A Norwegian man buys a house with a Rs27 investment; a British man searches for a hard drive now worth Rs7.5 mn in a garbage dump; and a man tears his hair out realising he paid Rs2.3 mn for two pizzas in 2010. All that happened because of the bitcoin, a concept of virtual currency introduced in 2009, which is slowly but surely nudging its way into the city too.

Why is this online currency, or crypto-currency as it is called, gaining so much currency today? Ajjai Chandra, developer at Ten Miles, a software product company, says it’s primarily because it is not controlled by a single person or institution.

“It decentralises the monetary system. It takes power from the hands of banks and puts it in the hands of the people,” says the 30-year-old, who has been into bitcoins since 2011 and who swooped in on the crypto-currency world when it was worth just about Rs200.

And power it is! A list of websites accepting bitcoins for payment shows that you can get everything from underwear to mini cannons for your bitcoins. The transactions are completely anonymous and cannot be traced back to you because of strong cryptographic programming when the transactions occur. This is a two-edged sword - while it ensures secure transactions, it also means that criminals can deal in drugs or guns through it. A drugs website called Silk Road, which was shut down recently by the FBI, transacted using bitcoins.

In fact, businesses in countries like Iran have evaded sanctions by using bitcoins for payment. One such company, persianshoes.com, claims: “The problem is we operate in Iran and most payment systems either are not willing to serve us at all or impose a huge risk on our business.” But of course, with bitcoins, there is no ‘willing to serve’ clause. The value of a bitcoin is not determined by countries or by banks.

Market Dynamics

How else is the value of a bitcoin determined? “Entirely by what you and I are willing to pay,” says Ajjai. Unlike a country’s currency, which is determined by several factors such as printing more notes or interest rates, bitcoin value is entirely determined by the demand-supply cycle.

To ensure that there is no inflation of currency value, only a fixed number of bitcoins come into existence in a day, through a process called mining, which in simplified terms, is book-keeping for the bitcoin transactions that occur in the network. If a client computer in the bitcoin network does some book-keeping work like authenticating transactions, all the other clients on the network agree that it deserves a certain number of bitcoins, and that number is then created out of thin air.

But the process of mining bitcoins keeps getting tougher. In 2009, when they first came into existence, they could be mined using a single desktop. Today, several complex machines need to run in parallel to mine even one, says Ajjai. Do people in Chennai use bitcoins? “It is still new, and some freelance programmers have started asking for payments in bitcoins,” says Ajjai. But, he adds, there is a screen of technicality around the concept and it’s a little more difficult to use than cash.

Not Taxable?

One of the reasons for the currency’s volatility is that many people view it as an investment rather than a currency. As an investment, is it taxable? “It’s not exactly a currency. Currency is related to a country. This is a different financial instrument, and any gains from it should be declared under ‘income from other sources’,” says Ajoy Prabhakar, a Chartered Accountant.

The other reason is that only a small fraction of people use it as currency.

While some see it as an investment, others like Santhana Amuthan, iOS developer at Ten Miles, are just curious. “It seems interesting. I’m going to invest Rs10 or something, for which I will get only 0.01 bitcoins,” she laughs. That’s right - bitcoins can be split up into a denomination so small, it can eventually reach 10^-8 (10 to the power of -8) bitcoins.

So, will the bitcoin bubble burst? “Bitcoins are being legitimised to a greater extent each day. A US Senate committee has deemed bitcoins to be legitimate (On November 18). The only way it can burst is if there is a massive hack,” says Adithya Raghavan, software engineer.

However, there were also sudden fluctuations in value when Silk Road was brought down and when China banned bitcoin transactions in banks. Which way will India go?