#WhatTheFinance – A Basic Guide To BitCoin and CryptoCurrencies

There has been a lot of talk about bitcoin the past few months so I thought I’d write a basic guide to bitcoin and other cryptocurrencies. I did write a guide for TheNewsMinute last week, but I felt like I could go even more basic for the blog. A bit of a disclaimer though – I am not a tech person, so if there is something that I’ve misunderstood or if there’s something that you think I could have explained better, please point it out to me! So without further ado –

What are cryptocurrencies?

A cryptocurrency is like the Rupee or the Euro or any other currency. There are a number of cryptocurrencies in circulation right now, like Bitcoin, Tether, and Ethereum. It is regulated or controlled using cryptography. What is cryptography? Cryptography is the science of converting information to gibberish using a key or a cipher. Now, if you’ve read the Da Vinci Code, you’d know how this works. Unless you have the key, you cannot convert the gibberish back into anything that resembles coherent data. BitCoin, the most popular cryptocurrency, comes in wallets that require these keys to open them. Wallets can be stored on a hard disk or in the cloud and have long, practically unguessable (and impossible to remember) keys – we’re talking alphanumeric codes like 23Aw45Gtyuid789H723Ewq9wjz5625 – to open the wallet. Once you open your wallet, you’ll know how many bitcoins you have in your name. This information is also stored on the blockchain.

Blah Blah BlockChain

Understanding the blockchain isn’t as difficult as people make it seem, really. The first thing you need to know is that cryptocurrencies don’t exist in the real world. There are no coins, no notes, no physical representation of money. The only proof of you having BitCoin is that password protected wallet – so how does one figure out what’s real bitcoin and what’s not? This is where the blockchain comes in.

A blockchain is a continuously growing list of records that is controlled by peer-to-peer networks – basically, there is a record of every bitcoin that is out in the world, that is maintained by a number of people simultaneously. Blockchains work like school public address/announcement systems. You go up to the mike and say that you, X, are giving your bitcoin(s) from your wallet to Y. The people listening (the peer-to-peer network) take note of the transaction together and presto! You’ve just sold your bitcoin. Y’s wallet will now show the bitcoins that she received from you. These blockchains are public record.

How is the price of bitcoin determined?

The creator of BitCoin, Satoshi Nakamoto put a cap on the number of bitcoins in circulation and so, there will never be more than 21 million bitcoin in the world, ever. As of June ’17, there were around 16.4 million bitcoins in circulation. Each day, bitcoins come into the world by way of ‘mining’, where people will be rewarded with bitcoins by solving (really difficult) puzzles similar to finding teeny tiny needles in giant haystacks.

The price of Bitcoin depends on the demand and supply. Currently, given the hype around cryptocurrencies, there is a massive demand – so the more the number of people who want to buy or are buying Bitcoin, the more expensive it becomes. Right now, it’s really expensive because so many people want it and there’s only a limited supply of it. In some ways, Bitcoin works the same way gold does because both are in demand and both are in limited supply. Except…

Prices of BitCoin Over the years

Gold is real, Bitcoin isn’t

This is the part where I confess my dislike for Bitcoin or any other cryptocurrency for that matter, as an ‘investment’. Call me old-fashioned but I am a firm believer in investing only in things that I can see and understand. Gold is real. Oil is real. Money has value. Shares are tied to the performances of real companies. Cryptocurrencies aren’t any of these things. It’s also significant to mention that you can’t just go to a store and buy something with your Bitcoins or whatever. Only a few markets accept cryptocurrencies, and before this whole crypto-craze broke out, bitcoins were used as a fair exchange for really terrible and illegal things like child porn and guns.

No Rules, No Regulation

And I’m only getting started here – Bitcoins are self-regulated. They aren’t controlled by banks, there are no authorities to regulate it, the RBI has been very vocal about how it doesn’t approve of cryptocurrencies and most importantly, the Finance Minister of India outlawed them when he presented the budget a few days ago.So there is literally NO ONE for you to write angry letters to if you get duped by the system. There has also been news of people who weren’t able to recover their money when they sold their cryptocurrency investments.

Should You Even Invest in Bitcoin?

If you’re toying with the idea of investing in Bitcoin, my advice would be in the negative. Don’t invest in it, because it’s not an investment. It was never meant to be an investment. Bitcoin was created with a vision of becoming an unregulated but widely accepted mode of exchange. Now, however, people are just hoarding it, leading to dizzying price increases. There are also a lot of people who are taking advantage of the interest in Bitcoin etc and scamming people out of their hard-earned money. Investing in cryptocurrencies right now is a lot like jumping into a really inviting patch of water in the open sea. Sure the water looks great, but are you sure that there are no sharks inside?

6 Comments

  1. Very interesting read! Thanks for breaking it down! I was just nodding away when in conversation, now can be a little more participative! Sure it’s too complex with cryptography and stuff. So only people who can write complex codes can thrive in it right?

  2. Earlier it was very complex and had a difficult time reading through websites and newspapers about this. You made it very interesting and put in layman terms that I now can confidently speak about crypto currency. Thanks much!

  3. Simple and informative read. The subject by itself is a bit confusing and as you say even if one decides to invest money in it he should be aware of the fact that there is no solid support system in place and neither a regulator body. One more thing that is scary is the fate of all those who have already invested. what would happen when the cap 21 million is reached? Will there be a method to increase the cap or are cryptocurrency prices going to see sharp fall?

  4. Good read. I agree about investment in Bitcoin, but should consider investment in other cryptocurrencies, with good tech. And yes there is so many scams out there, that’s the rease why Tweeter after Google is banning ads.

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