What is a bitcoin and how dose it work?

 

      There are nearly 5,500 citizens of India who own smaller or bigger amounts of bit- coin. Although unable to feel the touch of this virtual currency in their wallets, they do not have an iota of doubt about its safety in the vaults of the cyberspace (internet). Everybody is familiar with coins i.e. various sets of identical pieces of metal bearing specific patterns for use as money but this virtual currency is called bitcoin because it is the digital 'avtar' of the 0 and 1 bits. Out of various forms of mediums of exchange invented by humans since the prehistoric times, the bitcoin is the weirdest because it has no physical existence.

      In spite of being 'non-existent, more and more citizens of India are converting their rupees into bitcoins! Of course, the number of bitcoin currency owners is growing slowly as the growth is confined mainly amongst the IT professionals and others connected with this field of technology and that ordinary people in the street have not started clamouring for it yet. However, the scenario in developed countries is quite different. In these countries payments for shopping, dining out, or even for purchasing automobiles are made with the virtual bitcoins as their acceptability is increasing for both, payment as well as recovery of the dues.

      The acceptability of bitcoin as currency amongst tech-savvy people is all the more surprising because bitcoin currency is neither government-issued nor government guaranteed. Only government owned mints and security presses can issue coins and notes to be used as money. Any unauthorised minting of coins or printing of currency notes is treated as serious offenses of counterfeiting or forgery and are likely to attract exemplary punishment under law. Currency notes the world over bear guarantees for payment of an equal amount in the legal tender of the country under the signature of the governor of its central bank. This guarantee in the form of an unequivocal promise is not to be taken lightly because most governments go to great lengths to ensure that coins and currency notes in circulation do not exceed certain predetermined amount based on the gold reserve, foreign exchange reserve and other parameters. But conventional parameters which govern the quantity of money in a country do not apply to bitcoin for two reasons: Firstly, no government or central bank puts it in circulation and secondly, minting or printing of the virtual bitcoin currency which exists only in the cyberspace (internet) is out of question. It is this peculiarity of bitcoin which distinguishes it from other currencies like dollar, euro and rupee etc.

      Foregoing explanation begs the question how is the bitcoin currency created and put in circulation? Let us answer this question by recapitulating an actual incident. In 2008 economic slow down was taking toll of the U.S. banks in particular and the U.S. economy in general. The value of dollar had plunged. Simultaneous debt crisis was taking toll of some European countries like Greece, Spain, Italy and Portugal etc. and creating crisis for the European common currency, Euro. At that time one ingenious person calling himself Satoshi Nakamoto put the exciting concept of bitcoin on the internet. Obviously, the progenitor of bitcoin was an anonymous person or had assumed a fictitious name for safeguarding himself in case bitcoin became a hot currency and caused turmoil in the international currency market in the future.

      On bitcoin currency receiving desirable response eventually, people started making presumptions regarding the true identity of the elusive Satoshi Nakamoto. Ultimately, the search for the creator of Bitcoin whittled down to three persons. One of them happened to be a mathematician and IT expert named Ashish Gulhati of the Indian origin whose IQ score of 180 (considerably higher than that of Einstein's) had already made him famous. Another possible progenitor was one Japanese named Shinichi Mochizuki who was considered by some as the modern day Isaac Newton. The third possible progenitor was Jade 4 Makkellebe, the founder of a company engaged in exchanging dollar into bitcoin and vice versa. No more names have cropped up for consideration and none of the above three have claimed paternity of the cyber currency bitcoin, leaving it surrounded with mystery.

      Let the creator of bitcoin remain unknown if anonymity is what he really wants. More important from our point of view is the acquaintance with bitcoin itself. Since no government or government agency is putting bitcoin in circulation, a person who wants bitcoin currency must do the necessary ‘mining' himself. Manufacturing might have been more elucidating than 'mining'. But no word other than 'mining' conveys the same sense of indescribable joy which is felt by the miner on striking a gold vein or on finding solid gold nuggets at the end of indefinite amount of backbreaking work without any certainty about finding gold. Satoshi Nakamoto (or the unknown ingenious person using that name) developed the software regarding bitcoin mining and put it on the internet in 2009.

      Any person who wants to mine this virtual currency must first download the bitcoin mining software together with the software of the wallet' for storing the quantity of bitcoins mined. Thereafter, employing all the processing capability of his computer, he must carryout processing of some very complex figures. If he succeeds in creating certain stipulated 'sequences' of figures then he gets bitcoin in return. However, some people do not think it worthwhile to rack their brains but they buy bitcoins mined by others with payment through credit card or through e-banking. Believe or not, many prospective buyers of bitcoin buy them with a view to investing their money in bitcoins like investing in a com modity! This is so because the rate at which bitcoins can be exchanged into dollars and vice versa keeps fluctuating. Selling when the exchange rate of bitcoin is high can fetch the seller more dollars and consequently more profit. Some Indian investors of bitcoin have trading as their main objective whereas in the West, bitcoins are acquired more as a medium of exchange i.e. as a currency; though there does exist a class, albeit small, of the investors.

      When bitcoin made its maiden appearance as a currency in 2009, a number of market analysts had made bleak prophesy about its future. It is quite natural that a currency not enjoying government's backing (and through government, the backing of gold reserve) may not be treated as reliable. Add to this shortcoming the bitcoin currency suffered from some shocking computer glitches. In August, 2010 there suddenly cropped up 184 billion bitcoins in the cyberspace. Fortunately, this glitch was rectified in time before it could bring the entire edifice of bitcoin crashing down How could computer hackers overlook such a lucrative field for enrichment? Some computer hackers successfully siphoned off in different attempts 78,000, 43,000 and 24,000 bitcoins in August, 2011, March, 2012 and September, 2012 respectively. These amounts were siphoned off from the 'cyber vaults' of the bitcoin-exchanging companies. The exchange companies were acting as depositories for the customers who had deposited various amounts of bit- coins in their depository accounts.

      Above setbacks in quick succession failed to dampen the spirit of bitcoin aficionados whose ranks have continued to grow gradually. Today, four years after the introduction of the virtual currency bitcoin, nearly 11 million bitcoins are circulating in the cyberspace. There are some strong reasons behind the popularity. One such reason is that most of the American citizens have traditionally subscribed to a very liberal definition of personal liberty. Many of them vehemently reject even the slightest regulatory intervention by the government in their daily life. Although this type of attitude smacks of excessive individualism, it is a reality in the U.S.A. Similarly, government's regulatory monetary policies also raise hackles of many citizens. Hence, they are attracted towards the currency in which the government can not meddle.

      A law-abiding society must devise a set of rules to guide interpersonal transactions, ultimately. Hence, government has drawn up some regulations in respect of transactions involving bitcoins. One important reason behind ready acceptability of bitcoins is that bank commission is avoided as the conversion of dollars into bitcoins and vice versa is done on-line by the buyers and sellers directly. In addition to serving as a medium of exchange, cyber currency bitcoin is increasingly employed as a medium of investment nowadays. Its rate of exchange vis-a-vis dollar is determined by the forces of demand and supply just like share prices in stock market. Overall, bitcoins are passing through a buoyant phase.

      In the first-ever recorded transaction involving bitcoin, one resident of Florida State, U.S.A., paid as many as 10,000 bitcoins in May, 2010 for a pizza ordered on-line by him! Clearly, the purchasing power of a bitcoin was no more than 'a wee bit'! Soon things started looking up and bitcoin started fetching 30 dollars in exchange within a few weeks. But the bull run came to a halt soon and was followed by a crash-the value of bitcoin slid down from 30 dollars to 10 dollars and then to 3 dollars. However, investors who held on their bitcoins in spite of the vicissitudes of market were eventually rewarded as the rising exchange rate reached 1 bitcoin = 265 dollars in March 2013. Many owners of bitcoins booked profit at this exquisite rate with the result that once again its exchange rate came down significantly. Current exchange rate at the time of writing this article: 1 bitcoin = 93.56 dollars.

      It is worth reiterating that market for bitcoins is quite different from money market or currency market. Cyber currency bitcoin is not backed by gold reserve or any other assets. Hence, its value is determined on the basis of how many dollars the prospective buyer is ready to pay per bitcoin. The market price of this cyber currency is governed only by the forces of pure demand and supply unlike market price of a company's stock which is also affected by the profit or loss made by that company. It is essential for maintaining investor confidence that the supply of bitcoins in the market should not exceed the demand for them. On the demand side it is essential that as many business establishments as possible accept the payment in bitcoins. Fortunately, both the supply and demand aspects of bitcoins have remained well matched till now.

      The inventor of the cyber currency bitcoin, Satoshi Nakamoto (or whoever answering to that name) has made special arrangement for keeping its supply restricted. According to the software designed by him, 25 bitcoins come into existence through 'mining' every 10 minutes. But four years later in 2017 the number of bitcoins mined 9 will automatically reduce by one half to become 12.5 bitcoins in 10 minutes and after another period of four years, this rate will further reduce by one half i.e. 6.25 bitcoins will be mined in 10 minutes in 2021 and so on till the year 2140 when bitcoin mining' will come to an end permanently after 21 million bitcoins have been mined. In other words the stock of bitcoins will increase gradually but at a diminishing rate till the year 2140 from which date no more bitcoins will be created.

      In view of the growing population of the world, how will 21 million bitcoins suffice for the financial transactions of billions of people? But this matter has not been over looked by Satoshi Nakamoto. He has decimalized bitcoin as millicoin (0.001), microcoin (0.000001) and Satoshi (0.00000001). Thus 1 bitcoin = 10,00,00,000 Satoshi. Underlying reason for confining the total money supply to 21 million bitcoins and for subdividing every bitcoin into unconventionally small fractions appears to be its creator's desire to impart a reasonable purchasing power to even smallest unit when the upper limit of money supply has been pegged.