Mukhtar Ahmad Farooqi
Recently the value of Bitcoin jumped by 10 percent in Zimbabwe when the country’s army seized power and it reached to $10000 per unit mark in global markets on Tuesday and the investors are getting jittery about the possibility of the bubble in this type of currency.Before proceeding further , let us understand What is actually a Bitcoin? Bitcoin is a type of cryptocurrency that allows people to send or receive money across the internet, even to someone they don’t know or don’t trust. Money can be exchanged without being linked to a real identity. Bitcoins aren’t printed, like rupees,dollars or euros – they are produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, euros or rupee which are also traded digitally.A cryptocurrency is a digital or virtual currency that uses cryptography for security that is encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds. It is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrencythat makes it different from conventional money,is that it isdecentralizedwhich means it is not issued by any central authority/central bank, rendering it theoretically immune to government interference or manipulation. The idea of producing this type of a currency is to make it independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.Decentralised currencies are a unique concept. Similar to the internet, it is free from geographical boundaries – this is why bitcoin is also dubbed ‘the currency of the internet’.
One of the differences between using Bitcoin and using regular money online is that Bitcoin can be used without having to link any sort of real-world identity to it.The system is peer-to-peer, and transactions take place between users directly, without an intermediary. Ethereum, Monero, Dash, Litecoin, Namecoin and PPCoin are other forms of cryptocurrencies. The word bitcoin first occurred and was defined in the white paper that was published on 31 October 2008.It was invented by an unknown person or group of people under the name Satoshi Nakamotoand released as open-source software in 2009.Bitcoins exploded on to the financial scene in 2013, following enormous increases in their value.Bitcoin (capitalised) refers to the software or network (ie: the Bitcoin Network), while bitcoin (not capitalised) refers to the digital currency itself .More than $1.5 billion worth of bitcoins are currently in circulation around the world, with millions of transactions occurring daily. Now the question arises How Bitcoin Works?
A person can start investing in Bitcoins by installing BitcoinWallet like ZebPay.The aim of bitcoin-as envisaged by Satoshi Nakamoto, its elusive creatoris to provide a way to exchange tokens of value online without having to rely on centralised intermediaries, such as banks. Instead the necessary record-keeping is decentralised into a “blockchain”. The block chain is a shared public ledger that holds the transaction history of all bitcoins in circulation, and lives on the thousands of machines on the bitcoin network. This information is permanent and publicly viewableand cannot be edited or deleted. The people who are constantly verifying the blockchain, ensuring that all the information is correct and updating it each time a transaction is made, are called ‘miners’. Using powerful computers, miners take the information in the block and apply a mathematical formula to it, turning it into a seemingly random sequence of letters and numbers known as a hash. Every time someone successfully creates a hash, they get a reward in Bitcoin. But if there is no central authority, who decides which transactions are valid and should be added to the blockchain? And how is it possible to ensure that the system cannot be gamed, for example by spending the same bitcoin twice? The answer is mining.Bitcoin mining is the process through which bitcoins are released to come into circulation.Basically, it involves solving a computationally difficult puzzle to discover a new block, which is added to the blockchain, and receiving a reward in the form of few bitcoins. Some users put their computers to work verifying transactions in the peer-to-peer network mentioned above. These users are rewarded with new bitcoins proportional to the amount of computing power they donate to the network. Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. One bitcoin is divisible to eight decimal places (100 millionth of one bitcoin), and this smallest unit is referred to as a Satoshi.Bitcoins can be exchanged for other currencies, products, and services. As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment.Bitcoin can also be held as an investment.
Now there is a question ofBitcoin price. Like everything, Bitcoin’s price is determined by the laws of supply and demand. Because the supply is limited to 21 million bitcoins, as more people use Bitcoin the increased demand, combined with the fixed supply, will force the price to go up. Because the number of people using Bitcoin in the world is still relatively small, the price of Bitcoin in terms of traditional currency can fluctuate significantly on a daily basis, but will continue to increase as more people start to use it.
Any bubble has to burst and Bitcoina Cryptocurrency is considered to be in bubble because many participants appear to be buying cryptocurrencies as their prices are going up which is one of the features that aid the bubble.As its price is soaring there wide talk on it being a bubble that is going to burst soon.
This is what has been said by some of the experts:
* According to JP Mprgan chase CEO Jamie Dimon , it ia fraud that would eventually blow up.
* Michael Novogratz a former Fortress hedge fund manager said “I think this(crypto) is going to be the biggest bubble of our life time by a longshot” and ” To be fair , this is a bubble and there’s a lot of fraud mixed in and there are going to be wild crashes in it.”
Risks of Investing in Bitcoins
Many people purchase bitcoin for its investment value rather than as a medium of exchange. But their lack of guaranteed value and digital nature means the purchase and use of Bitcoins carries several inherent risks. Many investor alerts have been issued by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau (CFPB), and other agencies.
* Regulatory Risk: Bitcoins are a rival to government currency and may be used for black market transactions, money laundering, illegal activities or tax evasion. As a result, governments may seek to regulate, restrict or ban the use and sale of bitcoins, and some already have.
* Security Risk: Bitcoin exchanges are entirely digital and, as with any virtual system, are at risk from hackers, malware and operational glitches. If a thief gains access to a Bitcoin owner’s computer hard drive and steals his private encryption key, he could transfer the stolen Bitcoins to another account. Hackers can also target Bitcoin exchanges, gaining access to thousands of accounts and digital wallets where bitcoins are stored. One especially notorious hacking incident took place in 2014, when Mt. Gox, a Bitcoin exchange in Japan, was forced to close down after millions of dollars worth of bitcoins were stolen.This is particularly problematic once you remember that all Bitcoin transactions are permanent and irreversiblethat is Bitcoinscan not be refunded. It’s like dealing with cash: Any transaction carried out with bitcoins can only be reversed if the person who has received them refunds them. There is no third party or a payment processor, as in the case of a debit or credit card – hence, no source of protection or appeal if there is a problem.
* Insurance Risk: Bitcoin exchanges and Bitcoin accounts are not insured by any type of federal or government program.
* Fraud Risk: While Bitcoin uses private key encryption to verify owners and register transactions, fraudsters and scammers may attempt to sell false bitcoins. For instance, in July 2013, the SEC brought legal action against an operator of a Bitcoin-related Ponzi scheme.
* Market Risk: Like with any investment, Bitcoin values can fluctuate. Indeed, the value of the currency has seen wild swings in price over its short existence. Subject to high volume buying and selling on exchanges, it has a high sensitivity to “news.” According to the CFPB, the price of bitcoins fell by 61% in a single day in 2013, while the one-day price drop in 2014 has been as big as 80%.If fewer people begin to accept Bitcoin as a currency, these digital units may lose value and could become worthless.
* Tax Risk: As bitcoin is ineligible to be included in any tax-advantaged retirement accounts, there are no good, legal options to shield investments from taxation.
Though Bitcoin investment is not illegal in India itself, but the Reserve Bank of India has warned people about the risks that are involved in mining Bitcoins, or for that matter, the usage of bitcoins. Whether it proves to be a bubble or not only time will tell but we need to cautious in view of expert warnings.