Indian Finance Minister Mr. Arun Jaitley in his 5th and last full budget before general election, to be held in 2019, clear up the government’s intentions regarding Bitcoin.

He announced to ban the use of Bitcoin and other cryptocurrencies for payments, kicking Bitcoin’s already-sliding value further down the slope. It started probing illegal exchanges in December 2017, and also established a panel to work out new policies.

The news likely contributed to a drop of 6.5% in Bitcoin’s value over the last 24 hours, leaving the value of most popular virtual coin at $9,625 mark on 1st February 2018. Bitcoin, which soared neared $20,000 in December of 2017, has had a fearful time since then, partly thanks to regulatory moves against it in South Korea.

Its slide made cryptocurrency investors poorer by $44.2 billion in January 2018 alone.

Let’s look into this crypto currency in detail

1. What is a Bitcoin?

Bitcoin is a cryptocurrency, a digital resource designed to work as a medium of exchange that uses cryptography to control its creation and management, rather than relying on central authorities like other medium of exchange do.

In simple language, bitcoin is a digital currency. No bills to print or coins to mint. It is decentralized and there is no government, institutions (like a bank) or other authority that controls it. Owners are anonymous and instead of using names, tax IDs, or social security numbers, bitcoin connects buyers and sellers through encryption keys. And it isn’t issued from the top down like long-established currency, rather, bitcoins are mined by powerful computers connected to the internet.

2. History of Bitcoin

Bitcoin was invented in 2009 by a person (or group) who called himself (or themselves) Satoshi Nakamoto. His (or their) stated goal was to create a new currency system basically electronic cash system that was completely decentralized with no server or central authority. After ploughing the concept and technology, in 2011, Nakamoto turned over the source code and domains to others in the bitcoin community and subsequently vanished.

Check out the chronological development in Bitcoin over years:

  • The Pre-Bitcoin years (1998 – 2009)

Although Bitcoin was the first established cryptocurrency, there had been previous attempts at creating online currencies with ledgers secured by encryption. Two examples of these were B-Money and Bit Gold, which were formulated but never fully developed.

  • The Mysterious Satoshi Nakamoto (2008)

A paper called Bitcoin- A Peer to Peer Electronic Cash was posted to a mailing list discussion on cryptography. It was posted by someone calling themselves Satoshi Nakamoto, whose real identity remains a mystery to this day.

  • Bitcoin begins (2009)

The Bitcoin software is made available to the public for the first time and mining begins. Mining is the process through which new Bitcoins are created and transactions are recorded and verified on the blockchain.

  • Bitcoin is valued for the first time (2010)

Before 2010, bitcoin had never been traded, only mined, as it was nearly impossible to assign a monetary value to the units of the emerging cryptocurrency. In 2010, someone decided to sell theirs for the first time by swapping 10,000 bitcoins for two pizzas and that marked the beginning of trade in bitcoins. If the buyer had hung onto those Bitcoins, at today’s prices they would be worth more than $100 million.

  • Rival cryptocurrencies emerge (2011)

As Bitcoin increases in popularity and the idea of decentralized and encrypted currencies catch on, the first alternative cryptocurrencies appear. These are sometimes known as altcoin and generally try to improve on the original Bitcoin design by offering greater speed, anonymity or some other advantage. Among the first to emerge were Namecoin and Litecoin. Currently there are over 1,000 cryptocurrencies in circulation with new ones frequently appearing.

  • Bitcoin price crashes (2013)

Shortly after the price of one Bitcoin reaches $1,000 for the first time, the price quickly begins to decline. Many who invested money at this point will have suffered losses as the price plummeted to around $300 – it would be more than two years before it reached $1,000 again.

  • Scams and theft (2014)

Perhaps unsurprisingly for a currency designed with anonymity and lack of control in mind, Bitcoin has proven to be an attractive and lucrative target for criminals, especially cybercriminals. In January 2014, the world’s largest Bitcoin exchange Mt.Gox went offline, and the owners of 850,000 Bitcoins never saw them again. Investigations are still trying to get to the bottom of exactly what happened but whatever the story, someone dishonestly got their hands on a haul which at the time was valued at $450 million dollars. At today’s prices, those missing coins would be worth $4.4 billion.

  • Ethereum and ICOs (2016)

One cryptocurrency came close to stealing Bitcoin’s thunder in the year 2016, as enthusiasm grew around the Ethereum platform. This platform uses cryptocurrency known as Ether to facilitate blockchain-based smart contracts and apps.  Ethereum’s arrival was marked by the emergence of Initial Coin Offerings (ICOs). These are fundraising platforms which offer investors the chance to trade what are often essentially stocks or shares in start-up ventures, in the same manner, that they can invest and trade cryptocurrencies. In the US the SEC warned investors that due to the lack of oversight ICOs could easily be scams or ponzi schemes disguised as legitimate investments. The Chinese government went one further, by banning them outright.

  • Bitcoin reaches around $20,000 (2017)

A gradual increase in the places where Bitcoin could be spent contributed to its continued growth in popularity, during a period where it’s value remained below previous peaks. Gradually as more and more uses emerged, it became clear that more money was flowing into the Bitcoin and cryptocoin ecosystem.

The value of bitcoin jumped from $997 to over $19,661 and its popularity has soared exponentially. The currency went mainstream as it became listed on two futures exchanges CBOE and CME. The listing of Bitcoin Future contracts on these exchanges has boosted the legitimacy of bitcoin and made it more widely available. Despite the futures contracts providing ability to short bitcoin, the value of the cryptocurrency hits an all time high.

On August 2017 bitcoin split into two derivative digital currencies, the classic bitcoin (BTC) and the Bitcoin Cash (BCH). The split has been called the Bitcoin Cash hard fork.

Banks including Barclays and Citi Bank, have said they are investigating ways they might be able to work with Bitcoin. Meanwhile the technology behind Bitcoin, blockchain, has sparked a revolution in the fintech industry (and beyond) which is only just getting started.

Since its introduction in January 2009, Bitcoin (BTC) has come a very long way. Sometime in early 2011, Bitcoin touched the value of $1, a new record back then. As its popularity grew, so did its acceptability. It didn’t take long after that for people to start betting on the value of Bitcoin.

3. How Bitcoin works?

A person or group, or a company mines bitcoin by doing a combination of advanced math and record-keeping. Here’s how it works.

  1. When someone sends a bitcoin to someone else, the network records that transaction, and all of the others made over a certain period of time, in a block.
  2. Special software called the miners, inscribe these transactions in a gigantic digital ledger. These blocks are known, collectively, as the blockchain. The blockchain is an eternal, openly accessible record of all the transactions that have ever been made.
  3. Using specialized software and increasingly powerful plus energy intensive hardware, miners convert these blocks into sequences of code, known as a hash.
  4. Producing a hash requires serious computational power, and thousands of miners compete simultaneously to do it. It is like hundreds of chefs, in a frenetically excited manner, racing to prepare a new, extremely complicated dish and only the first one to serve up a perfect version of it ends up getting paid.
  5. When a new hash is generated, it is placed at the end of the blockchain, which is then publicly updated and propagated. For his or her trouble, the miner currently gets 12.5 bitcoins which, in December 2017, is worth more than $225,000.

4. What determines the value of a bitcoin?

The value of a bitcoin is determined by what people will pay for it. In this way, there’s a similarity to how stocks are valued.

The protocol established by Satoshi Nakamoto dictates that only 21 million bitcoins can ever be mined. About 12 million have been mined so far and so there is a limited supply, like with gold and other precious metals, but no real intrinsic value. There are numerous mathematical and economic theories about why Nakamoto chose the number 21 million. This makes bitcoin different from stocks, which usually have some relationship to a company’s actual or potential earnings.

Without any government or central authority at the helm, controlling the supply of bitcoin, the value is totally open to interpretation. This process of price discovery is the primary driver of volatility in bitcoin’s price, and invites speculation on investment in bitcoins.

Bitcoin has made Satoshi Nakamoto a billionaire many times over, at least on paper. It’s minted plenty of millionaires among the technological pioneers, investors and early bitcoin miners. According to the Fortune, the Winklevoss twins, who parlayed a $65 million Facebook payout into a venture capital fund that made early investments in bitcoin, are now billionaires.

5. How you can buy a Bitcoin?

If you’re willing to assume the risk associated with owning bitcoin, there is an increasing number of digital currency exchanges like Coinmama, CEX, Kraken and Coinbase, where you can buy, sell and store bitcoins. These are the largest and most established of digital currency exchanges.

Getting started is about as complicated as setting up a Paypal account. With Coinbase, for example, you can use your bank or Paypal account to make a deposit into a virtual wallet, of which there are many to choose from. Once your account is funded, which usually takes a few days, you can then exchange traditional currency for bitcoin.

If you are from India and interested in making investment in Bitcoin, read this-How to buy Bitcoins in India? And What is the Minimum Amount to Invest?

6. Are there other cryptocurrencies like Bitcoin?

The explosion in price and prominence of bitcoin has led to the growth of dozens of other cryptocurrencies. Meanwhile, companies are betting that blockchain, the underlying technology of bitcoin, could fundamentally change the economy, leading to a surge in blockchain projects.

Some of popular cryptocurrencies are:

Here, we throw some light on the prospects of top cryptocurrencies in detail – Top 10 Cryptocurrencies That People Are Investing In.

7. The future of cryptocurrencies

Second-generation cryptocurrencies include altcoins with more advanced functions, that harness the computing power of the blockchain. An example is Ethereum – the blockchain can execute “smart contracts”.

These are pieces of computer code that can interact with other coded contracts and perform work – for instance moving money around and making decisions. This could be the start of an autonomous financial future dictated by machines rather than humans.

8. Investment in bitcoin

Bitcoins are highly risky and unstable instruments to invest in. Bitcoins can make you rich or take away everything you own within a day. It is a game of risk assessment and requires investors to have knowledge of what they are doing.

Various risks associated with investing Bitcoin:

Type of risk Risk associated
Extreme volatility Prices of Bitcoin have been extremely volatile, which makes them very high investing option. There is not enough data for experts to analyse them, so people are investing with imperfect information and joining the herd of speculators. This might lead to form a bubble that will eventually burst causing widespread losses to investors.
Intangible nature Another big issue with Bitcoin is the lack of clarity about its origin. These are complex mathematical formulae which are intangible in nature. So, it can be very risky for businesses, industry and people to trade or invest in Bitcoins as it is not backed by any tangible asset, like commodity (gold, silver, precious metals etc) or currency, but by sheer demand on investors.
Unregulated space They operate in unregulated space in India i.e. unlike other investment instruments, bitcoins are not regulated by government bodies or banks. You cannot approach to anybody for grievance redressal.
Legality issue There is lot of confusion over legality of Bitcoins in India. Bitcoins are not recognised by Reserve Bank of India (RBI) though haven’t been declared illegal by RBI or any other authority in India. But RBI has issued 3 press releases cautioning investors over investment on Bitcoin

If you are very tempted, go ahead and invest, but make sure to invest an amount that you are not afraid to lose completely. Bitcoin is extremely volatile and trusting it with money that is dear to you does not seem like a good idea.

One mistake that people often commit is of expecting situations and performance to remain the same. If the price of a share is rising, they assume it’ll continue rising. And the same goes the other way too. A share the price of which is falling is assumed to be a share that’ll continue falling. This is a big mistake.

Just because Bitcoin has been gaining value over the past few years does not mean it’ll go on gaining. It does not also mean that if its price starts falling, it’ll take a long time to fall. It may or may not follow that path. Given just how volatile Bitcoin is, its value could erode in a very short period of time.

Read-8 Reasons to Invest and Not to Invest in Bitcoin, before going for investing in Bitcoins..

9. Indian regulators view on Bitcoins

View of Indian regulators as follows:

  1. On December 24, 2013, the Reserve Bank of India (RBI) cautioned the users, holders and traders of virtual currencies, including bitcoins, about the potential risks that they are exposed to. “The creation, trading or usage of (virtual currencies) VCs including Bitcoins, 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,” the RBI had said in a press
  2. On February 1, 2017, the central bank again reminded the users of risk involved in bitcoin trading. “The 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,” said RBI in the released early in 2017.
  3. On December 5, 2017, the RBI reiterated its warnings in wake of significant spurt in valuation of bitcoins. “Attention of members of public is drawn cautioning users, holders and traders of Virtual Currencies (VCs) including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs,” said the RBI.
  4. In May 2017 , the government sought public views on future of bitcoins. Government’s official platform MyGov had asked, “Whether Virtual Currencies (VCs) should be banned, regulated or observed?” The comments could be posted before May 31. Nearly 4,000 submissions were made to the government’s queries.
  5. On the future of cryptocurrencies, finance minister Arun Jaitley on November 30, 2017 said that recommendations are being worked at. “The government’s position is clear, we don’t recognise this as legal currency as of now,” Jaitley said when asked whether the government has taken any decision on crypto currency.
  6. Income Tax (I-T) department mulls taxing the gains made by bitcoin traders and investors as it conducted surveys, on December 13, of exchanges in Delhi, Mumbai, Pune, Bengaluru and Hyderabad.

Read Is Bitcoin Legal in India in 2018? The FM Finally Answers for final stance of India toward legality of Bitcoin.

10. Mutual fund vs Bitcoin

Mutual funds are highly risk averse as compared to Bitcoin and gives you good return too. The best thing about investing in mutual fund is that it provides you wide scope of investment option depending on your risk appetite. Other reason:

  • Mutual funds are regulated, unlike bitcoins
  • Bitcoins are known for anonymity which is not a good thing for investors
  • Mutual funds lead to smaller losses, compared to bitcoins
  • Mutual funds carry less risk
  • Bitcoins have the risk of money being stolen via computers

CheckBitcoin vs Mutual Funds: What is Better to Invest in? for detail analysis on this topic.

How to Invest in Mutual Funds?

Investing in mutual funds online is very simple and paperless. Simply log in to your Groww account, choose a fund, and invest using net banking – exactly like you would when shopping online.

Groww 30: Top funds in every mutual fund category. 

Happy investing!