Recently, a friend came up to me and asked "Raghu, how do I obtain bitcoins?"
I stared at him with an empty, blank look. Despite all the recent talks about bitcoins and their growing popularity, even with the Reserve Bank of India (RBI) getting involved, I realised that I knew absolutely nothing about the bitcoin except the fact that it was associated with the Silk Road - an illegal online black market that used bitcoins as its defacto virtual currency to enable regular folks to obtain all sorts of illegal items easily and anonymously. I had no idea what bitcoins were.
And so I decided to research and write up a column that would explain, in layman's terms, what Bitcoin is.
What's the point of having bitcoins if I can use regular currency for my purchases?
That's a question you're bound to ask yourself at some point in time; after all, the rupee seems to get the job done. Why add complexity to your life with 'virtual currency' that the RBI seems to want to get rid of?
Well, for starters, there are many benefits to bitcoins over traditional currencies. For example, let's assume you need to purchase an item for Rs. 10,000, but the seller doesn't accept credit cards or bitcoins; he only wants cash. You now need to scrounge around for Rs.10,000 and pay the seller in hard cash; the seller, on his side, has to somehow ensure that the money you're giving him is not counterfeit. Just the hassle of having to pay him Rs. 10,000 in cash is what Bitcoin prevents. If you have at least Rs. 10,000 worth of bitcoins (after converting rupees to bitcoins) and the seller accepts bitcoins, the entire transaction is completed in less than 10 minutes - hassle free.
But, you say, the seller is willing to accept credit cards. Well, this is where the seller would much rather want to accept bitcoins versus traditional credit cards. There is usually a 2 - 3 per cent transaction fee for every credit card transaction that the seller needs to pay (to Visa, Mastercard, American Express, etc). With bitcoins, there are little to no fees involved. So the seller has a strong incentive to accept bitcoins.
What it basically comes down to is this: if the buyer and seller agree on a said amount for a good or service, using bitcoins gives them full control and transparency. There are no credit limits imposed by credit card companies, no need to carry cash, no extra fees that the seller can impose upon the buyer without the buyer's full approval. Every single transaction has to be 'agreed' to by both parties before it goes through.
The greatest advantage, however, is that all necessary information is public and transparent. Without revealing the identities of the buyer and seller, the entire bitcoin network is made aware of each and every transaction. This gives a tremendous amount of comfort to both parties of the transaction.
How do I get started?
You can obtain bitcoins in a number of ways, but before we get to that, you'll need to get yourself a 'Bitcoin wallet'.
A Bitcoin wallet is first required to get started with using bitcoins. A wallet can be created easily through different online applications. Your Bitcoin wallet is essentially just like, well, any other wallet.
Think of a Bitcoin wallet like an "app" that you would install on your phone. You can download your wallet on your computer through a software wallet, on your mobile, and also on the web. Once you've got yourself a Bitcoin wallet, you're good to go. It takes just a few minutes to get a wallet; once you have one, you can start accumulating bitcoins.
How do I get bitcoins?
Obtaining bitcoins is a relatively easy process. The three common ways are:
As written above, obtaining bitcoins through an exchange is the most common and feasible way to get started. There are hundreds of exchanges (mostly online) through which you can obtain bitcoins. You simply register, enter your bank account information, and convert the local currency into bitcoins. In fact, there is an easy way for you to find an online exchange based on where you live through this website.
What do I do with my bitcoins? How do I know that what I'm buying is safe?
Although many brick-and-mortar businesses are starting to accept Bitcoin, the large majority of transactions occur online. You can think of bitcoins as 'cash' for the internet.
Making payments with bitcoins is an incredibly easy process; in fact, you could argue that it is much easier than using credit cards. All you need to do is, using your Bitcoin wallet:
The recipient will then simply receive the request for bitcoins in exchange for what he is offering (goods, services, or perhaps a currency).
Bitcoin works off addresses. There are two components to a Bitcoin address: a public address, and a private address. Each Bitcoin address has its own Bitcoin balance. Every time a transaction is made, the public address of each user is made public to the entire network. Therefore, it is recommended that the sender creates a new address for each transaction.
Here is an example of a Bitcoin transaction:
Here's an example of what it might look like on Rajiv's software when he sends his bitcoins to Snehal:
A bitcoin user can freely share his public address with everybody. His private address, however, is only for him to know. This is critical in that this is what allows Bitcoin to be a secure payment system.
As Bitcoin gains popularity, governments are slowly but surely starting to take stances against/for it. For instance, the RBI issued a vague warning last week that Bitcoin usage is unsafe due to potential money laundering and cyber security risks. The government of China took it one step further by barring financial institutions and payment institutions from accepting bitcoins as a form of payment. Governments are cracking down on "black markets" that accept bitcoins as a form of payment.
In India, it's not very easy to convert rupees to other currencies since the Indian currency is not freely convertible. Due to this hindrance, obtaining bitcoins is not as hassle free as it is in other countries. Another problem with obtaining bitcoins in India is that there is electronic method to transfer funds safely; most transfers happen through NEFT. Due to these hindrances, liquidity of bitcoins is relatively scarce in India, but is picking up.
That being said, Bitcoin isn't an institution, organisation, or any sort of centralised entity. In fact, the beauty of Bitcoin is that there is no central authority. It is literally a network of users - known as "peers" - who simply decide to buy and sell goods and services through a mode of virtual currency. It will be difficult for governments to 'shut down' Bitcoin. In fact, there are talks that virtual currencies are the wave of the future to do their inherent associations of being decentralized, transparent, secure and hassle free.
The RBI has taken notice of Bitcoin but has not outlawed it. As Mark Twain popularly said, "The more things are forbidden, the more popular they become."
We can only expect Bitcoin's meteoric rise in popularity to continue.
Raghu Kumar is the co-founder of RKSV, a leading low-cost broking firm. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.