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Bitcoin is almost synonymous with cryptocurrency, but did you know that it is just one of the 10000 cryptocurrencies being traded today! It is the most sought-after cryptocurrency and is also the first one to be launched. Crypto trading is for the ones with a strong and high-risk appetite, a highly volatile financial instrument that is backed by best-in-class technology. Read on to know more about it.

Bitcoin – the bits

Bitcoin is a digital currency, it is held in decentralized and digital form, the same can be bought and sold without any financial intermediary like a bank. The value of crypto is purely decided due to market forces. Due to the decentralized feature of bitcoins, there is no backing by the Government, the crux of this instrument is cryptographic proof. Currency on the other hand is a physical financial instrument that is adequately backed by Government and gold reserves. 

The instrument is in limited supply with a maximum of 21 million coins in supply *, overtime corporates have started looking at this instrument as a hedge against capital markets and inflation. This has enabled Bitcoin to scale up in value in a short period, since its launch in 2009, bitcoin has given huge returns to its early investors. The returns are unparalleled to any other financial instrument given the timeline and volatility.

The technology behind Bitcoin – the bytes

Bitcoin is stored and distributed via digital means on the technology called ‘blockchain’. Blockchain is a tightly linked database, the units are called blocks and these units contain information about all the transactions, including timestamp, value, buyer/seller details along with a unique code to identify the transaction. The data entered are in chronological order, they can be understood to be strung together to create a chain of blocks, hence the name blockchain. The storage is available for public access and anyone can access it like a public ledger. The decentralized form enables the easy update of a transaction by anyone who can access it. 

However, the update of any order can happen only if it is verified by a majority of bitcoin holders, the unique codes will recognize the user’s transaction, it should conform to the standardized encryption configuration. These codes are in an incredibly complex random format, which is difficult to fraudulently reproduce. The statistical randomness employed in blockchain technology on cryptocurrency makes it tough for hackers to penetrate the system. This reduces the risk of fraud to a large extent.

How to buy Bitcoin?

There are more than 10,000 cryptocurrencies across over 350 exchanges, buying and selling of bitcoin are done on crypto exchanges which are in the form of mobile apps; WazirX, CoinDCX, CoinBase, CoinSwitch Kuber are some of the prominent crypto exchanges in India. 

The exchange plays a very important role in enabling the exchange of cryptocurrency, the workings of a crypto exchange is similar to that of a stock exchange, it facilitates the buyer and seller to connect. If the exchange is large enough, it can have an order book that can facilitate currency pairs, this can help the cryptocurrency owner to swap between cryptos, for example, bitcoin could be exchanged for any other crypto such as Ethereum. The buying and selling on these platforms require KYC using PAN/Aadhaar cards.  

Regulation of cryptocurrencies in India

The cryptocurrency in India is currently not regulated, however, Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is expected to be presented in the Parliament in the current Winter Session. The bill intends to create a conducive framework to enable the issuance of official digital currency to be issued by RBI. 

India has so far been closed about the introduction of cryptocurrency officially. Other countries have been more forthcoming in recognizing the growing popularity of cryptos. 

For example, New York has a favorable legislative environment for cryptocurrency. In the year 2016, NY framed a licensing model for crypto exchanges. Any company that intends to transmit, buy, hold, sell cryptos have to obtain the BitLicense from the NY State Department of Financial Services. However, some states in the US have not formalized any regulatory framework. 

In the UK too, there is no regulatory framework yet to enable robust and formal operation of cryptocurrency. Although, they have issued the tax regimen and have mandated the gain from cryptocurrency to be treated on par with regular currency and pay taxes accordingly. 

Pros and cons of investing in Bitcoin

Pros:

• Reduced chances of fraud or scam

• High data security

• Seamless and immediate transfer of ownership

• Decentralized management

• High potential returns

• Effective hedge against inflation

• New means of diversification

• Highly liquid asset

Cons:

• High risk, the possibility of high losses

• Active black market trades

• Unregulated, possibility of cyber hacking

• No insurance or hedge against the flight of operators/ exchanges

Present situation for Bitcoin in India:

India continues to remain undecided on the crypto situation including that of bitcoin. There were efforts by RBI to ban the trade of bitcoin and other crypto fearing that they have been used for funding terrorist activities and the like. The Indian Government is more welcoming of blockchain technology and has willingly implemented it in other spheres, such as equity markets, but it continues to remain to vary of cryptocurrency including Bitcoin. The RBI’s ban was overturned by the Supreme Court in 2020, at present there are no regulatory norms attached to crypto or Bitcoin. What may pan out in the future, remains unclear. Despite this, the enthusiasm among investors remains intact. 

To wrap it up:

It is quite apparent that Bitcoin is only for those individuals who have substantial experience in investing in highly volatile instruments like equities and derivatives. In India, the future of Bitcoin continues to remain unstable, however, the popularity of this financial instrument is unprecedented due to its ability to provide substantial upside. 

For someone who wants to invest, it is best to do your research adequately and invest smaller sums of money. It may not be prudent to invest funds aligned to financial goals into this avenue, the avenue can be considered only for potential upside, keeping in mind the possibility of a complete ban of bitcoin in the future is a possibility.