Bitcoin is a peer-to-peer (i.e. no central authority to issue new money or to keep track of the transactions) network based anonymous (that the real world identity of the parties of a transaction can be kept hidden from the public or even from the parties themselves) digital currency.
It was started by an anonymous software developer (going by the name of Satoshi Nakamoto) in 2008 and since its inception; it has grown into a technology, a currency, an investment vehicle, and a community of users.
How is Bitcoin an innovation?
In Digital payment system the tough part is making sure that nobody spends the same money more than once. Traditionally, a central authority (For Example – PayPal) verifies all of the transactions.
However in Bitcoin the core innovation is that it uses consensus in a massive peer-to-peer network to verify transactions.
This result in a system where payments are non-reversible, accounts cannot be frozen, and transaction fees are much lower.
How is it generated?
These are mathematically generated by a complex procedure termed as “mining” is used to generate Bitcoin. It is designed in such a way that it becomes progressively difficult to mine Bitcoins over time.
Thus only a maximum limit (a total of 21 million) of Bitcoins can be generated over time with about 12 million in circulation currently.
Bitcoin is like a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive Bitcoins with them.
By three routes one can acquire a Bitcoin: Purchasing, Exchanging and Generating one through mining.
What is mining?
Some users put their computers to work verifying transactions in the peer-to-peer network mentioned above. These users are rewarded with new bitcoins proportional to the amount of computing power they donate to the network.
However as mentioned above it becomes more and more difficult to mine new coins, profitable mining now requires specialized hardware that can perform more computations with greater power efficiency.
Why is RBI worried?
It is not backed by any financial authority and thus not subjected to same regulations as other
In case of theft identifying perpetrator will be difficult as the user remains anonymous.
The currency is very volatile and while players who entered early may be profiting but latecomer investors may suffer huge losses.
Because of anonymity RBI can’t impose taxation on transaction and taxes are an important part of an economy for developmental purposes.
Bitcoins may be linked to black money and money laundering. Since users don’t know the identity of person they are dealing with, they may also be involved in anti-national activities or supporting criminal activities unknowingly.
Similar to physical Cash, Bitcoins wallets can be lost, deleted or stolen.
There is so much uncertainty associated with the Bitcoin that many genuinely think that this may be the future of world economy while others are afraid that it can destroy economies, but many from both sides agree that if Bitcoin or something like Bitcoin works and people starts trusting digital currency to work without the middlemen (i.e. central authorities), the way world’s economy functions could be transformed for better.