On June 22 this year, the Punjab Police arrested six people for kidnapping a Patiala trader, Ashu Jain. The police said an MBA graduate, Deepak Sharma, was the gang leader. The ransom demand: 20 bitcoins.Welcome to the world of bitcoin, the leading light in a cache (computer memory) of new age ‘money’—cryptocurrency—that has been making headlines this year.
Why do criminals demand it as ransom? When the gang kidnapped Jain, a single bitcoin was worth `2 lakh. At the time of going to press, it is around `5 lakh. This translates into nearly three times the return on investment in six months.
Money or Technology?
“At its very basic level, cryptocurrency is a digital or virtual currency that uses cryptography for security. It is literally created from code and is beyond any wallet or actual transaction amount,” says Lalit Singla, senior project manager, Infosys. He goes on to add that a defining feature of cryptocurrency is that just like human beings, it grows organically and each unit is actually unique, in the strictest possible definition of the term. “It is not issued by any central authority,” he adds.
What is the bitcoin then? “A bitcoin is a type of cryptocurrency invented or created to form a digital cash system that is secure and run without any central authority. Bitcon is just one type of cryptocurrency. Others are Litecoin, Namecoin, PPCoin and even Ethereum,” says Gaurav Rai, chief technical officer and director, Techbit Solutions Pvt Ltd, a company based at Mohali, Punjab.
“Bitcoins are created as a reward for a process of coding known as mining. They can be exchanged for other currencies, products, and services. The system is peer-to-peer. Transactions take place between users directly, without an intermediary. These transactions are verified by a computer and recorded in a publicly-distributed ledger called a blockchain,” Singla adds.
Why Have Bitcoins
Become So Big?
If you have money (whether in dollars, rupees or in bitcoins), you want to flaunt it. Yet, how did something that is just a ‘reward for a process of coding’, as Singla puts it, has gone on to become the rage in finance and become so expensive?
At today’s rate of around `5 lakh a bitcoin, it is almost four times India’s per capita annual income. Some handsome reward this. Nikhil Kamath, co-founder and head of trading at Zerodha, a financial services company, says, “A bitcoin is an information technology breakthrough that acts as a tool for the storage, verification and auditing of information, including digital representations of value.”
‘Digital representations of value’ did not seem something that the kidnappers’ gang seemed to be after when they demanded 20 bitcoins as ransom.
Prodded further, Kamath adds, “The bitcoins draw their advantage over other forms of currencies as all users collectively provide the computing power and resources to process transactions. Everybody has a copy of the transactions in the system, so the central, standalone middleman is eliminated and security is assured. ”Explains Vishal Kedia, founder of IT firm DevelopTech, “The process involves running an algorithm on your hardware and bitcoins, thus mined, will be proportional to the power and other computational resources you expend. Anonymity is one of its strengths.”
There are only 21 million bitcoins that can be mined. “The first inventor way back in 2009 wanted it this way. By January 2018, approximately 80 per cent of all bitcoins will have been mined,” Kamath adds.
Will Your Grocer Accept This Currency?
Quite the favourite buzzword now, bitcoin, or cryptocurrencies, will take time to actually wriggle into our lives and trouser wallets (sorry mobiles and laptops). “I do not think it is a fad,” Kamath says, emphatically. However, making it widely available will occupy the attention of inventors, coders and the Central Banks for now. Until, the man on the street recognises bitcoins, it cannot really be said to have gained currency.
Fundamentally, a currency ought to have a universal equal value in its geography with the guarantor assuming the responsibility of reimbursing its ‘value’, even if everyone else refuses to accept it. For instance, in demonetisation, what the Narendra Modi government, or to be more correct the Reserve Bank of India, did was announce withdrawal of that guarantee on `500 and `1,000 notes. Getting this guarantee, however, has a cost.
You incur transaction costs in using the currency, you pay taxes and then also you have to remain visible always in your finances. Buying a home, that new Audi, that fabulous holiday, everything has to be submitted to the central authority, the Central Banks, the governments for the luxury of spending that money.
And they take their cut! You have to pay the central authority for maintaining the system for everybody and, of course, there is a trail to whatever you spend, where and why.
Cryptocurrencies are seen as an answer to these problems, as they require no central authority to validate or OK transactions. Thus, there can really be no tax. Who will anyone tax, when there is no owner?
The only guarantee that any cryptocurrency offers that these will stay in circulation is the belief or the faith that each user has in the system of coding and the value of each bitcoin code. The faith (if you like it) is sought to be buttressed by the fact that everybody has a copy of the entire transaction sheet, from when the first bitcoin is created (minted, rather) to where it is spent and so on. Now, as everybody has a copy of the ledger, ‘who’ is not important here and the system does not ask for it. As of now, your neighbour could be holding one lakh bitcoins (a mammoth `5,000 crore) you will never even know.
“The value a bitcoin denotes has seen excessive volatility over its short history and increased acceptance, and liquidity should help diminish the uncertainty,” Kamath explains. He adds a bitcoin is programmed to be divided into eight decimal places. This should mean that, at today’s rates, a smallest unit of bitcoin should fetch you around `63,000. So, for it to be really called a currency, it has to become more liquid and the code that it creates has to be universally accepted, once and for all.
Money talks, and can generate followers. That same seems to be the case for cryptocurrency that—at the end of the day—is just computer code that a group of people have got together to value and exchange it among themselves, primarily to save transaction costs for all of them.
And, significantly, the groups that use and deal in cryptocurrency also peg it against the dollar in the US and rupees in India to signify value.
What is in it for You?
What then, is the inherent value in a bitcoin or any cryptocurrency? This remains a troubling question that has no clear answer, as yet. The answer, however, could be far deeper and revolutionary.
Recently, Warren Buffet told Forbes columnist John Wasik, “You can’t value bitcoin because it’s not a value-producing asset... it’s a real bubble in that sort of thing.”
Yet, the real value of the concept of cryptocurrencies lies in the idea behind it—the intuition that there can be public ledgers for transactions, financial or even otherwise. This is technically called a block chain. The real revolution that will gain ‘currency’ is in this—a block chain.
“A block chain is just a unique way to store all transactions. A block chain is a series of blocks that record data in a way that can’t be modified and tampered by hackers. The key to the blockchain concept is that data is stored on decentralised locations and any change made to the database is immediately sent to all the users because data is in the hands of users,” says Rai of Techbit solutions.
Banks are also using this to store transactions and creating their own way of communication. This technology is actually catching on quite fast for transactions among banks itself, and between banks and other financial institutions.
Singla of Infosys adds, “Approximately six times an hour, a new group of accepted transactions, a block, is created, added to the blockchain, and quickly published to all nodes. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary in order to prevent double-spending in an environment without central oversight.”
Remember, though, that there are almost always hundreds of transactions a second, so the blockchain is like a big cheque collection box at the banks these days.
For those who have bought or sold bitcoins, this is why the confirmation time for your transaction is there and it is in minutes.
Money Can Have various Clans
What the blockchain technology or the algorithm essentially means is that, in theory, any group of a minimum of three (potentially infinite number) people can join together to create a new cryptocurrency that will then circulate among themselves and no one else.
In the meantime, other currencies emerge and they compete for the same space.
This, in cryptocurrency parlance, is called ‘FORKING’. This happens when more than 50 per cent of members of the blockchain that governs cryptocurrency decide that it is time they got themselves something new. The followers march out, ensuring that they can now form a new blockchain with newer coding rules and attract followers.
The second way to see cryptocurrency is that it is a democratic way of having your own money. At less than 10 years in circulation, the experiment is actually something that has caught on as it has implications in every sphere of life—finance, politics, social, emotional and psychological. Financially, it is not even clear what it signifies except that it has benefitted people who bought it just to see its value appreciate.
Socially, it remains a niche area with mass acceptance far away. However, for people who have invented and made it possible, it will always remain their child, so emotional and rational analysis of their own creation, for them, will be a difficult task.
Why Aren’t More People Minting?
As things stand, few would recognise a bitcoin if it was in their wallets today. Simply because it does not exist in the world as we perceive it. It is on a network and we have a virtual alphanumeric key to actually open and use it. So very different from smelling and touching the `2,000 note in November 2016.
To make bitcoins, you need to work to mint them yourself. Why then is not everybody quitting their jobs to mint bitcoins? After all, it could get `5 lakh at today’s rate.“Minting bitcoins requires a lot of skill, hardware and practice. You need to be able to figure out an answer to complete the transaction in terms of input; the output is a given, the creation of a bitcoin,” says Satvik Vishwanathan, co-founder, Unocoin, a bitcoin wallet company. He says they help people buy and sell bitcoins for a 1 per cent commission, after registration on their platform and satisfaction of all KYC norms.
Their website says that they tax all transaction at a GST rate of 18 per cent. Bitcoins, meaning the address or key of where they are stored, are sent to an email ID of the user as and when requested.
Cryptocurrencies and the Economy
If there is to be no intermediary and no regulation, what will any Central Bank do? Hence, the concept is seen with some hostility, though not outright rejection.
As per a statement by various Central Banks around the world at varying times, increasing use of cryptocurrency (bitcoin) will influence the price of credit for the whole economy and it will make it difficult for statistical agencies to gather data on economic activities. There will be inter-governmental
challenges to determine exchange rate policies and so on.
The legal status of cryptocurrencies varies substantially from country to country, and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins in their own way. In recent past we have seen frauds in this trade. Very rarely, a mathematical chance of near zero, people can simply disappear with user deposits, clean their traces and voila!, we are robbed.
The Promise or a Chimera?
The ‘market’ of and for cryptocurrencies is fast and wild. Nearly every day, new cryptocurrencies emerge, old die, and some early adopters do get wealthy.
Every cryptocurrency comes with a promise, mostly a big story to turn the world around. People buy bitcoin to protect themselves against the devaluation of their national currency. Mostly in Asia, a fledging market for bitcoin remittance has emerged.
Yet bereft of legal status, bitcoins actually have a long way to go. People who lost money in the 2014 collapse of Mt. Gox, the world’s largest bitcoin trading exchange then, are not likely to get a penny back, according to reports.
Chandigarh-based financial planner Harpreet Singh says, “The only thing that has happened is that people ask me what is bitcoins. However, in mainstream financial planning, we are not recommending it to clients.”
Kedia, of DevelopTech, is forthright, “It is very risky, and one should tread with caution. There is a grey market for bitcoins that is doing good business. The concept will
pick up only when a major government backs cryptocurrency. Till then, it will remain a speculative investment vehicle only. No one should invest their savings here. Put in what you can afford to lose.”
Can the soaring value of bitcoins encourage more people to mine it themselves? “It is an expensive affair; requires capital and labour. China has emerged as a major centre where bitcoins are being mined,” he says.
Karan Checker, an entrepreneur with a traditional business, SNA Power Engineering Pvt Ltd, says, “Cryptocurrency will actually only mean something when you can buy bread using it. I believe when 10 per cent of the world’s population adopts it, it will then acquire a critical mass. Only then will governments really get into emergency mode and take real steps to actually either ban it with force or legitimise it. But again, no can really control cryptocurrency.”
it’s here to stay
Money talks, and is music to most ears, except maybe the lone ascetic. There is little doubt that cryptocurrency is here to stay and play its tunes for the world to enjoy. Yet, where’s the band (the visible backing as in a traditional currency) for it? This remains a million dollar (read bitcoin) question.
Cryptocurrency is like the world of internet, creeping up on us. To the point that now a world before internet seems… well unreal and dreamlike. Did we actually wait for a trunk call to connect to relatives in a town four hours away? In 2050, the question might be, did we actually take out a paper note to buy bread?
Kamath of Zerodha ends it, “This is a critical time for cryptocurrency and inventors have to be cautious and soon get backing of some kind for their idea in traditional, easy-to-visible forms. Cryptocurrency is too radical an idea in its present form.”
The Patiala kidnappers were ahead of their times and could be forgiven for the unusual demand.
Ecuador has banned bitcoins. Japan, however, is encouraging these—Japanese are said to be the original inventors. Countries such as Russia
are embracing bitcoin and other currencies. Banks across the world
are working on an engagement
strategy with the phenomenon. In there, cryptocurrencies do not enjoy any legal status.
3 ways Cryptocurrency Could Change Life for the Worse
1. All transactions are irreversible. If you send bitcoins to someone by mistake, there is no way on this earth to get it back, unless the other party wants to return it.
2. After a point, chaos could result with ‘forking’ (factions in political sense) going out of hand; after it, your money will be stored just as a mumbo-jumbo of code.
3. Value could vary widely, even within hours. A loaf of bread available for `30 at noon could cost `10,000 by 5pm. Stability of pricing in terms of real-world goods and services will be an issue.
3 Ways Cryptocurrency Could Change Life for the Better
1. Paper notes will go out of circulation
2. Lower transaction costs; cheaper services
3. Democratic way of life, crime rate could be
lower as much of lure of the money comes
from the way it looks and feels
“Cryptocurrency will actually only mean something when you can buy bread using it. I believe when 10 per cent of the world’s population adopts it, it will then acquire a critical mass.” Karan Checker, entrepreneur
“The process involves running an algorithm on your hardware and bitcoins, thus mined, will be proportional to the power and other computational resources you expend.”Vishal Kedia, Founder, DevelopTech
“Minting bitcoins requires a lot of skill, hardware and practice. You need to be able to figure out an answer to complete the transaction in terms of input; the output is a given, the creation of a bitcoin.”
Satvik Vishwanathan, Co-founder, Unocoin, a bitcoin wallet company
“A bitcoin is an information technology breakthrough that acts as a tool for the storage, verification and auditing of information, including digital representations of value.”Nikhil Kamath, Co-founder and head of trading, Zerodha
“A bitcoin is a type of cryptocurrency created to form a digital cash system that is secure and run without any central authority. Bitcon is just one type of cryptocurrency.”Gaurav Rai, CTO and director, Techbit Solutions, Mohali