Say you’re planning a cross-continental trip to three different countries. The usual hassles accompanying such a trip would be the exchange of currencies and the inevitable fee that accompanies each exchange. Say you run short of cash and now need to head to the nearest ATM, and pay ridiculously high international transaction fees.
Now imagine an alternative scenario- one where you don’t need to convert your currencies, travel with actual cash in your wallet, or pay any fees to use it. Sounds like a dream, right? Well, this may very well be the future of money- thanks to a unique little invention called the Bitcoin.
What is Bitcoin?
Bitcoin has garnered a lot of international attention over the past few years. It is a virtual currency that is created and held electronically, and can be used at Starbucks to buy a cup of coffee, or even at Tesla Motors to buy their latest Model S automobile. Barely 8 years old, this revolutionary new-world currency was created by an anonymous person under the pseudonym Satoshi Nakamoto in 2008. Nakamoto subsequently disappeared in 2011. Earlier this year, his identity was claimed by Australian businessman Craig Wright, but he later proved to be a fraud. The true identity of Nakamoto is still unknown.
Bitcoins do not have a physical existence and aren’t printed, or minted as coins, which allows them to offer a level of security unlike any other. They are nearly impossible to steal- unless you share your private user details of course. Bitcoin users need to create an e-wallet, which is basically the virtual equivalent of a bank account. It is a software program where Bitcoins are stored, and there are three kinds of e-wallets- desktop wallets, app-based mobile wallets and online wallets.
How does Bitcoin work?
Bitcoin users start off by creating an e-wallet. The virtual equivalent of a bank account, an e-wallet could be a software program or a mobile app. Once you have created an e-wallet, you are ready to send and receive bitcoins. Bitcoins uses peer-to-peer (P2P) technology to operate, and the issuing of Bitcoins is carried out collectively by the public Bitcoin network. The process of adding transaction records to the public Bitcoin ledger is called Bitcoin mining. This ledger is called a Blockchain-as it is made up of a chain of blocks of all the earlier transactions. This allows the highest possible level of transparency possible, as anyone can view the Blockchain online at any given time of the day.
Computers around the world “mine” for coins by competing with each other. By allowing nearly instantaneous P2P transactions anywhere across the world, the Bitcoin allows exciting uses that could not be covered by any previous payment system.
Bitcoin is also unique as a payment system in that it is open-source. In other words, nobody owns or regulates it. The system is, in fact, based on software that uses mathematical logic to create, regulate and transfer bitcoins from the buyer to the seller. Such an arrangement, in turn, results in negligible transaction cost and complete transparency. Think of a banking system minus any regulators such as the Federal Reserve in the US or the RBI in India. However, the decentralised nature of Bitcoin and the freedom it enjoys in terms of regulation have become decisive factors for countries across the world to determine the extent of acceptability of this electronic payment system.