Bitcoin - An Introduction to Indian Investors

What is a Bitcoin

Bitcoin was introduced on 31 October 2008 by an unknown group or a person named as "Satoshi Nakamoto". It is basically a   digital crypto currency asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. The identity of Nakamoto is not confirmed yet. The bitcoin transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain. Since the system works without a central repository or single administrator, it is categorized as a decentralized virtual currency. 



How Bitcoin Works

Bitcoins are created as a reward in a competition in which users offer their computing power to verify and record bitcoin transactions into the blockchain. This activity is referred to as mining and successful miners are rewarded with transaction fees and newly created bitcoins.Bitcoins can be exchanged for other currencies, products, and services though bitcoin users are not protected by refund rights.

What is Bitcoin Mining

Bitcoin follows a competitive mining scheme, based on a hash-puzzle. The miners have to compete with one another, using the computing resources at their disposal, to append a new block to the blockchain ledger. Bitcoin employs a smart incentive mechanism to ensure honesty of the miners, as well as to regulate the influx of Bitcoins in the market. To further regulate the flow of Bitcoins, the hash-puzzle in designed in such a way that new Bitcoin blocks are created (mined) every 10 minutes, on an average. The mining competition based on the hash-puzzle is also known as a proof-of-work strategy for consensus.

Consensus: Bitcoin follows a standard majority consensus, where each miner may choose which block in the chain to append to, and eventually the longest chain sustains. It is widely believed that as long as honest parties control majority of the computing power, the longest chain will grow and outperform other forks.

Can I purchase Bitcoin?


The answer is yes. Bitcoins can be purchased from different bitcoin currency exchange networks online. These networks allow users to buy and sell Bitcoins from their chosen form of currency including INR, USD, and Euros. In India, you can purchase BTC currency from following exchanges.
  •  BTCXIndia
  •  Unocoin
  •  LocalBitcoins   
  •  Coinsecure
Through these websites you can easily buy bitcoin with INR from any online banking or through NEFT/RTGS. Selling bitcoin is just as easy, you will receive INR directly into your bank account. All banks that have IFSC are mostly supported.

Why RBI warned the usage of Bitcoin in India

In 2013, RBI warned the usage of all virtual currencies including Bitcoin siting below reasons and clearly stated that Bitcoins are not safe.
The creation, trading or usage of VCs including Bitcoins, litecoins, bbqcoins, dogecoins etc as a medium for payment are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities. As such, they may pose several risks to their users, including the following:
  • VCs being in digital form are stored in digital/electronic media that are called electronic wallets. Therefore, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack etc. Since they are not created by or traded through any authorised central registry or agency, the loss of the e-wallet could result in the permanent loss of the VCs held in them.
  • Payments by VCs, such as Bitcoins, take place on a peer-to-peer basis without an authorised central agency which regulates such payments. As such, there is no established framework for recourse to customer problems / disputes / charge backs etc.
  • There is no underlying or backing of any asset for VCs. As such, their value seems to be a matter of speculation. Huge volatility in the value of VCs has been noticed in the recent past. Thus, the users are exposed to potential losses on account of such volatility in value.
  • It is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.
  • There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.

Is buying Bitcoin legal in India?

Though RBI was issued sereral warnings, Bitcoin transactions are not illegal. Bitcoin is totally legal to buy in India under existing laws of Indian Government, but the risk involved is high.

In the recent press release, Reserve Bank of India advises that it has not given any licence / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk

Bitcoin - Recent Developments in India

In Jan 2017, RBI’s research arm, Institute for Development and Research in Banking Technology (IDRBT) has completed the first ever end-to-end test of the technology behind Bitcoin in a project involving regulators, banks, financial institutions and clearing houses. IDRBT conducted the project using the technology behind Bitcoin in a trade application with banks and the National Payments Corporation of India (NPCI).

IDRBT released a white paper titled, ‘Applications of blockchain technology to banking and financial sector in India’.  The white paper concluded that the overall proof of concept provided a good demonstration of the use-cases and helped broaden the understanding of the technology and its potential to other real-life applications. 

 The technology partner for the project was New York-based MonetaGo, which provided the actual platform for test cases including payments with its proprietary enhanced information payments system (EIPS) and trade finance. MonetaGo said that the project was believed to be the first ever end-to-end test of blockchain using existing banking protocols, including regulators, banks, financial institutions and clearing houses.

150% return in 1 year

As shown in the below graph, Bitcoin has given 150% returns in the last year. So, planning to try your luck..huh..?😋

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3 comments:

  1. Dear Admin Sir, IHG Blog,

    It is reported that in China Bitcoins are EXCESSIVELY used to "siphon local currency in to USD or Euro etc..." without any legal authorization of Chinese Govt Agencies or PBC, such activities has resulted in LARGE OUT FLOW OF CAPITAL leading to weakening of Chinese Currency and therefore, China has called "Closed Door Meeting with all such Bitcoins Exchanges Officials" to deal with the Bitcoins related problems...and issue necessary orders...

    In India too, if any one deals in ANY foreign currency without written authorization of RBI, he may be subject to violation FEMA and will ultimately land up in JAIL !!!

    regards,

    AJAY

    ReplyDelete
    Replies
    1. Dear Ajay, Thanks for that insite. But does we have any reference to prove that Bitcoin trade and mining is FEMA violation. Bitcoin is a virtual currency and I am not sure it comes under FEMA

      Delete
  2. Dear Admin Sir, IHG Blog,

    Thanks for your reply !

    In a Bitcoin Transaction: We are not dealing in a mere Video Game but with such virtual Currency which may be EFFECTIVELY utilized to Buy either a Foreign Currency (USD or EURO) or ANY Goods, so whether it be a Virtual or a Physical, but it is a kind of "Currency Transaction(s)" & by definition all the authorities for Banking & Currency Transactions lies ONLY with Central Bankers of our Country i.e. RBI and only subject to Prior Approval or Authorization of RBI. E.g. Use of ANY Virtual Wallet facilities by say for example: by PayTM etc. are "WITH PRIOR RBI LICENCING" ONLY....

    Money Laundering is other potent tool of Govt. which they can use against ANY such person(s) if they have sufficient evidence of the ANY unauthorized Financial Transaction e.g. Corruption by a Politician or by a Govt Officials or any Corporate entity or ANY Individual(s) etc...

    The Greatest Risk is THAT, THERE IS NO THIRD PARTY GUARANTEE in Bitcoin Transactions like NSE / BSE or MCX where your Payments are FULLY SECURE under all the circumstances !!!

    Keeping in mind above aspects: WE MUST STAY-AWAY FROM BITCOINS:

    regards,

    Ajay

    ReplyDelete