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All you need to know about Bitcoin

  The word Bitcoin is seeing a lot of bandying about, with people across the world sitting up and taking notice, and many others trading in the cryptocurrency. But what is Bitcoin, how did it come about, and where is it headed?  

Dr Suresh Srinivasan

Bitcoin has been prominently in the news over the last month. We have heard that the valuation of Bitcoin against the US dollar has been volatile and fluctuating. We also heard about the ‘fork’ and the tussle between various developers and groups in shaping the future of Bitcoin. What does all this mean? How do we make sense of them?

What is Bitcoin?
Bitcoin is a cryptocurrency created in 2009. Being digital in nature with no physical form, Bitcoin is used as a medium for exchange of goods and services. Generally, the ‘hard’ currencies serve the same purpose, but are generally transacted through a bank that issues such currencies. With Bitcoin, and other cryptocurrencies like Litecoin, Syftcoin, Blackcoin, Ripple, etc, transactions are made with no middlemen, which means banks are not involved. While centralised agencies like banks play the role of issuing and accounting of the currency, Bitcoin and other cryptocurrencies are decentralised using a distributed ledger. ‘Blockchain’, for instance, is a digital ledger that records and secures every transaction of Bitcoin.
By eliminating middlemen like the banks, cryptocurrencies have the advantage of having no transaction fees. Although the transactions made through Bitcoin are recorded, protected and cannot be erased, the identities of the parties involved in the transaction need not be disclosed. While the legality of Bitcoin and other virtual currencies vary from country to country, they are not tied to any specific country, which means cross border transactions become cheap and easy.

How did Bitcoin grow?
Trust and enthusiasm are the major binding blocks that are growing the Bitcoin movement. Developers and startups are virtual currency enthusiasts and they are large in number. They are also spending millions in developing the currency emerge. At this point again, trust plays a key role. The currency is recorded in public digital registers like blockchain through ‘mining’, a process by which transactions are verified, added and new units of the virtual currency released. To a certain extent, it is an open source model that can be accessed by individuals through the Internet and with appropriate hardware. That said, such a model exponentially drives risk in the currency.
With every passing day, the number of transactions through these virtual currencies is increasing, and there are a number of Bitcoin Automated Teller Machines (ATM) being installed. Close to 15 million users are already transacting using Bitcoin. Exchanges that trade in Bitcoin have cropped up, and they facilitate buying and selling of the virtual currency. These include Exchanges BTC.sx, CEX.IO, Coinbase, etc. Stored by individuals in ‘digital wallets’, today, one can buy a number of goods and services using Bitcoin!
The price of Bitcoin has been steadily increasing since its inception, which demonstrates the acceptability of the cryptocurrency and the extent of its adaption by individuals. In 2012, during the European crisis, its price started moving upwards north of $200 and after many volatile phases it settled at close to as high as $6,500 a unit by 2017.

Recent developments
The last few days have seen Bitcoin being extremely volatile, moving up to $7,700 and dropping back to $5,600. The main reason for such volatility is the divided view of groups of developers of Bitcoin regarding its future.
The problem with Bitcoin at this stage is that the transactions using the currency are slow. This hinders the ability to scale the currency and adoption among users as the volumes of transactions is hampered. A group of developers are hence suggesting that the currency should be split, or ‘forked’, in order to allow transaction speeds to be increased.
One section of the Bitcoin developers feels that Bitcoin would be used for ‘day to day’ transactions, in which case it needs to have high transaction speeds, especially as its adoption among users increases. Other groups are divided on this view, and feel Bitcoin should be used for high value and large transactions only, where transaction speeds may not be, and should not be, relevant.
Earlier during August 2017, Bitcoin was split, and a new competing currency called ‘Bitcoin cash’ was created. The block size of Bitcoin is around one megabyte, which means that transactions are relatively slow. The block size of Bitcoin cash increased the block size to eight megabytes, thereby increasing the transaction speed.

Bitcoin and alternatives
There is a raging battle playing out within the Bitcoin developer community with competing groups having divergent perspectives, vision and future outlook for Bitcoin. Different developer groups are attempting to gain control over the future evolution of the currency. ‘Bitcoin Gold’, an alternate competing digital currency — another spin-off like Bitcoin cash — is intended to be a storage of value and is also being actively considered. For example, the proponents of Bitcoin Gold are forcing the usage of a mining algorithm different from regular Bitcoin’s, such that traditional computing machines would not be able to access or mine; these require specialised hardware, interlard circuit board and algorithms to mine!

Bitcoin current growth scenario
There are a number of other initiatives that are being undertaken to reduce the space constraint and allow Bitcoin to expand faster. ‘Lightning Network’ is one such initiative, which is expected to take Bitcoin to a larger number of users, where the transaction contents are minimised. At the same time, the transaction trails are robustly captured without compromising on the security of the transaction.
However, the traditional Bitcoin developers are looking at Bitcoin emerging as a ‘digital gold’, a reservoir of value in events of global uncertainty. These developers consider ‘transaction speed’ and ‘process time limitations’ as irrelevant.  This is contrary to the views of the pro-‘Bitcoin cash’ group of developers, who would want to position the virtual currency as a mass market digital currency.

Bitcoin and countries
There are other issues with the emergence of Bitcoin. Being anonymous, it could be seen as an extremely suitable medium to finance the Dark Web, as well as terrorism related transactions. This is why many governments, regulators and central banks are extremely concerned. Many countries, for example the United States (US), don’t even recognise Bitcoin as a currency at this stage, but deal with it more like an ‘asset’; which means it would be subject to capital gains.
From an Indian perspective, at present, the Reserve Bank of India regards cryptocurrencies as a violation of the country’s existing foreign exchange norms, as they perceive virtual currency transactions to be highly unsafe and vulnerable to cyberattacks. However, the RBI, although not comfortable at this stage, is seriously looking at the developments with Bitcoin and other virtual currencies in order to be proactive and ready, if the situations becomes conducive for adaption in the future.
Such limitations also do not stop Indian Bitcoin startups from working towards growing the digital currency. In India, a number of Bitcoin startups, including Zebpay and Unocoin, are creating a forum for the orderly and transparent growth of Bitcoin in the Indian market. The primary idea is to develop the rules of the game for trading in Bitcoins in an orderly fashion and ensuring anti-money laundering protections and generating reports on Bitcoin users with suspicious transactions. 

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