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Financial transactions of the future…
Here’s the funny thing about Bitcoins: they don’t exist at all. Not as a bit, not as a coin, not as anything you can point to and say, “This is a Bitcoin”.

Normally if someone claims to be a millionaire, it means if you look into their bank account you’ll find a million rupees. But if someone claims they have a million Bitcoins and you look at their ‘Bitcoin wallet’ you’ll not find any digital Bitcoins held within. And yet ‘1 Bitcoin (BTC)’ is currently trading at 53,872.83 INR. Confused? Read on.

Society once operated through barter. You do a job, and you get a product in exchange. Then came ‘Commodity money’ (5 pieces of gold for the job!). Next walked in ‘Representative money’ (a piece of paper with ‘500’ on it for the job!). The shift from commodity money to representative money brought about the rise of the banking industry; a bank safeguarded one’s heavy commodity and money and gives representative money via bank notes. Eventually governments started to get involved and replaced the bank-issued notes with centrally produced currency instead.

However, banks can fail (US financial crisis) and the central government-backed currencies are vulnerable to political turmoil. (Zimbabwe hyperinflation)  “The problem with conventional currencies is that central bank must be trusted not to debase the currency, but the history of currencies is full of breaches of that trust,” said Satoshi Nakamoto, the creator of Bitcoin.


The Bitcoin era

Bitcoin is a distributed digital currency. It is stored entirely by computers spread across the Internet. There is no central controlling agency and everything happens peer-to-peer. If one wanted to ‘own’ Bitcoins, one has two options: one can buy Bitcoins online ‘Bitcoin Exchanges.’ Or, one can make his own Bitcoins through a process called ‘mining’.

Once you decide how you’re getting Bitcoins, you’ll need a ‘Bitcoin Wallet’ to use them in transactions. A ‘Wallet’ is not a place where you put your Bitcoins into; for BTCs are not ‘stored’ anywhere. A wallet is just an application for managing Bitcoin addresses and handling transactions. Once a wallet is installed you will be provided an anonymous ‘Bitcoin Address’ which will now be the identity on the Bitcoin network. One can have multiple wallets with multiple addresses if one


Accountability, anonymity and security

Trust is critical in finance. Trust comes from accountability, and accountability comes from transparency. Anonymity is a key selling point of the BTC community. Anonymity and accountability might sound like conflicting goals at first glance, but this is where the true ingenuity of Bitcoins come in.

If you login to your existing bank account you’ll probably find a statement accounting for all your transactions. Given that Bitcoins are ‘de-centralised’ by nature, who gets tasked with maintaining this ledger? Everyone! Every single entity on the Bitcoin network stores a ledger detailing ‘every’ single transaction since the first Bitcoin in the chain was mined. What’s more, this information is public! Sites like track history of each block. This may sound shocking; imagine one’s bank publishing transactions on the Internet! But this is not a big deal in the Bitcoin world, since all transactions are anonymous. The transaction ledger notation will be something like

1RFTgGHhZ8tLbFmLHReXgTowHQnRontZi1nfBgj2m27PpeHLy1AGSatFD84u8dpuxx 053 BTC

Every participant in the network can make entries in this ledger and every one of those entries is then propagated to the network in real-time, so that every copy on every computer is updated near simultaneously and all copies of the ledger are kept synchronised.

Each participant must come to consensus on the validity of a transaction, similar to how a bank clears a credit card transaction. If a rogue participant tries to spend more Bitcoin than he has, instead of verifying the transaction and broadcasting it to the rest of the network, the rest of the peers will see in the ledger that the transaction is invalid and block it. In this way double spending and fraud is prevented.


The future of finance?

Bitcoins represent a truly innovative paradigm in finance. In terms of scope they’ve often been compared to the impact of Email on the postal industry. A truly global currency certainly sounds appealing. Ultimately Bitcoins derive their value by virtue of being a self-fulfilling prophecy – if enough people bet on it’s success, it will succeed.


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