Imagine you own a wallet that is inside of a locker and has $20 in it, the locker key is a security measure because you need it to open the locker and get the wallet. Bitcoin uses a similar system in order to secure your wallet by proving users with a private key or seed. This key is an authorization method that allows the buyer to use bitcoins from a specific wallet.
Now, imagine that you want to buy chocolate online, you go to the online chocolate store site, you click on buy and it redirects this purchase to a bank secure website, then the bank authorizes the payment but it also gets a commission. But why pay a huge commission to a bank and to the government when you could use bitcoins?
When you want to purchase something using Bitcoins, your wallet and your private key are inter-linked by a signature method. This signature is an unmodifiable contract that is put into a block and integrated into the blockchain. Once the block is created, it goes through a network of different data miners from around the world and requires them to check if the information on the block is right or wrong. It checks for your bitcoin wallet credit and it also checks that the right number of bitcoins are being used in the transaction.
Why should people move towards the use of bitcoin?
What are the main benefits of using this cryptocurrency?
Haters might not see it clear by now, but the truth is that Bitcoin provides users with:
1. Person to person exchange
2. Lower fees for transactions
3. Anonymous transactions
4. Universal currency (can be used in any country)
5. Bitcoin accounts cannot be frozen
6. No banks involved, and no prerequisites required
7. Most currencies experience inflation, Bitcoin has had a deflation evolution over the years
Bitcoin might be your lucky investment!
But are there any risks related to the use of bitcoins?
Will this system be sustainable in the future?
Now that you know how the bitcoin is mined, let me tell you an interesting fact. The bitcoin protocol states that only 21 million bitcoins can exist online. This calculation is based on the history of how the mining and the transactions led to the generation of bitcoins. This means that if at some point, bitcoins become a global phenomenon, there would be only 21 million bitcoins for the entire world. So, people would actually speculate that a rise in the demand of bitcoins would increase its value and instead of using the currency as a means of exchange, it would rather be seen as an investment tool.
This is analogous to the situation of generating profit by buying and selling shares online. Most of the bitcoin users see it as a store of value rather than a medium of exchange. So, we can say that its adoption as a medium of exchange is still at a nascent stage.
Another problem which bitcoin faces is the problem of scalability. Today, the VISA is able to handle 2000 transactions per second (tps), Paypal handles 115 tps while the bitcoin can sustain only 7 tps due to the limitation of the blockchain size which is 1megabyte. The good news is this problem is already being taken care of by the lightning network which is a decentralized network for making quick payments and uses bitcoin's built-in scripting. So, a few years from now, scalability problem might cease to exist.
So, bitcoins could be a source of income if transactions are taking place online and hence we can associate that to taxes. Since this decentralized system is not regulated by any government body, a different taxation model would take ages to implement. Also, we keep hearing about the security breaches and the volatility of this cryptocurrency frequently and therefore, the future is not really predictable.
Nevertheless, we believe that Bitcoin is here to stay.
Imagine a situation, where you just need to pick your backpack and roam around the world without having to think about the different currencies. Wouldn't that be great? You just need your cell phone and an internet connection and you can make payments using bitcoins. Many online e-commerce sites have added the option of making payments through bitcoins in exchange of goods and services. A number of corporations such as Microsoft, Dell, Barclays, etc, announced their willingness to accept bitcoin as a form of payment.
Reading the newspapers last weeks, we found out that Google might also jump on the bitcoin wagon. Automated Teller Machines dispensing this cryptocurrency have come to light in the Silicon Valley. This means, that you walk in there with your physical currency and get bitcoins in return.
This technology undoubtedly would have extensive applications in the future. The big question is...
Are we ready to adopt it?
Will a new Jeff Bezos emerge and use this disruptive technology to bring a radical change into our lives?
MiM Candidate at IE Business School & Bachelor of Commerce Graduate from Saint Louis University
MiM Candidate at IE Business School & Bachelor of Technology Graduate from Vellore Institute of Technology