BITCOINS – THE VIRTUAL CURRENCY ??

 

INTRODUCED ON THE 3^RD DAY OF JANUARY, 2009

INVENTOR OF BITCOIN IS Satoshi Nakamoto.

(READ THE WARNING ADVISORY ISSUED BY THE RESERVE BANK OF INDIA)

(THE ENFORCEMENT DIRECTORATE HAS INITIATED ACTION ON SOME OF THE DEALERS)

THIS ARTICLE IS ONLY FOR GENERAL INFORMATION.

What are bitcoins?

Bicoin is a peer-to-peer payment network and digital currency based on an open sourceprotocol, which makes use of a public transaction log.

Bitcoins is a form of virtual currency- in other words, it will not have physical appearance but it will have the effect of physical existence, meaning, if you have bitcoins, you do not physically purchase goods by handing notes or tokens to the seller.

 Bitcoins are used for electronic purchases of goods and services and could be used for transfers. It could be used (bitcoins) to pay friends, merchants, etc.

When the Bitcoins is in store of your account, every single purchase is immediately logged digitally (on computers) on a transaction log that tracks the time of purchase and who owns how many bitcoins. This is called as transaction log as an audit trail: it contains every single piece of information of every bitcoin transaction. This digital transaction log is called ‘blockchain’.

The blockchain records every single transaction – of present and past – and the ownership of every single bitcoin in circulation. 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’. One way to think of miners is: they those who confirm transactions. Their job is to ensure that the transaction is secure and processed properly and safely. In return for their services, miners are paid fees by the vendors/merchants of each transaction and are also given physical, minted bitcoins.

Bitcoin isn’t an institution, organisation, or any sort of centralised entity and does not have any legitimate existence like any bank.

For Bitcoin, there is no central authority.

It is literally a network of users – known as “peers” – who simply decide to buy and sell goods and services through a mode of virtual currency.

It is called a cryptocurrency as it uses public-key cryptography. When paying with bitcoin, there will be no exchange of digital notes or tokens between buyer and seller. Instead, the buyer requests an update to a public transaction log, the blockchain. This master list of all transactions shows who owns what bitcoins currently and in the past and is maintained by a decentralized network that verifies and timestamps payments. The operators of this network, known as “miners“, are rewarded with transaction fees and newly minted bitcoins.

Bitcoins are growing in popularity, and although they were largely used by speculators who were looking at it as a way to make money by buying bitcoins at lower prices and selling them at higher prices (much like trading foreign exchange or forex), there is a growing trend of businesses accepting Bitcoin as a form of payment.

The original Bitcoin software by Satoshi Nakamoto (THE FOUNDER) was released under the MIT license. Most client software, derived or “from scratch”, also use open source licensing.

How are bitcoins priced?

a). Bitcoins are like any other currency:

b). they fluctuate in value relative to other currencies. Similar to how the rupee’s valuation swung wildly against the US dollar this year, bitcoins have had drastic movements in price as well.

c). The value of a bitcoin is constantly changing, and there is no centralised exchange for it. Think of it this way: each time a bitcoin changes ownership from seller to buyer, the two parties need to agree on its price. There is no ‘fixed’ price. Usually, it’s the seller’s responsibility to give a fair price to the buyer based on what rate bitcoins are being traded in elsewhere. The difference between bitcoins and other currencies is that there is no centralised bank that prints the currency and sets relative values. Through transactions, the value of bitcoin fluctuates through supply and demand.

What’s the point of having bitcoins if I can use regular currency for my purchases?

That’s a question you’re bound to ask yourself at some point in time; after all, the rupee seems to get the job done. Why add complexity to your life with ‘virtual currency’ that the RBI seems to have issued a warning advisory??

BENEFITS OF BITCOINS! (ASSUMPTIONS AND PRESUMPTIONS)

There are many benefits to bitcoins over traditional currencies. For example, let’s assume you need to purchase an item for Rs. 10,000, but the seller doesn’t accept credit cards or bitcoins; he only wants cash. You now need to scrounge around for Rs.10,000 and pay the seller in hard cash; the seller, on his side, has to somehow ensure that the money given to him is not counterfeit. Just the hassle of having to pay him Rs. 10,000 in cash is what Bitcoin prevents. Rs. 10,000 worth of bitcoins (after converting rupees to bitcoins) and the seller accepts bitcoins, the entire transaction is completed in less than 10 minutes – hassle free.

But, the seller is willing to accept credit cards. Well, this is where the seller would much rather wanted to accept bitcoins versus traditional credit cards. There is usually a 2 – 3 per cent transaction fee for every credit card transaction that the seller needs to pay (to Visa, Mastercard, American Express, etc). With bitcoins, there are little to no fees involved. So the seller has a strong incentive to accept bitcoins.

What it basically comes down to is this: if the buyer and seller agree on a said amount for a good or service, using bitcoins gives them full control and transparency. There are no credit limits imposed by credit card companies, no need to carry cash, no extra fees that the seller can impose upon the buyer without the buyer’s full approval. Every single transaction has to be ‘agreed’ to by both parties before it goes through.

The greatest advantage, however, is that all necessary information is public and transparent. Without revealing the identities of the buyer and seller, the entire bitcoin network is made aware of each and every transaction. This gives a tremendous amount of comfort to both parties of the transaction.

How to get started?

The bitcoins could be obtained in a number of ways, but before that  ‘Bitcoin wallet’ could be procured.

A Bitcoin wallet is first required to get started with using bitcoins. A wallet can be created easily through different online applications and the  Bitcoin wallet is essentially just like, well, any other wallet.

Think of a Bitcoin wallet like an “app” that would be installed on a mobile(smart) phone. The application could be downloaded to the wallet on the computer through a software wallet, on the mobile-too, and also on the web. Once a Bitcoin wallet is obtained, It takes just a few minutes to get a wallet; and can start accumulating bitcoins.

How to get bitcoins?

Obtaining bitcoins is a relatively easy process. The three common ways are:

• If you are selling a good, you can accept bitcoins as a form of payment.
• You can purchase and sell bitcoins through Bitcoin exchanges (this is the most common way. Exchanges are typically found online.)
• You can trade bitcoins for traditional currencies of countries.

As written above, obtaining bitcoins through an exchange is the most common and feasible way to get started. There are hundreds of exchanges (mostly online) through which you can obtain bitcoins.

You simply register, enter your bank account information, and convert the local currency into bitcoins. In fact, there is an easy way for you to find an online exchange based on where you live through this website.

What do I do with my bitcoins?

How do I know that what I’m buying is safe?

Although many brick-and-mortar businesses are starting to accept Bitcoin, the large majority of transactions occur online. You can think of bitcoins as ‘cash’ for the internet.

Making payments with bitcoins is an incredibly easy process; in fact, you could argue that it is much easier than using credit cards. All you need to do is, using your Bitcoin wallet:

• Enter the recipient’s address (we will explain what an address is later on in the article).
• Enter the amount of bitcoins to be sent.
• Press send.

The recipient will then simply receive the request for bitcoins in exchange for what he is offering (goods, services, or perhaps a currency).

Bitcoin works off addresses. There are two components to a Bitcoin address: a public address, and a private address. Each Bitcoin address has its own Bitcoin balance. Every time a transaction is made, the public address of each user is made public to the entire network. Therefore, it is recommended that the sender creates a new address for each transaction.

Here is an example of a Bitcoin transaction:

• Mr.A, owns an online store that accepts bitcoins as a form of payment.
• Mr.B, a consumer and buyer wants to purchase a Rs2500 item. He looks online and sees that the prevailing rate for bitcoins is approximately Rs500/bitcoin.
• Mr.A, is selling the item for 5 bitcoins on his website.
• Mr.B, who has a bitcoin account, creates a new Bitcoin address through his wallet. Mr.B, can see  public Bitcoin address of Mr.A`store on the  website. 
• Just as a seller does not need to know your physical identity if you pay cash, Mr.A,(buyer) never needs to disclose his identity to Mr.A,(seller) and can thus remain completely anonymous.
• Mr.B,(buyer) instructs his Bitcoin client (the free Bitcoin software he installed on his computer/mobile) to transfer 5 bitcoins from his wallet to the Mr.A`s(seller) address. This is the transaction message.
• Mr.B’s(buyer and bitcoin account holder) bitcoin client will electronically “sign” the transaction request with the private key of the address from where he is transferring his bitcoins. While Mr.B’s (buyer)public key is available to anyone for signature verification, his private key is only known to him for the purpose of security of the transaction.
• Mr.B`s (buyer) transaction is broadcast to the Bitcoin network and will be verified in a few minutes by miners. The 5 bitcoins have been successfully transferred from buyer Mr.B`s address to the Seller Mr.A`s address.

Here’s an example of what it might look like on the buyer Mr.B`s software when he sends his bitcoins to the seller Mr.A`s account:

A bitcoin user can freely share his public address with everybody.

His private address, however, is only for him to know. This is critical in that this is what allows Bitcoin to be a secure payment system.