We have studied and even evidenced the evolution of money from barter system to invention of coins to currency notes to digital banking and now to bitcoins. Without wasting any time further let us read through 5 basic concepts that will help us understand bitcoins from a lay-man (non-technical) perspective.
Bitcoin is a new form of money, digital payment system or a cryptocurrency. The simplest way of defining Bitcoin is the new form of digital currency that can be accepted by the vendors across the world without getting into the subject matter of country specific financial laws and baking regulations. Literally, if we put a dissection in the term ‘bitcoin’ we get 2 terms – ‘bit’ and ‘coin’. The term ‘bit’ as defined by Wikipedia is the basic unit of information in computing and digital communication. The ‘coin’ as we all know are used as to denominate any currency in the world to its smaller units.
Bitcoins can also be referred to as electronic currency, digital money/cash or virtual currency.
Bitcoin was created in the year 2009, and got released in the form of an open-source software by an unknown programmer, or a group of programmers, under the name ‘Satoshi Nakamoto’.
3. Owning, Transacting and Transferring/Exchanging (Buying & Selling) Bitcoins:
Bitcoins can be bought and sold both through on-line as well as off-line mediums.
Some of the on-line vendors/mediums may include Bitcoin.org; Unocoin.com; coinbase.com, BitPay etc. are some of the portals that are trading bitcoins online. The way we use app like PayPal, PayTM, etc. for sending or receiving bank money, Bitcoins can also be transferred using mobile applications.
Off-line medium of transacting bitcoins include bitcoin kiosk or bitcoin ATM’s. Unlike conventional bank ATM’s, bitcoins ATMs are connected to the internet where a user inserts cash into the bitcoin ATM. A transaction fee may be attracted in transacting the bitcoins.
Bitcoin uses blockchain network technology which is a public ledger that records bitcoin transactions. Blockchain is a technology used to record information shared between the communicating nodes running bitcoin software. In other words, the transactions done on bitcoin are recorded in a public ledger, however the details of the input and output owner are secured with the help of digital signatures. The transaction carries the digital signature of every input owner. Each bitcoin transaction, for example, Z sends X bitcoins to payee Y are broadcasted from time-to-time is broadcasted to the blockchain.
The phenomena of recording the transactions onto the network is called ‘mining’. Mining is a record-keeping service. Miners, for example coindesk.com, keep the blockchain consistent, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a block. (we shall look deeper into the mining process in the upcoming articles)
Bitcoins are stored in digital wallets. Even bitcoins are prone to certain risks like (1) bitcoins stored in cloud wallets can be hacked and (2) bitcoins stored in user computer can be infected by viruses or may get accidently deleted.
4. Market Status of Bitcoin as on today:
Many economists has encouraged the use of bitcoins. As of 2016 it was estimated there were over 800 bitcoin ATMs operating globally, the majority (500+) being in the United States. As of 2015, more than 100000 merchants including PayPal, Microsoft, Dell, Expedia, etc. are accepting bitcoins. Bitcoin is considered as a high-risk asset, since the value of a bitcoin is highly volatile. Bitcoin is considered as the future of money.
In the upcoming articles we shall cover some advance level concepts around Bitcoins like record-keeping, governance, regulations, etc. We shall also be evaluating the impacts (both already occurred as well as potential) of emergence of Bitcoin on the Financial Services (FS) Industry and auditing.