Bitcoin - How does it work? How to invest in Bitcoin?

What is Bitcoin?

Bitcoin is a decentralized digital currency that can be purchased, sold and traded directly, without any intermediary like a bank. Bitcoin’s founder/creator, Satoshi Nakamoto, described the requirement for “an electronic payment system based on cryptographic proof instead of trust.”

Bitcoin was created in January 2009. The identity of the person or persons who created this technology is still a secret. Bitcoin offers the guarantee of lower transaction fees than traditional online payment system and, unlike governments' currencies, it is managed by a decentralized authority.

Bitcoin is one of the various cryptocurrencies. There are no physical existence of bitcoins, only balances are maintained on a public ledger which provides access to everyone. All the bitcoin transactions are verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments and they are not as valuable as a commodity. Despite not being a legal tender, Bitcoins are becoming very popular and has triggered the launch of hundreds of other cryptocurrencies, generally called as altcoins. Bitcoin is also written as "BTC."

How does Bitcoin work?

Bitcoin trading is based on a distributed digital record called a blockchain. As the name indicates, blockchain is a connected chain of data, made up of units called blocks which contain information about each transaction made, including date and time, total value & amount, given information of buyer and seller, and a unique identifying code for each exchange. Entries are managed in chronological order, creating a digital chain of blocks.

“Once a block of details is added to the blockchain, it becomes transparent to anyone who wishes to view it, being a public ledger of cryptocurrency transactions,” stated Stacey Harris, consultant for Pelicoin, a network of cryptocurrency ATMs.

Blockchain is decentralized, which means it’s not controlled and administered by a single organization. Nobody owns it, but any person who has a link can contribute to it and as different people update it, your copy also gets updated.

While the idea that anyone can edit the blockchain might sound risky, it actually makes Bitcoin trustworthy and secure. To add a transaction block to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must be confirmed to the right encryption pattern.

These codes are long, random numbers and make them harder to produce for fraudulent purposes. In fact, a fraud person guessing the key code to your Bitcoin wallet is just the same as someone winning a lottery nine times in a row, according to Bryan Lotti of Crypto Aquarium. This level of statistical randomness blockchain verification codes, which are required for every transaction, significantly reduces the risk of making fraudulent Bitcoin transactions.

Bitcoin Wallets

Bitcoin Wallets are the same as mobile wallets where we store our money and do transactions from that. Bitcoin wallets are for holding bitcoins and other cryptocurrencies. A Bitcoin wallet is a software application that allows you to store and keep the track record of your Bitcoins. A bitcoin wallet is different from a traditional wallet as it holds bitcoin private keys. A wallet is usually password-protected. A Bitcoin wallet is operated only by its owner, unlike blockchain technology, which is distributed and shared. There are several bitcoin wallets and each one have its own various features. All bitcoin wallets have to follow the Bitcoin protocol in order to be able to send and receive funds, regardless of how they are implemented.

Some Famous Bitcoin wallets in India

• WazirX Bitcoin Wallet
• Zebpay
• Coinbase Bitcoin Wallet
• Unocoin Bitcoin Wallet
• Ledger Nano
• Guarda Wallet
• BuyU Coin

Is Cryptocurrency trading legal in India?

In 2018, The Finance Ministry said in a statement that:

“ The Government of India does not consider Cryptocurrencies as 'Legal Tender or Coin' and will take all measures to prohibit the use of these Crypto Assets in Financing “Illegitimate Activities” or using as the part of Payment System. The Government is exploring the use of Blockchain technology proactively for assuring Digital Economy.”

Thus, Cryptocurrencies are not illegal in India; anyone can buy, sell and trade cryptocurrencies. It’s unregulated; India does not have a regulatory framework to govern it for now. However, the Indian government is exploring the ways of regulating the cryptocurrencies. Various crypto exchanges are supporting the government and helping investors join the trend by self-regulating and a proper KYC check for all their investors.

Can bitcoin be converted to cash?

There is no official procedure built for bitcoin/cryptocurrencies to convert to another currency. However, online businesses of other countries where Bitcoin is officially accepted and regulated might accept or provide services of converting bitcoin into different currencies.

What are the problems with Bitcoin?

There are several criticisms of bitcoin, including that the mining system is enormously energy-consuming. The University of Cambridge has an online calculator for tracking energy consumption and at the starting of 2021 it was estimated to use over 100 terawatt hours annually.

The cryptocurrencies are easy to be linked to criminality, with critics saying that bitcoin can be a perfect way to make black market transactions. Cash have been used for such transactions for centuries, and the public ledger of bitcoin may actually be a tool for law enforcement.

(Read about Bitcoin in Gujarati)

4 Tips to Invest in Cryptocurrency Safely

Investing in cryptocurrencies is always risky, but some experts say that cryptocurrency is one of the riskiest investment, according to Consumer Reports. However, digital currencies are also some of the trending commodities. Earlier this year, CNBC estimated that the cryptocurrency market is expected to reach a value of $1 trillion by the end of 2018. If you're willing to invest in cryptocurrencies, these tips can help you make better choices.

Research Exchanges

Before investing even a one dollar, you must learn about various cryptocurrency exchanges. These platforms provide the services of buying and selling digital currencies. Do your research, read reviews and talk with more experienced investors of cryptocurrencies before moving forward.

Know How to Store Your Digital Currency

If you buy a cryptocurrency, you will have to store it. You can either store it on an exchange or in a digital wallet. There are many different types of wallets, each one has its own various benefits, technical requirements and security. As with exchanges, you can investigate your storage choices before investing.

Diversify Your Investments

Diversification is a key to any investment strategy, and it is true in case of cryptocurrencies, too. You must try not to put all of your money in a single cryptocurrencies. There are thousands of options, and they are best to spread your investment around to several currencies.

Prepare for Volatility

The cryptocurrency market is a volatile one, so you have to be prepared for ups and downs. You'll see dramatic swings in prices. If you are not prepared for the volatility, you may go for various investment options other than cryptocurrencies.

Conclusion

Investing in something that's new comes with challenges, so be prepared. If you are prepared to handle uncertainty, you can go for Bitcoin. If you wish to invest in Bitcoin, do your research and start with very small amount.