• What is Bitcoin

    Nowadays we heard a lot about Bitcoin currency which was recently banned by the Reserve Bank of India. This is a peer-to-peer payment system network and digital currency which was not used throughout the world and not regulated by any Central Bank. As it is used across all the countries in the same form, it is considered to be a truly global currency. This was introduced by Satoshi Nakamoto in 2009.

    Bitcoin currency is also known as crypto currency as it uses cryptography to control the creation and transfer of money between seller and buyer of the currency. Bitcoin is generated through a procedure which is known as Mining, which is nothing but a mathematical procedure runs on the Bitcoin network which enables users to earn Bitcoin after solving a particular mathematical problem. It tracks each new bitcoin created in the system on a public ledger or system to make it transparent. As we continue to generate Bitcoin through mining, it has set up a limit for itself which is 21 million which is expected to reach in 2140, after which no more bitcoins will be created.

    How Bitcoin transactions happen

    As we told earlier, Bitcoins are created through a mathematical process known as Mining. This is like a mathematical formula or program which gives all the users a virtual wallet (More similar to mobile wallet or mobile money) which the users use to send and receive Bitcoins and do transactions with other users.

    This is more like virtual currency which actually does not exist either in physical or in electronic form. So buyers and sellers use only virtual wallet (also known as Bitcoin wallets) to exchange Bitcoin among themselves and the transactions are tracked using their addresses (also known as “Bitcoin address”) which are mostly digitally verified to make it more secure and error free. Whenever a user install Bitcoin software/wallet in his mobile or computer, it is connected with worldwide Bitcoin network and a Bitcoin address is generated which is used for transactions in Bitcoin. All these transactions between sellers and buyers are tracked and recorded real time on a public transaction database (also known as block chain) so that everyone is aware of these transactions. This makes it very much transparent and helps buyers to get genuine seller details.

    Characteristics/Benefits of Bitcoin

    • This is not regulated by any Central bank or Central Monetary authority, thus giving more freedom. Because of this characteristic, Bitcoin is also termed as decentralized.
    • This is priced on the free market and the transaction details are always available online, which makes the transactions and Bitcoin system very transparent.
    • It also has the same value across all the countries in the world and anyone can transact on the same value.
    • Can be exchanged with traditional currencies on different exchanges, thus making it a truly global currency.
    • Transaction fees are very low compared to other currencies, specially credit card, debit card transactions which makes it very much popular among some users
    • The transactions are very secure due to dedicated network for transaction processing
    • This is done through virtual currency so transactions can be done without revealing true identity of the buyer, hence free from tax related issues

    Now the question will come in our mind is that; If it is so useful and transparent, then why it is not widely accepted by the Central banks across the world and not used widely by all the users. This is because of some disadvantages associated with Bitcoin which we will discuss now.

    Disadvantages

    The disadvantages of Bitcoin currency are specified below:

    • Too much speculation leads to higher fluctuation of this currency as it is not controlled by any Central Bank authority or exchange
    • Due to higher valuation fluctuation compared to other currencies Most of the normal traders avoid trading/using this currency
    • As it does not have any physical existence or not backed by any asset, it does not have any intrinsic value
    • Values and transaction details are available online on the Bitcoin network which makes it very much vulnerable to virus attack and other potential hazards
    • As it is not regulated by any Central bank or Exchange, there are significant credit risks involved in this as there is no control that the buyer will pay
    • This can be used for money laundering very easily and pose bigger threat to the worldwide financial market
    • As it does not track identity of the buyer and seller, this currency can be used for all kind of illegal activities including terrorism. That’s the main reason it is banned in some countries.
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