Bitcoins and Blockchains - A Decentralized Digital Currency

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In one of my previous blog posts “Technology Innovation in Banking Industry”, published in October this year, I made a reference to virtual currency and Bitcoins. After that blog was published, my inbox was flooded with emails – mostly requesting me to write about Bitcoins and Blockchains. In this article, we are going to do exactly that.... explore this idea a little more.

What is a Bitcoin?
Wiki states, "Bitcoin is form of digital money that uses various processes securing transactions between untrusted third parties, without the need for a central authority or bank. Bitcoin is anonymous, and completely transparent". 

Bitcoin is the first decentralized digital currency. It is an innovative payment network and a new kind of money. The other names for bitcoin are virtual-currency, universal-currency and crypto-currency. Bitcoins are kept in digital wallets and sent over the internet and authorized by digital signatures and verified by “miner” networks. The verified transaction is stored in public ledger known as Blockchains. It was started in 2009 based on the ideas of Satoshi Nakamoto’s  Whitepaper.
Bitcoins are not physical but only balances associated with public addresses (like “bank account numbers”). The balance of each address/account can be viewed in Blockchain (like General ledger) that keeps track of all transactions. 

 Each address has a private key (like “ ATM PIN” number of a bank account) to authorize transactions using a strong mathematical encryption algorithm. This key is known only to the account owner.

Fees for Bitcoin transfer transactions are relatively low compared to traditional transfer transaction methods. Bitcoins can be bought on exchanges.
It is legal in USA and in many countries, primarily because of the lack of well-defined regulations governing digital currency.
It is accepted as payment source by many retail and eCommerce merchants.

New Bitcoins are released through process known as "mining". Anyone with access to computer and open source software can participate in Bitcoin mining. The interval in which the Bitcoins are released kept constant by the network because of this, the more “miners” that participate, the harder it is to mine for Bitcoins. The amount of coins being released in each interval is decreased by half around every four years. 

The unit of account of the Bitcoin system is Bitcoin. As of 2014, symbols used to represent Bitcoin are BTC and XBT. Small amounts of Bitcoin used as alternative units are millibitcoin (mBTC), microbitcoin (µBTC).  Satoshi is the smallest amount within Bitcoin representing 0.00000001 bitcoin, one hundred millionth of a bitcoin. A millibitcoin equals to 0.001 bitcoin, one thousandth of bitcoin. One microbitcoin equals to 0.000001 bitcoin, one millionth of a bitcoin. A microbitcoin is sometimes referred to as a bit. (Source: Wikipedia)

Operational Challenges of Bitcoin:
  • Very poor experience and no guarantee of safety of funds
  • Investments are highly volatile  
  • No consumer protection and financial integrity
  • Difficult to measure Economic Growth (GDP)  
  • Lack of well-define protocols and regulatory uncertainty
  • Decentralized process leads to following questions:
    • Who to turn to if things go wrong?
    • Who is responsible for development?
    • Who will regulate the process?


As of 6 February 2016, there are 15.2 million bitcoins circulation of a capped total of 21 million. That means over 72% of all bitcoins are already in circulation. Currently there are 25 new bitcoins produced (mined) every 10 minutes.  (Ref: Quora)

How to buy Bitcoins:
  1. Find a Bitcoin exchange (Some popular ones are Coinbase, Indacoin, Kraken, BitQuick, LocalBitcoins, WallOfCoins, ButBitcoinWorld, Circle etc. – Please note that the list is not by any means, my recommendations; These are just a few sites available online to buy Bitcoins.; It is completely under your discretion if you choose to do so)
  2. Buy Bitcoins by exchanging your local currency, like the USD, Euro, Pounds, Yens, INR etc.
  3. Transfer the Bitcoins to your wallet
Conclusion
Bank of America believes Bitcoin will be a major source of payment for a business through eCommerce (Ref: Download). According to Nicholas Colas of the ConvergEx group, 90 percent of Bitcoin buyers are market speculators. 

 In spite of the challenges and speculations, I expect Bitcoin would be a next step towards globalized finance.  Bitcoins are merely a proof of concept towards future digital currencies. I am sure all the stakeholders of the digital finance market are going to work together and shape this into what will become the future of financial transactions and payment.

 This is just the beginning.... ladies and gentlemen.... the future is already here....

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