How to buy, send and invest in the digital currency

“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.”

Nassim Taleb, author of The Black Swan

How do people use bitcoins?

It is an electronic or digital currency that works on a peer-to-peer basis. This means that it is decentralised and has no central authority controlling it. Like currency notes, it can be sent from one person to another, but without a central bank or the government attempting to track it. The system depends on cryptography to control the creation of the currency. While no one authority controls the generation of the coins or tracks them, the system itself is designed in such a way that the network maintains a foolproof system of the record of every transaction as well as tracking issuance of the currency.

The beauty of this cryptocurrency is that if you receive a bitcoin from another, you can be as sure of the payment as you would on receiving physical currency notes, with the same anonymity ascribed to it. No one need know if your neighbour spent 2 bitcoins this morning to buy gold, but the transaction is recorded for posterity.

This anonymity is lacking in other forms of digital payment such as online banking or e-wallets.

Who can you send bitcoins to?

You can send bitcoins digitally to anyone who has a bitcoin address anywhere in the globe. One person could have multiple addresses for different purposes – personal, business and the like.

Receivers can get to spend them within minutes of receiving the coins. Once given away, like currency, there is no getting them back, unless the receiver decides to give them to you. A bitcoin is not printed currency but is a non-repudiable record of every transaction that it has been through. All this is part of a huge ledger called the blockchain.

Where do you get bitcoins?

Bitcoins are available in bitcoin exchanges. You could also purchase bitcoins from other users. A bitcoin exchange traded fund could be another source in the near future. You can become a bitcoin miner by investing in software and hardware. More the power of the hardware that helps with encryption technology, higher the probability of your earning bitcoins.

Unocoin is a Bengaluru-based company that allows users to buy, sell, store or use bitcoins. While bitcoin usage is certainly not mainstream, there are said to be more than 500 merchants who accept bitcoins for payment in India.

How is a new bitcoin generated?

A bitcoin is generated when an entity, i.e. a person or a business, uses software power to solve a mathematical puzzle that makes the blockchain more secure. The difficulty level of solving the problem is high enough to ensure that it takes time to do it.

Beware of tall promises

Even if you become a bitcoin miner, there is no guarantee that you would be able to mine a certain number of bitcoins. Any scheme related to bitcoins promising a fixed return is likely a tall promise best avoided.

Can you own 50 million bitcoins in, say, 2 years from now?

Unlike currency notes that can be printed by a central bank for an unlimited value, there are only so many bitcoins that can be produced. The blockchain system is designed such that at its maximum only 21 million bitcoins can be produced and in circulation. The number cannot exceed this cap. As of February, about 15.2 million bitcoins have been mined (or produced). That is about 75% of the total cap already in circulation.

Current estimates are that the last bitcoin that will ever be mined will come into existence in 2040.

What is the value of one bitcoin today?

One bitcoin is worth roughly about $1,200 now. An early investor in Snapchat has been quoted on the Web as saying that by 2030, the value could be as high as $500,000. One of the reasons that could prompt you to buy a bitcoin today is not so much to use it for payment online but as an investment.

Urban legend has it that someone who was doing a thesis on cryptocurrency bought 5,000 bitcoins for $27 in 2009. Do the math for the value today!

And unlike traditional currency that is inflationary in nature, the bitcoin is a deflationary currency. In other words, if there are only so many bitcoins in use, and the demand for those rises, the value of a bitcoin would, logically, rise.

How does the payment system work?

When you send a bitcoin to a receiver, the transaction is included in the blockchain and broadcast to the network. The blockchain ensures that the same bitcoin is not spent twice by the same user. A computer network validates the transaction using algorithms so that the transaction becomes unalterable. Once validated, the transaction is added to others to create a block of data for the ledger.