptocurrency which is unregulated and has no physical form. Technological experts manage its circulation on a public ledger.
The access to these ledgers is granted using public and private keys. Bitcoins are believed to make payment for commodities and services easier and speedier.
It has been viewed as an unconventional method to skip transaction costs charged by institutional payment gateways while making payment for online purchases.
How a bitcoin works?
If you are a Bitcoin enthusiast, then it becomes imperative to know the process of bitcoin transactions.
The Process flow in a bitcoin is analogous to that of any usual electronic wallet; the only difference being that e-wallets are regulated by an authority.
On the contrary, the entire back-end flow of a bitcoin is managed in the public domain. Similar bitcoin enthusiasts like you who are tech savvy volunteer to keep track of transactions.
The impressive structure of bitcoin network is given as follows:
1. Bitcoin Wallet
As you need a purse to keep physical currency, bitcoins also need a wallet. The process of bitcoin transaction starts with the creation of a bitcoin wallet.
The best part is you can enjoy benefits of bitcoins even without being a technical expert.
Initially, you need to install a bitcoin wallet on your smartphone or personal computer. It will automatically generate a Bitcoin address like your e-mail id.
Share your bitcoin wallet address with your friends to receive or make payments in bitcoins. You can use one Bitcoin address only once like a One-Time Password.
In future, you are allowed to generate addresses as per the requirements.
2. Private Keys
Whenever a monetary exchange occurs between bitcoin wallets, it is called a transaction. If you want to transfer bitcoins from your wallet to your friend’s wallet, you need to use the private key.
Private Key helps to sign the transactions electronically using mathematical codes. It will also prevent your transaction from being altered by anyone else in the network.
After you are done with the transaction, it will be broadcast to other users. By an act of mining, other users will confirm your transaction.
3. Database Mining
All kinds of bitcoin transactions are maintained in a distributed database. This database can be accessed only by the members of the bitcoin network.
Under the mining framework, transactions are packed in an encrypted block. Then these blocks wait for verification.
As the blocks have encryption, the members are unable to modify them once these are created. Mining also gives chronology to the blocks and protects the neutrality of the network.
Additionally, it facilitates different computers to reach an agreement on the status of the bitcoins.
4. Blockchain Creation
Whenever you conduct an online financial transaction like using a debit card for making purchases, your bank records it in a ledger and the passbook.
A bitcoin transaction also undergoes similar treatment. When you receive or spend bitcoins, the transaction has to be authenticated by other bitcoin members on a blockchain.
The blockchain is a shared ledger like a bank passbook which is controlled by other blockchain members. After verification, your transaction will be recorded in the blockchain in chronological order with encryption.
After your transaction is posted on the blockchain, all the bitcoin wallets calculate and update their balances to ensure the authenticity of the whole network.
Also read: Everything you want to know about bitcoins
Impact of Bitcoin Bubble
Using Bitcoins for online transactions is free of cost. Although the government isn’t in support of such an unregulated form of currency, its popularity is growing with each passing day.
Apart from being a medium of exchange, individuals are showing speculative interest in bitcoins as well. Bitcoin exchanges have been established world over which trade bitcoins like equity shares.
Immense interest in a cryptocurrency in such a short span of time can be detrimental to the global economy as a whole. It’s because there’s nothing physical as an underlying which backs the value of bitcoins except the assumptions and whims of the investors.
Nor it has been supported by any regulatory body or a government.
A kind of bubble is forming due to such growing frenzy.
A bubble, in financial domain, relates to unreasonable and uncontrolled hike in the price of an asset. The prices keep on increasing to the extreme that creates vulnerabilities for the investors.
If the prices of bitcoins crash, it might have telling repercussions on investor sentiments.
Those of you who are unaware of the bitcoin phenomenon spreading around the world need to wake up and smell the coffee.
If you ain’t interested in bitcoin, then it doesn’t mean that you will be shielded by its adverse repercussions.
The reason being, the frenzy of possessing bitcoins isn’t limited to retail investors. Even big institutional investors are participating in bitcoin exchanges with similar enthusiasm.
In fact, leading global investment banks are proposing to introduce bitcoin exchange-traded funds (ETFs). Some of the futures markets are even planning to render services in digital currencies.
While hedge funds in developed nations are beefing their investments in bitcoins up to as high as 30%. Others perceive it as a cushion to bring about financial stability in the existing stock market turbulence.
If the price of bitcoins falls, it may create a contagion effect. Initially, the retail investors may lose money. Institutional investors who have put significant stakes in bitcoins might also start scrambling.
A substantial loss in bitcoin exchange might in turn impact share prices of these companies. Such kind of slump may dampen the retail investor sentiments. Ultimately, if this bitcoin bubble bursts, the retail investor is going to hurt badly.
Bitcoin rally is here to stay for a while! Already it has crossed Rs. 4.8 Lakh mark in India and $7200 in bitcoin exchanges abroad. Previously, we considered bitcoins as something the HNIs could have given a try. But the dynamics have changed profoundly.
Experimenting with such digital currencies now can prove to be highly risky. Especially, when the regulators aren’t in favor of such a currency; and there is no fraud addressing mechanisms in place.