Block Chain & Bitcoins
Some time back, I came across an interview of Shri Chandrababu Naidu, CM of Andhra Pradesh. He was asked a question that he was instrumental in turning Hyderabad to Cyberabad and placed Andhra Pradesh on world Map , so how is he going to develop new Andhra Pradesh?. He said he is not going to use same model of IT development in new AP, he wants AP to shift from Labour oriented model to innovation model. He said they will work in latest areas such as digital excellence, block chain, cyber security and Internet of things.
Later in December 2016, his government inked MoUs with top five companies — PayTM, Blocktrust, GMS Soluti-ons, Transaction Analysts and Knolskape for starting companies in IT-SEZ at Rushkonda near Vishakhapatnam. At that time he said “This is the first-ever tower in the world that will help fintech companies to develop latest technologies related to digital payment applications, block chain, cyber security and Internet Of Things. The world is moving towards digital economy and transactions. Especially in India, it has become necessary after demonetization”. I was really delighted to note, how abreast he is about current developments in IT and Finance.
So what is Block chain?
Block chain is a distributed digital ledger which records any transaction with a time stamp and maintains a link with its just previous transaction. It becomes a chain of transaction of any asset. Each record is called block. When a new block is added, it tries to check whether all old records and currently added record are in order. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks and a collusion of the network majority. Functionally, a block chain can serve as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically”. The concept of distributed computing and parallel processing is used here.
The first block chain was conceptualized and used by Satoshi Nakamoto from Japan in 2008 for creating of BitCoin Ledger. Bitcoin is a digital virtual currency also called crypto currency. Since it is a virtual currency and with users all around world, it was possible that somebody can falsify digital token used by digital currency or duplicate the same and use elsewhere thereby spending it twice (Called double spend problem). Satoshi Nakamato used the Block chain to create a Bitcoin ledger where every digital currency transaction is recorded on server so that if any counterfeit currency is created, then system will throw out the same since it will not have parent transaction.
Though Block chain at present is used for Bitcoin or similar money transactions it can well be used for any other transactions such as land records etc. Though Block chain is being used world over for some time, On Oct 12, 2016 ICICI bank announced that it has successfully completed first Block chain transaction with Emirates NBD, Dubai’s largest bank. Also Axis bank and Kotak Mahindra Bank are testing Block chain transactions as of now.
Now what is Bitcoin?
The currency came as a replacement for barter system in earlier stages. First came gold and then physical currency. People and countries have been using different methods to value their physical currency. In earlier time each country was printing currency with keeping equivalent gold reserve. But on June 5, 1933, US president F.D. Roosevelt stopped that practice and allowed US to print any amount of currency without backing of gold. Then people started valuing their currency by creating basket of currency concept. Now a days each currency’s valuation depends on balance of payment, economic conditions, GDP etc of that country.. However they may be, they are artificial in nature. There is no fix formula to derive the currency valuation. It also depends on Demand and supply like Company Shares. All currencies are owned and controlled by the respective central banks.
To avoid lacunas of these systems mentioned above, some genius created a virtual currency also called Crypto currency which does not recognize any central issuing authority, its valuation does not depend on economic conditions of any particular country, nor it requires any backing of any asset like gold. It is smoothly used for digital transactions.
One such Crypto currency is Bitcoin (BTC) , others being Litecoin (LTC), Ethereum (ETH), Ripple (XRP), Monero (XMR) etc. As of 11, July 2017, there are more than 900 such Crypto currencies. A new crypto currency can be created any time. At present Bitcoin is the largest used crypto currency by market capitalization. It is uses Block chain ledger to take advantage of its features such as security, Privacy, tamper proof, peer to peer transactions etc. As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment. According to research produced by Cambridge University in 2017, there are 2.9 to 5.8 million unique users using a crypto currency wallet, most of them using bitcoin.
There is a control over total number of Bitcoins available in the system (Called Monitory policy of bitcoin's inventor Satoshi Nakamoto whose Identity is unknown.) of 21 million bitcoins based on artificial scarcity concept. Bitcoin software is an open source software developed by Satoshi and anybody can download and start using the same.
The unit of account of the bitcoin system is bitcoin. As of 2014, Small amounts (sub parts) of bitcoin used as alternative units are millibitcoin (mBTC, a millibitcoin equals to 0.001 bitcoin, one thousandth of a bitcoin). microbitcoin (µBTC, sometimes referred to as bit. One microbitcoin equals to 0.000001 bitcoin or one millionth of a bitcoin ), and satoshi named after creater is the smallest amount within bitcoin representing 0.00000001 bitcoin, one hundred millionth of a bitcoin). A transaction can be in any or combination of above Bitcoin forms.
A valid transaction must have one or more inputs. Every input must be an unspent output of a previous transaction. That means any coin in circulation must come of transaction and it must be unused. The transaction must carry the digital signature of every input owner. The use of multiple inputs corresponds to the use of multiple coins in a cash transaction. A transaction can also have multiple outputs, allowing one to make multiple payments in one go. Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather bitcoin addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the Block chain are public.
A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold or store bitcoins, due to the nature of the system, bitcoins are inseparable from the Block chain transaction ledger. A wallet is something that "stores the digital credentials for your bitcoin holdings" and allows one to access (and spend) them. Bitcoin uses most secured public-key cryptography. You can create a wallet and store Bitcoins which are bought from other bitcoin holder.
There are people called Bitcoin miners who maintain records of transactions in Bitcoins. Miners keep the Block chain consistent records, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions. These people can charge for any transaction as a transaction fee however it is optional for person who initiates transaction. Miner gets a bonus of 12.5 bitcoins for adding a record (also called Block) per transaction. Miner is responsible for all transactions under his records which work on peer to peer basis in decentralized network environment. The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks (approximately every four years). Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins will be reached in c. 2140; the record keeping will then be rewarded by transaction fees solely.
The first transaction was done in January 2009 by Satoshi by mining first block of Bitcoin and got reward of 50 bitcoin. It is said that Satoshi has mined over one million Bitcoins before disappearing from the scene and handing over the reins to developer Gavin Andresen, who then became the bitcoin lead developer at the Bitcoin Foundation.
Price of Bitcoin has raised from USD 4.92 per Bitcoin on 9 april 2012 to 2013.60 US Dollar (1, 29,563.88 Indian Rupee) per bitcoin as of 17.07.2017. This demonstrates interest of investors in crypto currency. Amount of Bitcoin traded is a fraction of available supply. Most is kept as investment.
Reserve Bank of India has not permitted investment and Transactions in Bitcoin as of now and is against FEMA. One of the reason why RBI may not allowing is that it can be used for money laundering as it does not identify owners and hence it can be used for unforeseen uses such as Drug trade, Terror financing etc.
In my opinion, the main concern about this or similar currency is that it does not reflect any intrinsic value and the price is based completely on demand and supply principal and number of users holding same, even though it has all other very good features. If you consider shares of a company which are of predefined numbers and their Market value depends on performance of the company, Financial position, future plans, demand of the products or services, Assets and machinery, Sales and Sales forecast etc. But that thing is missing here in crypto currency.
So before investing in Crypto currency, please do consider this side also.
Madhav Bhole
(madhavbhole99@gmail.com)
