What is Bitcoin? How does Bitcoin work and why is it so popular?

What is Bitcoin? How does Bitcoin work and why is it so popular?
Posted on 31-01-2022

Greetings, friends!

Can you imagine a thing- the value of which was zero around ten years back

and today, it's value has touched almost 15 lakhs!

I'm talking about Bitcoin, that has recently touched its all time high price point

due to which it is being talked about in the market and the media again

So, I thought this would be the right time to make an educational video on it

and explain to you what Bitcoin actually is what s its history?

Merely 12 years ago, on 31st October, 2008, a person named Satoshi Nakamoto published a paper on the Internet

Satoshi's main motive was clearly evident from the first line of the paper

A version of electronic cash that would allow payments tobe sent directly from one party to another party without going through a financial institution

Cryptocurrency is a digital asset over which central banks or financial institutions have no control or regulation

For instance, the US dollar is controlled by the central bank of US. The Indian Rupee is controlled by the RBI

But there is no central bank or any main financial institution that controls the bitcoins/cryptocurrencies

Back then, cryptocurrency was merely an idea in the mind of that person. But now, there is trading worth lakhs and crores on its crypto exchange

just like shares are traded on the normal stock markets

In order to understand the paper of Satoshi and the context of crypto currency, we will have to understand some concepts of our economic history

Our financial systems are based on trust

The currency notes and coins have value in our society because they are guaranteed by the government and the central bank

Take a look at any note in your wallet. For example, a 200 hundred rupee note. It reads- "I promise to pay the bearer a sum of 200 hundred rupees."

This is a promise made by the Governor of the Central Bank, that is, the Reserve Bank. There is his signature right below

This note holds no value without this promise/guarantee

This note will be reduced to an ordinary paper if it does not carry this signature

There is a small, but interesting story in this context

After the second World War, America became the most powerful country in the world and the rest of the countries had to align their currency with the US dollar

And what was the US dollar aligned with/guaranteed by? A reserve of gold.

The actual value is that of gold or silver. But it is not practical to carry gold or silver around in your pocket

The currency notes were printed for convenience. But US did away with this gold standard rule back in 1971

After that, the central banks of the rest of the countries could print their notes as per their wishes

But what do cryptocurrencies and Bitcoin have to do with this?

It helps you to guess how powerful the government and the banks- especially, the central banks of the country are as far as monetary policy is concerned

The fact of the matter is that when you deposit your money in the banks, you give the banks permission to play with that money, in one sense

Making use of these deposits, the banks give loans to companies and individuals

This is what fetches returns, that is, interest on the money that you have deposited

Very recently, we have seen that these banks use these savings and deposits in a very irresponsible manner

It happens quite often that banks give loans to big industrialists without performing adequate checks and then these loans become bad debts/NPAs

And who becomes the victim in such cases? Depositors like us.

In the last 15 months, three deposit taking institutions have failed- Yes Bank, PMC bank and Laxmi Vilas bank

But even the decisions of the government can put the common man in danger

Do you remember November, 2016? Demonetization! The government laid to waste the 500 and 1000 notes in one single strike

86% of Indian currency became unusable

Those in favour of the Bitcoins and cryptocurrencies are so because they do not want the government or the central banks

to exercise so much control over their money or currency

Do you now understand the original idea/vision of Satoshi?

Satoshi imagined Bitcoin as an alternate financial system

which would be based on software technology and would be outside the control of third parties

You might be able to recall the Global Economic Meltdown of 2008

Mega investment bankers like Lehman brothers had become bankrupt

Cryptocurrencies were born right after this scenario

Bitcoin was the first to arrive. And then many other crypto currencies surfaced- Ethereum, Litecoin and Ripple

In fact, in the beginning of the year, more than 2000 cryptocurrencies were available on the internet

Let us move on to the main point now: How does crypto- technology work?

If truth be told, in order to understand this, one needs to have knowledge of advanced mathematics and computer science- which I don't have

But if you want to start investment or trading, then basic knowledge would suffice

Let us take the example of Bitcoins

There is one public account in digital form, of all the bitcoin transactions- this is called a 'ledger'

A copy of this ledger exists on all the systems that are a part of the Bitcoin network

Those that run this system are called 'Miners'

The job of the miners is to verify transactions

Say, A has to transfer 2 Bitcoins to B's account

Miners will have to confirm whether A actually does have 2 Bitcoins in his account or not

To complete the transaction, miners will have to solve a complicated mathematical equation

You might have studied about variables back in school. Every Bitcoin transaction has a unique variable

The job of the miners is to calculate it

It's not that they sit with a pen or paper to solve the equations

All these calculations are carried out on the computers automatically because they are extremely complicated and their combinations run in crores

which is why these miners require computers with very complex and high processing power

Once the equation is solved, the other computers within the network confirm it and this transaction is added to the chain

A block of transactions gets created. And hence, the technology is called 'block chain'

And what do miners get in exchange for this? They get the most valuable thing- Bitcoins!

This system is called 'Proof of work'

The miners have to prove the computation work they do in order to get awarded the Bitcoins in return

If all this explanation went straight above your head like a bouncer, then do not worry!

Because understanding the philosophy, vision and future of crpto technology is far more important than understanding the working of crpto technology

now comes the question of how to use crypto currency and Bitcoins

It is extremely important to understand that as well. Because on one hand, some people use Bitcoins as an investment

while on the other hand, some people use cryptocurrency as an alternate currency

A lot of people want to replace it with currency and use Bitcoins in place of rupees and dollars

But the main use of crypto currency at present is like an investment

We invest money in cryptocurrency hoping for a higher return in the future and hence get more money in return

This, then becomes a "store of value", just like Gold.

Just like we don't use gold in our daily transactions but instead buy it and store it in the bank lockers like a guarantee

to get more returns in the future because the price of gold keeps rising gradually

People do the same with Bitcoins and this is why Bitcoins are also called "Digital Gold"

But just like any other investment, this too, entails risks. And those who criticize this as a form of investment say that

Bitcoin is a digital currency. It has no inherent value of its own

For example, you can physically touch the gold in your hands. If you buy a house as an investment, it will be physically available to you

Bitcoins, on the other hand, are not physical. Everything is happening on the computer

It could still be referred to as a "niche product" that does not have a widespread acceptance in the society

Cryptocurrency is not yet a medium of exchange, that is, you cannot go to the nearby shops and buy bread and eggs with Bitcoins

But this trend might change in the future because

there are several restaurants and hotels in the Western countries that have begun to accept Bitcoins as an alternative form of payment

There is a technical challenge here that makes it difficult to use Bitcoins as a medium of in daily transactions

The Bitcoin transactions on the block chain take time to get confirmed. One block process takes around 10 minutes for the computers to calculate

So, you can understand that it is not practical to wait for 10 minutes for a transaction to get completed in daily life

But at the same time, there are some present day usecases for Bitcoins where they work better than our traditional ways

The best example of this is our Foreign Funds transfer

When you have to transfer money from one country to another, the banks deduct a lump sum in the name of foreign transfer fees

They charge a lot of fees and take a lot of time to transfer money from one country to another

The Bitcoins are more economical in this case. Bitcoins do not charge any transfer fees and ten minutes is a much lesser time as compared to the 1 to 2 days that the banks take

A similar thing applies to the credit card fees

Cryptocurrency can be more economical than credit card fees

This is why banks, credit card companies and remittance companies have been against the Cryptocurrencies and are so even today

because Cryptocurrency can become a rival to their business model

In the last few months, especially due to the Covid pandemic, situations have changed. While several industries and mutual funds have been struggling,

the value of Cryptocurrencies like Bitcoins and Ethereum has been on the rise

From the 1st of March, until November 30, the value of Bitcoin has risen more than 120%, that is, it has more than doubled in value

Paypal, the world's biggest digital payments company, has introduced the feature of crypto transactions in November

J P Morgan Bank used to be the biggest foe of Bitcoins. When Bitcoin was on a bull run in 2017,

that is, when its price was rising exponentially, the CEO of J P Morgan had said that it was a fraud

And now, just a few months ago, J P Morgan has opened corporate accounts for famous crypto exchanges like Coinbase and Gemini Trust

So you can see how the doors that had earlier been shut for cryptocurrency have now been opening up

An open mindedness is being observed with regard to cryptocurrency in the general public and the financial industry

Talking about India, a change of attitude has been observed this year in India as well

In April 2018, the RBI had frozen out the crypto industry from the banking system

The RBI had instructed the banks via a circular to desist from dealing in crypto related platforms or transactions

The mainstream media had claimed that RBI had placed a ban on cryptocurrency but it was technically inaccurate to say so

Cryptocurrency had never been directly banned in India. RBI had merely blocked the banking access of the crypto ecosystem

The result of this was that the public could not deal in INR that is, in Indian Rupees on the crypto platforms

The banks treated the crypto platforms with lot of harshness

With the platform accounts frozen, they were not able to pay their employees or pay rent to their landlords

So, a question arises: Why did the RBI do this?

The reality is that cryptocurrency has some negative points as well that are mainly related with money laundering and security

In the dark web on the internet, the people had started accepting payment in Bitcoins for buying weapons and drugs

It became very difficult for the law enforcement agencies to track transactions because they were outside the traditional financial system

Issues related to hacking also surfaced

Another reason is that any one can come up with their own cryptocurrency. This is why, a lot of bogus and fraud companies took money from the public

with a promise that once trading started in that particular currency, the value of their money would double/triple

so they claimed that the money invested would double/triple

A person named Amit Bhardwaj came up with a similar fraud crypto scheme by the name of "Gain Bitcoin"

There is an allegation of a fraud of 2,000 crore against Bhardwaj

Bhardwaj claimed that he had "mining farms" in China. That is, a place where several computer servers were solving equations

and said that the bitcoins that were earned as a result of mining operations would be given to the investors as returns

But all his promises were hollow. He took money from a lot of people and fled India

There were such allegations on him. Finally on April 2018, he was arrested

As per the latest update, he is out on bail and the case is pending in the courts

So, due to reasons like this, here was a negative bend of mind regarding cryptocurrency and bitcoins and in response, the RBI took the decision to

impose a banking ban on crypto

Crypto exchanges i.e., platforms where you can invest in cryptocurrency and convert rupees into Bitcoins had been operational in India since 2013

Some exchange founders decided to challenge the banking ban in courts. It was not only a matter of their livelihood, but also a matter of principles

They got a chance to explain how the crypto technology and blockchain works to the government and the RBI

They were of the opinion that the negative points pertaining to cryptocurrency are also valid on other asset classes as well

There can be money laundering over property, fake notes can be printed,

there can be money laundering there as well

There are many fraud schemes that operate in a lot of other things. The software of banks or stock exchanges can also be hacked

There are chances of that as well. So, the problems that exist with Bitcoins exist with other things as well

In response to this, the reputed Indian platforms included a lot of safeguards. For example, KYC (know your customer) process was made mandatory during sign up

The case reached the Supreme Court. Several famous senior lawyers refused to fight the case because there was a lot of negative news regarding the cryptocurrency in the media

A lot of rumors were afloat as well

There were adjournments. Some exchanges were not able to survive during this time and consequently, they had to wind up

Finally, a three bench judge heard the case in January 2020

and the court accepted the stance of the exchanges and conceded that the ban of the RBI was "disproportionate"

because RBI was not able to prove in the court that the crypto investments and trading had negatively hampered the financial systems or banks

Under Article 19(1)(g) of the Indian Constitution, it is the Fundamental right of every citizen to indulge in any business/occupation or trade

The court said that the banking ban imposed by the RBI was interfering with this fundamental right. This is a huge thing

because it is no ordinary thing to defeat the RBI in court

Therefore, it was a historic day on 4th March for the Indian crypto industry

The court clearly declared that there is no legal prohibition on cryptocurrency trading and investment

This business is legal and the RBI would have to repeal its banking ban

Overall, this is good news for all of us. We can freely invest in cryptocurrencies, if we wish to

We have this opportunity to diversify our financial investment

You could invest some money in cryptocurrency as an experiment

After the decision of the Supreme Court, several exchanges have burgeoned and this process has become extremely straightforward and easy in India

One of these is Coinswitch Kuber, an app on which you can deal in more than 100 cryptocurrencies

More than 7 lakh users have signed up on Coinswitch Kuber within 6 months

and their safety measures are also extremely stringent

The Aadhar and PAN of the customers are verified and the minimum investment allowed is of 100 rupees- all without any fees

Furthermore, rupee withdrawals are instant. That is, there is no problems of lock ins

These days, crypto investment has become as easy and painless as online food ordering

This will become evident upon seeing the clutter free user interface of Coinswitch Kuber

Ofcourse, you will have to follow some rules of common sense . For example,

do not trade by taking loans from Banks or others. If there is a need for you to take loans,

to invest in cryptocurrencies or Bitcoins, do not do that. Then, this is not for you

Only invest that much money that you are comfortable losing because this is an extremely risky investment

The price of the cryptocurrencies fluctuate a lot and it is extremely volatile. So, it is pretty clear that it is both an opportunity as well as a risk

Your risk appetite and investment goals decide whether you want to play a short term or a long term game

Overall, it can be said that cryptocurrencies and Bitcoins could play an important role in the future of finance

It remains to be seen whether cryptocurrency can become a medium of exchange that will be subject to widespread use

or will it remain a store of value investment?

Will you be able to buy bread and eggs from your nearby shops with Bitcoins in the future?

or will it not be possible?

That day might be very far but it cannot be ruled out as impossible that easily

I hope you would have enjoyed this educational video

Share this video if you liked it and you can get the link of the Coinswitch Kuber app in the description and the pinned comment below

We will meet again in the next video. Thank you