Investors are always on the lookout for potential opportunities. Of late, people all over the world are swarming to get their hands on bitcoins like never before, thanks to bitcoin diehard fans who claim it to replace gold, silver, and even physical currency.
There is no denying that Bitcoins have enticed investors by offering an appealing investment opportunity. Many financial experts, as well as the general public, now regard bitcoin as a game-changer. Similar to the late-1990s IT boom.
Let’s take a detailed look at how bitcoins work and whether you should invest in them.
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What is a bitcoin and how does it work?
Simply put, bitcoin is a virtual currency that allows you to send and receive money from anywhere to anyone in a snap without involving any intermediary financial institutions and that too without revealing one’s identity. In other words, the basic idea of bitcoin is to create a Peer-to-Peer Electronic Cash System.
The idea may sound simple, yet it’s very complex in practice. One of the biggest challenges is that there is nobody or an entity to regulate bitcoin transactions. No wonder they have turned out to be the paradise of illicit transactions.
To understand how it works, we need to know about blockchain technology first.
Blockchain Technology- The Power House of bitcoin
Bitcoin is nourished by blockchain technology. Think of blockchain as a series of blocks. Within each block, there would be a set of transactions that is checked by the miners. In turn, the miners get rewarded in Bitcoin.
Once a transaction is verified, it is transferred to the recipient and the transaction is complete. Each transaction is converted to a block and is linked to the previous blocks forming a blockchain. Consequently, each transaction is linked or chained to the code creating a permanent record of all transactions as a register.
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Why does bitcoin need blockchain technology to work?
One of the biggest challenges to be addressed by cryptocurrencies is the issue of double-spending. In simple terms, it is referred to as spending the same amount more than once by an entity.
Let’s consider an example:
Imagine, you go to Domino’s to order a Margarita worth Rs. 500 in cash. Now that 500 rs in cash is with dominos in the cash vault of Dominoes. By all means, you simply cannot spend the same Rs. 500 somewhere else to make another purchase.
unless you snatch it!!!
But this is not the case with cryptocurrencies. if a verification mechanism is missing, it can lead to double-spending. The problem of double spending is effectively tackled through blockchain technology. This is done by maintaining an open-source ledger of all the transactions which can’t be edited.
BITCOIN: A BRIEF HISTORY
Bitcoin had its humble origins in November 2008. This cybercash was developed by Satoshi Nakamoto. However, the identity and whereabouts of the creator still remain an enigma.
He has published a thesis entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008, which was an explainer of his idea of bitcoins. In 2009 the first-ever bitcoin network came into existence with the release of the first bitcoin client and the issuance of the first bitcoins.
The first cryptocurrency exchange, Bitcoin Market, was established on 3rd January 2009. The first bitcoin trade took place a month later. The first real-world bitcoin transaction occurred when 10,000 BTC is used to pay for two Papa John’s pizzas.
At today’s value, that’d be one expensive pie in history! Today, many large companies like Microsoft, Dell, Coca-cola, etc accept BTC as a mode of payment.
CAN BITCOINS BE HACKED?
Being a digital currency there is a popular belief that bitcoins are prone to hack. Based on cybersecurity experts, Bitcoin is difficult to hack thanks to the blockchain technology that sustains it. As blockchain is constantly scrutinized by Bitcoin users, hacks are unlikely.
To hack a bitcoin network, you need access to over 50% of the network nodes simultaneously. This is a mission impossible for even the brightest cyberpunks on the planet.
Even though Bitcoin is considered safe, potential safety risks do exist at various stages of the trading process. You must therefore be cautious while playing with bitcoins.
BITCOIN MINING: ALL YOU NEED TO KNOW
In layman’s terms, Bitcoin mining is the process of creating a bitcoin. Each bitcoin is mined after a series of difficult puzzles are solved. This is accomplished by the use of advanced software that necessitates a large amount of computing power. Miners ponder the problem in order to find a solution. Miners also sell their computing power to keep the records up to date in the hopes of making money with bitcoins. Miners are paid in bitcoins when a puzzle is solved.
As of now, miners get 6.25 BTC (Bitcoins) per valid block mined. But this reward varies roughly every four years, or after every 210,000 blocks are mined and gets reduced by half each time. This whole process is called bitcoin halving. This is an efficient way to control the BTC supply.
How to buy Bitcoins in India?
If you want to diversify your portfolio with bitcoins, bitcoin exchanges are a good place to start. Coinbase, Bitstamp, Wazirx, and Bitfinex are the most prominent cryptocurrency exchanges in India. You can start trading or invest in BTC with these exchanges for as little as Rs 100. There is, however, no upper limit.
Is Bitcoin leagal in India?
THE LEGALITY OF BTC is still being debated. The RBI banned banks and other institutions from supporting crypto transactions in 2018, but the Supreme Court intervened and legalized Bitcoin use in the country last year.
The existence of Bitcoin or any cryptocurrency, according to the Supreme Court, is unregulated but not illegal. So, in a nutshell, investing in Bitcoin is completely legal, and you can do so through a variety of apps and traders on the market right now.
But, as India continues with its plan to prohibit all cryptocurrencies in India, you must be very cautious.
Should you invest in Bitcoin right now?
The greatest rally ever in history was witnessed by bitcoins. Bitcoins have delivered superior returns than any other mode of investment.
Does that mean you have to invest? But before investing in Bitcoins, one needs to know about risk factors.
1. Price Fluctuations
The pricing incoherence of BTC is the first important issue. As we all know, the demand and availability of Bitcoins decide the price of Bitcoins. BTC supply is limited to 21 million bitcoins. No more bitcoins will be mined.
Bitcoins are widely considered the most fluctuating asset class on the planet, according to historical information. So it has a very high risk-reward ratio.
So no wonder if your entire capital is wiped out in a single day.
So it’s a better idea to trade on bitcoins rather than investing in them. You should restrict bitcoin investments so that your financial position will not be affected.
2. Vulnerable to threats
Secondly, as previously discussed, when you invest in BTC, you are vulnerable to several possible cyber threats. There is a possibility for bad guys to get away with your hard-earned bitcoins.
You can’t claim it or seek redress once your bitcoin is stolen. The reason is that regulatory authority is not available. To securely store your bitcoins, experts recommend offline wallets.
Third, in many countries, the legitimacy of Bitcoin remains a challenge. However, if you are prepared to take some risks you can still consider BTC as an attractive investment path for higher returns.
Bitcoins offer an appealing way to build a diversified portfolio. If used wisely it may improve your financial position. But be aware of the risk factors and know your limits before investing.