If you browse the Internet, you might have heard about Bitcoins. The digital currency seems to be taking the world by storm, as people claim to make a fortune out of it, governments are yet to understand it as mainstream ‘money’, and critics are calling it the currency of online criminals. There’s much written about Bitcoins, but only someone who is dealing with this beast of a cryptocurrency can explain this new concept best. We talked to Fintech Consultant and Bitcoin Miner Satish Jangid to understand the Bitcoin better:
Bitcoin is a digital currency that can be ‘earned’ and ‘spent’ online only. Unlike regular currencies that are issued by central government regulatory bodies, Bitcoin is not issued by any authority. You can think of Bitcoin as an online financial network that people use to send payments from one person to another.
Experts believe that Bitcoin is safer compared to conventional currencies because it’s extremely difficult to steal or tamper with as it is based on the blockchain technology. You might have heard this term and our best guess is, it still sounds like technical mumbo-jumbo to you! Blockchain is an algorithm and distributed data structure for managing electronic cash without a central administrator among people who know nothing about one another. Stills sounds complex? Watch this video for a simple explanation.
What can I do with my Bitcoins?
- You can spend them, just like cash
- You can save them
- You can day trade with them
- You can invest in various BTC based companies
Confusing? Thinking why will people trust a currency that’s not issued by a government?
Believe it or not, Bitcoin, the currency that doesn’t have any government validation and initially thought of as imaginary money is rising in value. One can clearly say that Bitcoin is rising in value because people worldwide are trusting the digital bitcoin. As more and more people ‘mine’, buy, and spend Bitcoins to make purchases online, the value of the currency experiences a rise.
What makes Bitcoin valuable?
In essence, Bitcoin’s limited supply, and the level of difficulty involved in earning it makes it valuable. Bitcoin has been created with the traits of Gold. The yellow metal is valuable because it is limited in supply. The more gold one mines, the richer that person can be. Similarly, more Bitcoins can be created only by ‘mining’ it. The creators of Bitcoin (Invented by an unknown person with the alias Satoshi Nakamoto, and currently managed by the Bitcoin Foundation) have created a system in which a limited number of Bitcoins (21 million) can be ‘mined’ between now and the year 2140.
This simply means that the more bitcoins one will mine, the richer that person will be (much like gold). Like any other currency, Bitcoin rewards labour (mining). People work to earn money, which is the reward for the amount of work they do. The total amount of money in a country is limited because it is regulated and issued by central authorities. People who earn more of this limited supply of money by engaging in a profession or business will be richer than the ones who earn lesser of this money. Similarly, in Bitcoin’s virtual world, the supply of currency is limited, and needs to be earned through labour in the form of ‘mining’.
What are they worth?
Like fiat currencies, they are worth what we think they are. When the first Bitcoin exchanges went online, the price per Bitcoin was about $.05*.
Currently** the price has been hovering around $100 per Bitcoin. Bitcoin reached its all-time high in April of 2013 when it reached $266 per coin. Speculators anticipate it can go much higher.
How do you get Bitcoins?
There are currently four methods of acquiring Bitcoins:
- Mining (Requires large investment)
- Wiring in fiat currency to a BTC exchange
- Buying from an individual
- Selling items for BTC
Bitcoins are commonly abbreviated as BTC. However, ISO standards require an “X” in front of non-centralized currencies. The official abbreviation has yet been decided.
Where do you store Bitcoins?
Bitcoins are stored in what are called wallets. A wallet is a randomly generated string of numbers and consists of two parts; the public key and private key.
Example of a public key: 14GabW85FUMQy62CMWLCToQLo81w7iXL2x
Where do you store Bitcoins?
The second half of the Bitcoin wallet is what is known as the private key. The reason it is called a private key is that it is intended that only you, the wallet owner, has access to it.
If anyone gets a hold of your private key, they will have access to all of your Bitcoins. Always keep your private key private!
What is a Bitcoin wallet?
There are three different types of Wallets:
Online Wallet Services: All that is required on your behalf is to create and remember a password. The most popular services are Blockchain.info and Coinbase. Considered safe, but still susceptible to network failures and hacking. You can take measures to increase security.
Local Wallets or Offline Wallets: A local wallet is an application that can be downloaded to your personal computer. Your private key(s) are stored locally on your hard drive. Considered safe, yet is important to make backups of your private keys in case your hard drive fails. This also carries a risk of hacking or physical theft.
Paper Wallets: A paper wallet is a public/private key that is generated offline and printed on a physical piece of paper and then stored in a safe location. Arguably the most secure way to store your BTC, it has no record of the private key online or your hard drive. Therefore it is impossible to be hacked. However, paper wallets are susceptible to theft, fire and water damage.
How do I send Bitcoins to someone?
Sending or receiving Bitcoins is as simple as scanning a QR code with your smartphone. Online services such as Blockchain.info and Coinbase both use their own official apps. Both have security features that require you to use a PIN to make transactions. Simply scan the receivers QR, enter the number of coins to send, and you are done. The transaction appears within the network almost instantly.
How can I keep my Bitcoins secure?
Here are a few tips to keep your Bitcoins safe:
- Use strong passwords
- Use 2 Factor Authentication for online services
- Always encrypt your wallet files
- Keep your paper wallets in a safe and secure place
- Always run antivirus software if you are on Windows
Think of Bitcoin as cash. You would never leave $10,000 out in the open. The same should be said for Bitcoin. As the Bitcoin economy continues to grow, taking proper security measures will be much simpler for average users.
Do I have to buy whole Bitcoins?
No. It is very easy to buy fractional amounts of Bitcoins. Coinbase, a service that lets you buy BTC with your bank account, requires a minimum of .10 BTC to be purchased. Therefore, if the market value is $105, then the minimum amount you can buy would be $10.50. If you want to buy less, it is recommended that you wire money into one of the many BTC exchanges. The process of wiring money takes about 3-5 days.
What are the risks involved?
- Bitcoin carries many of the same risks that cash does
- Susceptible to physical theft
- Holes in online services could lead to hacking and theft
- The market is incredibly volatile. Fluctuations of 10% or more are fairly common
- Government intervention
- Misinformed slandering by the Media
Should I invest, and if so, how much?
Short answer, yes. While many traditional industry analysts still proclaim Bitcoin as a joke or a fad, the truth is that many of these individuals are perfectly fine with the system in its current form.
Their arguments are very similar to those of the 90’s when the Internet was coming to fruition.
It is highly likely that many of these talking heads are in fact investing heavily into BTC, whilst keeping the mainstream at bay… For now.
Rule #1 of investing: Invest only what you can afford to lose