Many of us in India do not know what exactly is Bitcoin and the technology behind it.
This confusion also prevents many of us to invest in Bitcoin.
After reading this article, you will know what exactly is
- The technology behind Bitcoin
- What is Bitcoin Mining
- Is Bitcoin Legal and Regulated in India
- How to buy/sell Bitcoin in India
- Taxes on Crypto Currencies in India
- Disadvantages of Bitcoin
Let’s Dive Deeper into the Article
What is Bitcoin/CryptoCurrency
Cryptocurrency is a digital decentralized peer-to-peer currency.
Decentralized Currency means that there is no government to regulate.
There is no central authority or institution that maintains cryptocurrencies.
Instead, it is backed up by the technology called BlockChain. We will know more about it in the upcoming section.
Bitcoin was created by Satoshi Nakamoto, a name used by the creator of Bitcoin.
Don’t worry, whenever I refer to Satoshi, I am referring to the creators of Bitcoin.
Bitcoin is Digital Cash.
We also have cryptocurrencies other than Bitcoin like Ethereum, Dogecoin, Lite Coin, etc.
These are called Altcoins – Alternative Coins as they came after Bitcoin.
The Technology behind Bitcoin
Now, you may ask me, Vathsan, you say Crypto Currencies are Digital Cash. Can we then transact crypto?
The answer to the question is you can do it.
You can send Crypto to anyone if you have their Crypto Address.
Just like you would send money parcels or net banking to people to who you want to send money.
As Crypto Currencies are decentralized, your transaction data and your name are stored on everyone on the Network.
Don’t Worry, they will be stored in an encrypted format.
The other feature of CryptoCurrency being decentralized is you can check anyone’s transaction history if you have their crypto address.
You can check anyone’s transaction history without their names but with their crypto address.
You can check Bitcoin Transaction History for up to 50 transactions by clicking here.
Blockchain is the technology where blocks are chained together and that’s why they are named so.
Here, the blocks are made up of chunks of information about the transactions.
You might be wondering, if Bitcoins are decentralized, then who creates them.
You would get the answer to the question in the next section.
What is Bitcoin Mining
Do you wonder how Bitcoins are created? That is what we are going to see in this section.
When we send money to someone through net banking, we have proof that is stored in the bank’s database.
In the Bank’s Database, it is registered as XYZ has transacted money to ABC.
But we know that Bitcoin or any CryptoCurrency doesn’t have a central authority like a Bank.
Then, what is the proof that you have sent money to someone?
But Bitcoin’s Founder, Satoshi Nakamoto has a system set in place for this issue.
There is a community called the miners’ group. Even I or you could be a miner of Bitcoin or any CryptoCurrency.
All we need is a device to mine but that does not mean that you could mine bitcoin on your phone or your personal laptop which you will know why when you complete reading this article.
Mining is the process of registering a particular number of transactions.
Approximately every 10 minutes, the Bitcoin Algorithm poses a challenge to the Bitcoin Community.
The Challenge is to Solve a Mathematical Equation.
This challenge is to find the highest computing power.
After, the Challenge is posed to the Bitcoin Community.
The Bitcoin Community (Machines) solves and gives the algorithm their guesses of the perfect solution.
The technology checks whose answer is an almost perfect guess and then gives the machine the opportunity of being a banker for a set of transactions.
After the machine registers the set of transactions, it is not added directly into the chain of blocks.
The set of transactions is then reviewed by all the machines connected to the network.
After Reviewing, this chunk of transactional information is added to the chain of Blocks.
After the block is added, the algorithm awards a certain amount of Bitcoin to the bitcoin miner.
This Bitcoin is the newest set of Bitcoin that is created.
Although bitcoins are just an award for registering transactional information, this process is called Bitcoin Mining.
Bitcoin’s Incentive System
You may be a bit confused about how does the algorithm decide how many bitcoins to give.
The Incentive that the algorithm gives becomes halved every four years.
You might be thinking, then what are the incentive rates and I will give you a table for it.
In this table, you could clearly see that the incentive rates are becoming halved every year.
In 2024, the incentive rate would be 3.125 Bitcoins.
This is the structure of the incentivized system and this incentivized system goes on until the supply limit of Bitcoin is Reached.
I said before that the supply Limit of Bitcoin was 2.1 crores or 21 Million.
Do you now wonder what will be the incentive rates after the supply limit is reached?
Every transaction of Bitcoin comes with a transactional fee. Additionally, the miner also gets transactional fees and the Bitcoin incentive.
After the last Bitcoin is mined, the transactional fees are the only incentive for the miners.
Why can’t you Mine on your Phone or PC?
I earlier said that we can’t mine Bitcoin on your phone or PC.
It is because the computing power that is required to solve the problems is very intense and our Personal devices do not have the capacity.
Mining on your phone or PC may heavily damage your phone or PC and drain your battery for a very little amount of money in exchange.
It also affects your battery life.
Thus, it is not recommended to mine Bitcoin on your phone or Laptop.
Is Bitcoin Legal and Regulated in India
Buying or Selling Bitcoin is not illegal in India. However, it is not regulated or governed by the RBI.
In 2018, RBI banned banks from supporting Crypto Currencies as there were many fraudulent activities with Bitcoin.
With the nature of the Bitcoin Ecosystem, it is hard to trace the person out.
But in 2020, the supreme court struck down the ban against cryptocurrencies.
Now, RBI informs that its previous notice of 2018 could not be referred by Banks.
This happened majorly due to a large number of crypto holders in India. It is approximately said that there are over crore crypto investors across India.
How to Buy/Sell Bitcoin in India
You might be wondering how you could even buy Bitcoin if the price of a single bitcoin is above 30 lakhs.
Unlike the share market where you have to buy at least a complete share, you can buy Bitcoin or any other CryptoCurrency in Fractions.
Generally, Bitcoins are stored in Wallets.
Wallets can be Software Wallets or hardware wallets. I will talk about wallets some other day.
Software wallets are Apps while Hardware wallets are physical devices.
For Hardware Wallets, there is a security code that you have to remember but for the software wallets that is apps, there is no need of remembering passwords except the password you set for the app.
In this article, I will show you the Software Wallet Method.
To buy Bitcoin or any Crypto, we have to connect our wallet with the exchange.
For hardware wallets, you have to buy them and then connect them to an exchange.
But for Software Wallets, most of the time the wallet itself is connected to the exchange.
There are various apps.
I use WazirX.
WazirX Platform is incredibly easy to use; you could transfer your money through UPI or Net Banking into your wallet.
Sign up for WazirXSign Up for WazirX
Disclosure: This is my Invite Link.
Then, you could buy portions of Bitcoin or any other Cryptocurrency with the money in your wallet.
If you know any other Platforms for trading Crypto in India. Share them in the comments.
Disclaimer: This is pure Informational Purpose and not Financial Advice. Take Risks at your Own Discretion. The money you invest in Bitcoin should be the money that you have paid taxes on.
If you’re interested in reading more about the Best 3 Investments, click here
Taxes on Crypto Currencies
As the RBI does not include Crypto Currency as a Legal Tender that is a regulated currency, money earned by capital gains has taxes accompanied with it.
You have to pay income tax on the capital gains that you get from investing in Bitcoin.
For more information, reach out to your financial advisor for more details about the taxes on Crypto Currency as it differs on the tax slab you are in.
Disadvantages of CryptoCurrency
Even though Crypto is a decentralized peer-to-peer transactional method backed by technology, it comes along with some disadvantages.
- Crypto is highly volatile.
- Mining of Bitcoin leaves Carbon Foot Prints and consumes a lot of electricity.
Conclusion and My Thoughts
I think Crypto is the future of Payments and Bitcoin is just the first step of evolution.
It could be better and great if new coins reduce the environmental damage done.
But most experts say that the environmental damage done by Crypto Currencies is much lesser than the damage done by the Normal Banking System.
The Normal Banking System wastes a lot of Paper, Ink and so much more.
Why couldn’t we the people who adopted digital browsing, online shopping, online social media platforms adopt the online way of transferring money??
Comment your thoughts about this post.
Thanks for reading