Bitcoin Explained for Laymen

[On 05-Apr’2018, RBI barred all Indian Banks and e-Wallets from providing services to crypto exchanges. But on 04-Mar’2020, the Supreme Court of India lifted this ban. Indian Banks have started transactions with the cryptocurrency exchanges”.]

What is a Bitcoin? Bitcoin is a cryptocurrency. Clear? I don’t think so. So let me try again.

Bitcoin is a cryptocurrency which uses cryptography as a technology. It was even more complicated? Perhaps yes.

In layman terms, Bitcoin is a “Digital Money” (digital currency).

Gary Anderson, Chief Scientist at Bitcoin Foundation says, “Bitcoin is a modern way of doing money”.

Bitcoin is a modern technology (not only a currency) which will eventually change how this world sees money today.

We all use digital money these days. The items we buy from Amazon, Flipkart, Snapdeal etc, how do we pay for it?

We make online payments. Right?

These online payments has been made possible by the advent of digital money.

Let it be US Dollar, Euro, Pound Sterling, Japanese Yen, Chinese Yuan, Swiss Franc, or Indian Rupees, all of these traditional currencies have their digital avatar these days.

All of these currencies once had only one form, PAPER. But with extensive use of Internet, digital money was born.

We all know that USD is controlled by Federal Reserve Bank (Feds). Reserve Bank of India controls Indian Rupees.

But who controls Bitcoin?

The quick answer is NO ONE. But the long answer is “MINERS USING BLOCKCHAIN TECHNOLOGY”.

Who are these Miners? What is Blockchain?

We will learn about them a bit later. For the time being lets try to know more about Bitcoin basics.

So, what we now know about Bitcoin is that it a Cryptocurrency (digital money) which is in no ones control.

Surprised?

Don’t be, a lot of things in this world is in NO ones control.

Bitcoin is a universal thing…

Bitcoin is universal.

Some traditional examples of universal things are Sunlight, Atmosphere, Water, Vegetation etc.

These things, present on our mother earth, is shared by all inhabitants of this planet equally.

Later, only we humans started building boundaries and limitations.

Otherwise, these facilities were originally meant for ONE universal use.

There are more examples of things that we use universally.

These are such things that were not developed after BIG BANG. We humans have invented it.

I am talking about Industrialization, Transportation System, Telecommunication, Computers, Internet, etc technologies.

These are comparatively newer technologies that is not owned by one person or one nation.

Bitcoin is also a new invention which has capacity to become as big as its former (like internet).

Twenty years back, who thought that computer and internet will replace Radio, Telephone, TV, Travel etc.

Likewise, today not many people are believing that “cryptocurrency” is going to dominate the traditional currency in the coming decades.

What makes Bitcoin so unique?

Bitcoin is decentralized. What does it mean?

Suppose you are an Indian. You are going to Germany for a 7 days personal trip.

In Germany, if you will approach Deutsche Bank and would like to open a bank account, they will refuse.

Even if you are in India, if you do not have ALL documents, an Indian Bank also has rights to refuse opening a bank account for you.

Banks have been given the complete control.

The rules are stated by Reserve Bank of India (RBI).

And these rules has been made legal by the Finance Ministry as per Indian Constitution.

So, no second thoughts.

What Banks say is like the WORD OF GOD.

But Bitcoin doesn’t work under such tight control. But still it is probably safer than our traditional currencies.

This is what makes Bitcoin so unique.

It is safe and anyone who has a computer/smartphone and internet, can open a Bitcoin Account for free in less than 10 minutes.

The only rider is, there is nothing called Bitcoin Account.

In fact it is not even called as Bitcoin Bank. What it is called as, is “Bitcoin Address” (cryptographic wallets).

It is in these wallets (like out present PayTM wallets), Bitcoins are stored.

The only difference is, Bitcoin wallets are highly codified (Crypto).

It is almost impossible to penetrate these wallets.

Where to get Bitcoins?

These days there are “mobile apps” which does everything for you as far as Bitcoin Transactions are concerned.

Please NOTE the difference. I am not talking about BANKS or FINANCIAL INSTITUTIONS.

Just a simple MOBILE (IOS or ANDROID) APP can help you buy/sell bitcoin, make payments, convert bitcoin to local currency, withdraw money to ones bank account etc.

No more Brick and Mortar Banks which is controlled by Government.

A simple mobile APP will work like your bitcoin bank.

There is a nice app called ZebPay which deals with Bitcoins in India.

I saw one of their presentations on youtube. You can also check it to know some basics about Bitcoin.

What makes Bitcoins so safe?

Cryptocurrency is very safe. What does it mean? Nobody can steal it from you.

Transactions in Cryptocurrency are 100% anonymous.

Means, nobody will ever no who made the payment and who received it.

In our traditional banks, we need to have our full bio data with them to start using their services.

Moreover, even when we make any personal transactions, our banks know it all. The rules are like this.

When a person transfers some money to his ailing friend, he probably will not speak about it to anyone.

He would prefer to keep it anonymous for personal reasons.

But no transaction is anonymous in the present banking system. Bankers know it all.

Not that we have anything to hide, but just as a matter of fact, we have got adjusted to this fact that banks KNOW IT ALL.

But when it comes to Bitcoin, nobody can pose as a ‘master’ over YOUR OWN money.

As Bitcoin is a cryptocurrency (Crypto : secret, hidden), the transactions involving Bitcoin are always anonymous.

In other words, this makes hacking almost impossible.

Moreover, there is almost a zero possibility that the transactions in Bitcoin can be faked.

This is due to a technology called BLOCKCHAIN (we will read more about it later).

But on downside, it is also impossible to reverse the payments made. Remember, I told you that there are no regulators of Bitcoin.

So what makes bitcoin so safe? Distributed Public Ledger called blockchain.

This is like a chapter on its own. So, allow me to only leave this link for you.

It explains is great detail what means by “Distributed Public Ledger”.

This piece of computer program is the heart of Bitcoin.

Those days are not far when even shares transactions (leave alone payments), will be done using Distributed Public Ledger system.

Anyways, if you want to write a thesis on Distributed Public Ledger called blockchain, read this. I am done ?

What is the value of Bitcoin?

In Indian Rupees, One Bitcoin is worth approx Rs.380,000 ($5900).

So does it mean that, to buy one Bitcoin one need to have $5900 (Rs.380,000)?

Like USD is divided into cents, and INR into paisa, the smallest unit of Bitcoin is called as Satoshi.

One Bitcoin = 0.00000001 Satoshi (one divided by 100 million).

Means, one bitcoin divided by 10 crore is 1 satoshi.

Common public will not trade in Bitcoins, but as Satoshi’s.

You can understand it better with an analogy of Gold.

One KG of Gold will be worth Rs.29,07,000 today. But we do not buy gold in kilograms. Instead, gold is purchased more in gram.

One gram of gold is worth Rs.2,907. More affordable than 1Kg of Gold.

So, what is the worth of one Satoshi in Indian Rupees?

1 Satoshi = Rs.0.0038.

There are apps in India which accepts as low as Rs.1000 (minimum) to purchase Bitcoins.

In Rs.1,000, one can purchase 0.00263157 Bitcoins (or 263,157 Satoshi’s).

I personally assume that, in future, majority transactions will be made in denominations of Satoshi’s, and not as ONE bitcoins.

So, in terms of one Satoshi valuation (Rs.0.0038) it is still too weak.

Over a period of time, when more Bitcoins will come into demand, strength of one Satoshi will further improve.

This logic also strengthens this fact that, no matter if one bitcoin is trading at Rs.380,000 today, but in terms of real valuations (Satoshi’s) it still has long way to go (Upward).

Interesting facts about Bitcoin

It is believed that the inventor of Bitcoin is a person called Satoshi Nakamoto (Japanese).

But nobody can tell for sure that if this really is the name of a person or a group of computer programmers who developed Bitcoin using blockchain technology.

Till date nobody can claim to have personally seen or met Satoshi Nakamoto.

He worked on Bitcoin anonymously and have dissapeared completely after year 2011.

The working beta version of Bitcoin has come into light only in year 2009, after the famous Stock market crash of 2008.

Before disappearance of Satoshi Nakamoto, he handed over control of Bitcoin to a person named Gavin Andresen who now works as a Chief Scientist at Bitcoin Foundation.

Gavin Andresen has revealed that, he only interacted with Satoshi via emails and chats only.

The handing of controls from Satoshi to Gavin happened between May’2010 to March’2011.

After this, Gavin also never heard from Satoshi Nakamoto.

Gavin Andresen personally feels that Satoshi Nakamoto is an Individual (likely a man).

Unlike Satoshi Nakamoto who was like a Ghost, Gavin Andresen has been a very visible person dealing and explaining the concepts of Bitcoin to the masses.

There has been several youtube videos posted on youtube where Gavin can be seen speaking about bitcoin.

I will suggest my readers to watch this interview of Gavin Andresen on youtube.

It is very interesting to watch this video to see how Gavin Andresen is comparing early days of VHS Tapes with early days of Bitcoin.

I also liked to see than grin on the face of Gavin Andresen (like a proud father) when he talks about how investors are now beginning to consider Bitcoin as an independent asset like Gold and Stocks.

In this interview I also found Gavin Andresen taking example of India to explain the possible use of Bitcoin in times ahead.

He was quoting our Cash on Delivery (COD) method of buying things online using Amazon.

He was hinting that COD was mainly practiced as less people in India use Credit Cards.

So Bitcoin can be an alternative of Credit Card and COD payments.

Massachusetts Institute of Technology (MIT) is working on this digital currency (Bitcoin) along with Gavin Andresen.

There is also a website of MIT dedicated to Bitcoin (bitcoin.mit.edu).

Gavin works as a link between, the academic work which is currently being done in MIT related to digital currency (Bitcoin), and its practical application.

Just to give you an idea of how big is Bitcoin now, In early 2010’s all bitcoin in the world was valued approximately as low as $20,000.

But today (June’2017-CNBC TV) it is $100 Billion industry.

A lot of start up companies have started their own business using Bitcoin as their core process.

Bitcoin supply is limited like gold. There is only finite gold which is available on this earth.

After all gold is mined, there will be no new gold supply.

Similarly there will be only 21 million bitcoin that can be mined digitally.

As per Bitcoin Charts, as on today, 16.5228 million bitcoins have already been mined.

As supply of Bitcoins are limited (unlike traditional currencies which can be printed more and more, leading to inflation), its value is only going to move up with time.

Though there will be volatility in short term (like stocks), but over long term horizons, trends will only be upside (like gold).

That is why Bitcoin can behave as our cryptographic gold.

What famous people think about bitcoin technology?

In today’s times, you will find more people being either confused about Bitcoin or they are skeptical.

More negative thoughts are published about Bitcoin than positive stuffs.

The reason is obvious. Bitcoin is an alternative to our traditional currencies.

How how Central Banks will make money if everyone opts-in for the Bitcoin?

Having said that, it is also true that Bitcoin is still in its Beta stage.

Though it has evolved a lot since year 2010-11.

But still Bitcoin Foundation is working a lot to make it anyway similar to our local currency.

So this poses the major risk and reward.

People who are afraid of this new technology, can stay away and avoid risk.

People who believe in this technology will stick to it and possible earn rewards in future.

The trick is to convince yourself that “you are on which side”.

I personally have lot of belief on the technology called “blockchain”.

I am not sure if tomorrow Bitcoin will become a dominant new Currency or an investment asset like Gold.

But one thing is sure that Government’s, Central Banks, Commercial Banks, Stock Market, etc will eventually use the blockchain technology to make their process more secure, efficient and cheap.

Lets see what famous people say about Bitcoin:

Richard Branson in Year 2014

“Well, I think it is working. There will be other currencies like it that may be even better.

But in the meantime, there’s a big industry around Bitcoin.

People have made fortunes off Bitcoin, some have lost money.

It is quite volatile, but people make money out of volatility too”

Raghuram Rajan in Year 2014

“…we are still watching the evolution of these kind of currencies. One of the problems that we envisage with Bitcoin is, one of course was Security is the issue, you have seen that they are not as secure as people thought they were and there have been stolen Bitcoins and so on, but the second issue was the fluctuation in value. For money you require some stable store of value and something which fluctuates so much is less effective in use as money.

There are some lessons to be learned that from the technologies that Bitcoin has employed, some of them are useful and some of them are worrisome, and we have to see how we take onboard such technologies.I have no doubt that down the line we will be moving towards primarily a cashless society and we will have some kind of currencies like this which will be at work.

For us as Reserve Bank, this may happen 10,15,20 years from now but we will have to figure out how we make money. Because the way we generate most of our revenue is seignorage….

But I think that these virtual currencies will certainly get much better, much safer and over time will be the form of transaction, that’s for sure”

Bill Gates in Year 2015

“Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient. The Customers we were talking about are trying to be anonymous, they are unwilling to be known, so the Bitcoin technology is the key. You can add to it or you can build a similar technology, where there is enough attributions where people feel comfortable…it noting to do with terrorism or any type of money laundering”