Bitcoin is a crypto currency that came into existence in 2009. Since then, it has become the most widely used and recognized crypto currency. The founder of Bitcoin is anonymous. All people know about is an alias that they used, Satoshi Nakamoto. Bitcoin has gained worldwide recognition. In fact, you can now use Bitcoin for booking hotels, flights, etc in many countries.
Introduction to Crypto Currency
The word cryptocurrency speaks for itself. Formed from the two words crypto meaning hidden, and currency i.e. a medium of exchange. Cryptocurrency is a digital medium of exchange that is not controlled by any central authority. In simple words, it is decentralized. The currency is secured using a technique called cryptography. Due to this, it becomes almost impossible to counterfeit it or spend it twice.
How does Bitcoin Work?
Bitcoin just like most cryptocurrencies works on a technology called blockchain. Blockchain is a technology that combines the essence of Peer-to-Peer technology (P2P) and Distributed Ledger Technology (DLT).
Blockchain is a chain build-up of different blocks. These blocks store data and once they are filled with data, they get attached to the previous chain. Through this process, the blocks keep on adding and chronologically forming a chain. Therefore, the entire data related to bitcoin is stored in this chain.
DLT makes it possible for every user across the globe to access these records. Due to this, one cannot replicate an existing Bitcoin. One of the most common myths that people have in mind is that it cannot be created. But that is not true.
Bitcoin mining is the process through which new bitcoins can be minted and added to the blockchain. However, since its existence, more than 18.6 million bitcoins have been mined out of the 21 million. One surprising fact is that it took just 10 years to mine 18.6 million bitcoins. However, it is said that to mine the remaining 2.3 million can take up to 120 years.
The increasing demand combined with the decreasing supply of Bitcoin is what makes it valuable. This in turn surges its price. In 2009, the value of Bitcoin was $0 and now the value of 1 Bitcoin is nearly $50,000.
Let us now take a look at some advantages and disadvantages of Bitcoin:
Advantages of Bitcoin:
● Acceptability:
The currencies that we generally use are limited to a few countries. The currency of one country might not be valid in the other. However, that is not the case with it.
A Bitcoin does not have any real money value. The currencies that we use (also called fiat money) are generally backed with some assets like gold etc. Therefore they derive their values from them. However, a Bitcoin is not backed by any asset.
Since it does not have any real money value, it can be used anywhere in the world without conversion. Therefore, it gives an advantage over fiat currency.
● No Central Authority:
Fiat currencies are managed by a central authority that issues and regulates them. An example of this could be the Reserve Bank of India that regulates Indian Rupees. In the case of Bitcoin, there is no organization to regulate or manage it.
Therefore, you are the only person in charge of the currency you own. Since there is no central authority for regulation, Bitcoin cannot be seized. This is because the ledger is saved in the form of a blockchain that is spread across the globe.
● Non-taxable:
The bitcoins you own can only be accessed by you. Therefore, no third party like the government can evaluate the number of bitcoins you own. As a result, the taxation of Bitcoin is not possible. Other sources of income such as rental, salary, capital gains, etc have a taxation system. That is not the case with bitcoin. There is no taxation system developed for bitcoin yet.
Disadvantages of Bitcoin:
● Usability:
Bitcoins and their owners are spread across the globe. However, some countries do not accept Bitcoins. So, you can own a Bitcoin but you might not be able to use it in such countries.
In terms of usage, there are a few countries that have started accepting Bitcoin as a direct mode of payment. However, it is not as popular as other forms of currency. In fact, some countries have banned transactions in Bitcoins completely.
● Volatility:
Bitcoins are highly volatile in terms of price. Since it does not have a value of its own, it fluctuates as per the demand. Another factor influencing the price of Bitcoin is news.
Lately, we have seen how tweets by some famous personalities have brought about changes in the price of the currency. Thus, one should always be aware of the risk involved.
● No guaranteed valuation:
As mentioned earlier, the value of a Bitcoin is not derived from an asset. Therefore, there is no fixed value of a Bitcoin. Theoretically, it can fall or rise limitlessly. If a large group of users dumps their Bitcoins, it would lead to a sharp fall in the price. This sudden fall can lead to panic selling among those who own Bitcoins.
Bitcoins are a great form of cryptocurrency. The way we are developing digitally, cryptocurrency might have a huge demand in the future. Thus it can be a great investment avenue. At the same time, one should always be aware of the risks associated with it. We saw that bitcoins do not have a value of their own, this makes it a very risky investment avenue. The returns can be tremendous but so are the risks involved.
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