Bitcoin All The Way
- 1. Bitcoin… all the way!!! Uday Kumar Panuganti udaykumarp@sbsandco.com By SBS Hyderabad
- 2. www.sbsandco.com2 Bitcoin – for some people, this may be something making them excited and sleepless while for some others, it may be the first time they have come across such a term. Bitcoin - Introduction
- 3. www.sbsandco.com3 Cryptocurrencies and Bitcoin – Value graph
- 4. www.sbsandco.com4 Some believe it to be the greatest digital invention while some are convinced of its failure in near future. Some see it as undisputed future global currency, many believe it as a better investment asset (digital gold) in fact to be better than gold. Some say it is the ultimate solution to modern day tyranny, some say it only fuels terrorism(physical and cyber) and results in financial chaos while most other people are yet to know about what exactly a bitcoin is. Bitcoin - Introduction
- 5. www.sbsandco.com5 Keeping aside the issue “whether the old world will kill the new currency or the new currency will create a new world”, it is true that Bitcoin (since its inception in 2009) has made a long way till today (almost 8 years) and many economies started recognizing bitcoin as legal currency. In this regard, (through this session), a humble attempt is being made to give a decent introduction to the freshers (for bitcoin) about bitcoin as crypto- currency, its mechanism, its past-present and future way, in simple language. Note: even after going through this ppt, if bitcoin mechanism doesn’t make any sense for you, no need to worry, all you need to know about bitcoin is its practical usage, legal position, merits and demits of it, safeguards while using it etc. Bitcoin - Introduction
- 6. www.sbsandco.com6 What is bitcoin? Bitcoin is cryptocurrency, which is entirely digital (has no physical existence). It has been invented by an unknown programmer (or a group of programmers) under the name ‘Satoshi Nakamoto’. It has been designed to be completely decentralized currency, running on peer to peer system structure (with open source software). Bitcoin ???
- 7. www.sbsandco.com7 Bitcoin simplified (In an attempt to make clear bitcoin mechanism, a simplified version for easy understanding is presented, certain concepts mentioned below are much more complex and varied)
- 8. www.sbsandco.com8 Bitcoin is digital currency, dealing with it is much similar to dealing your money in your paytm or bank account. It can be transferred to any person, with a small transaction fee charged. However, while your traditional money can exist in paper and digital form (interchangeability), bitcoin can exist only in digital form. While the traditional currency is created (printed) by the government (through central bank) and circulated, no one can create bitcoin except by mechanism called bitcoin mining. While the transactions in bank accounts are verified, processed and maintained by the banks, there is no central authority maintaining and processing the transactions of bitcoin. Bitcoin - Basics
- 9. www.sbsandco.com9 The transactions are verified by decentralized bitcoin miners who verify the transactions, record them in a public ledger (located decentrally in the servers worldwide) called “blockchain”. Bitcoin exists on the hard drives of users all over the internet, each updating one another about new transactions and checking each others work. Ownership of Bitcoins is tracked on a public ledger (the “block chain”) that is distributed to all users of the system. When a transfer takes place, the transfer is added to the ledger and info is distributed to all users. Bitcoin - Basics
- 10. www.sbsandco.com10 One can get bitcoins in only two ways: Bitcoins are traded worldwide on special bitcoin exchanges like coinbase, bitsquare, BTC etc. One can exchange the traditional currency with the exchanges and get bitcoins of that worth in his/her bitcoin account. Currently 1 bitcoin can be bought at just Rs. 2,87,206.60 onlyyyy (on 06th Oct 2017). Bitcoins are created as reward for the miners when the miner successfully verifies and integrates a block of transactions in to the blockchain (public ledger). Bitcoin –How are they made
- 11. www.sbsandco.com11 Digging deeper into bitcoin mechanism – blockchain, mining etc: A bitcoin transaction can be understood by the following chain: 1. Wallets: Bitcoin wallets are similar to bank wallets used. It is password protected. It generates a unique digital address to be used on the network and contains a record of the owner’s bitcoin balance. 2. Keys: There are two types of keys in bitcoin network. A public key and a private key. A public key (‘address’) can be understood as a bank account number (serves similar function). Bitcoin – mechanism
- 12. www.sbsandco.com12 A private key authenticates ownership of bitcoins– similar to the password to bank account. 3. Submitting a transaction: For example, Mr Sai wants to send 10 bitcoins to Mr Ram, for him, all he has to do is to select the public key of the receiver and authenticate the amount with his private key. What actually happens backend is, the transaction is encrypted with sender’s private key and submitted on the bitcoin network for verification by the miners Bitcoin -mechanism
- 13. www.sbsandco.com13 4. Mining: Confirmation of the transaction is done by the miners. What exactly happens in mining – lets see Several hundreds of active transactions are made into a block (consolidated) and the same is associated with a mathematical problem (more accurately a random hash algorithm). The solving of the problem based on a certain logic is purely based on computing power of the computer (don’t imagine the mathematical problem to be one that can be solved by human with a calculator). Bitcoin - mechanism
- 14. www.sbsandco.com14 Mining Bitcoin - mechanism
- 15. www.sbsandco.com15 Mining Bitcoin - mechanism
- 16. www.sbsandco.com16 The protocol of Bitcoin requires solving a math using SHA – 256 hashing algorithm (too much technical for us indeed), to link the current block with previous block chain. This way, following an algorithm, blockchain in updated with a new block and now the miners start working on next block of transactions. This is a tedious job, done by the computer. Mining requires two things – faassstt computing powered systems; lots and lots and lots of electricity. Bitcoin -mechanism
- 17. www.sbsandco.com17 5. Verification: Miners across the world compete to solve the algorithm. The first miner to solve the algorithm is rewarded (or rather compensated with bitcoins). This is the only way that bitcoins can come into existence. All the miners already working on the block will then verify the solution for any duplication (i.e check whether the transaction is related to a bitcoin already spent by the bitcoin sender) and the block gets included in the blockchain only when 51% of the miners verify and confirm the block inclusion, after which the miners start with next block. Bitcoin -mechanism
- 18. www.sbsandco.com18 Thus, in order to fool the bitcoin network and use a bitcoin spent already, one needs around 51% of mining power at a time, achieving of which is far from reality at present, even after consolidation all the computing power of 600 super computers of the world. 6. Compensation: The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees. As of 9 July 2016, the reward amount of 12.5 newly created bitcoins, per block added to the blockchain. All bitcoins in existence have been created in such coinbase transactions. The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks (approximately every four years). Bitcoin -rewards
- 19. www.sbsandco.com19 Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins will be reached, the record keeping will then be rewarded by transaction fees solely. Thus, by the bitcoin protocol (unless revised later), only a maximum of 21 billion bitcoins can be generated. One need to know that, in order to earn reward, speed is the only thing that matters. The systems consume so much power that for many miners, the electricity bills exceed the reward. Bitcoin - rewards
- 20. www.sbsandco.com20 Fascinating features of bitcoin: Bitcoin offers more flexibility in the quantity of amount you transfer. The unit of account of the bitcoin system is bitcoin. Small amounts of bitcoin used as alternative units are millibitcoin (mBTC),microbitcoin (µBTC, sometimes referred to as bit), and satoshi. Named in homage to bitcoin's creator, a satoshi is the smallest amount within bitcoin representing 0.00000001 bitcoin, one hundred millionth of a bitcoin. (Currently, a satoshi is equivalent to 0.28 paisa and 1 bitcoin is Rs.2,87,206/-. Thus, one can imagine the wide range of flexibility that bitcoin offers for amount that can be transferred. Bitcoin - Facts
- 21. www.sbsandco.com21 21 million – That is the total number of bitcoins that can generated (as per the bitcoin protocol). This is because - Every block introduces 50 new coins in the system. This quantity (50) halves every 210,000 blocks. This ensures that the currency’s value does not decrease, and instead will steadily increase over the period. Bitcoin - Facts
- 22. www.sbsandco.com22 Unlike banks (where the process of recording transactions is done by a specific authority), in Bitcoin’s case, anyone can offer their computers to record the transactions onto the database. Bitcoin has made this process extremely simple. All you need to do is install a software provided by the Bitcoin development team and run it. (Though it may not be a good idea to run that in your pc to get bitcoins, if you care for the pc) The people who offered their computers for this purpose were called ‘Miners’ and the process of recording transactions was called ‘Mining’. Bitcoin - Facts
- 23. www.sbsandco.com23 Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms. By this time in our journey, one might have formed a good picture of what a bitcoin is, how does bitcoin system works out, now let us understand its genesis – why and how it came into this world. Bitcoin -Facts
- 24. www.sbsandco.com24 The root cause for the creation of and the fast booming of bitcoin lies in the term “ The global financial crisis 2008”. Bitcoin has come up as an answer to address the following problems with traditional currency: Losing of faith on the banking system due to financial crisis and safety of value of currency threatened; Reduction in value of money in hand and in circulation due to excess printing of currency by the sovereign. Let us understand the global crisis 2008 and how it led to bitcoin creation: Bitcoin - to the Roots
- 25. www.sbsandco.com25 Global economic crisis 2008 (vis a vis bitcoin): People deposit their money and surplus earnings in banks for safe keeping. Banks use the same for lending and safe investing in order to generate its income and to pay interest on deposits. The same has been happening in US, and everything was right. However, lately the US banks started to give give out risky loans to people to attract new customers (the sub-prime crisis) and due to inability of the borrowers to repay the money, the banks faced significant defaults on such loans, ultimately forcing them to file for bankruptcy. Bitcoin – to the Roots
- 26. www.sbsandco.com26 The banks also invested the money in various oppurtunities, some of which did not payoff, resulting in banks losing all the money. Alarmed by the increasing bankruptcy, the US government tried to save some banks by bailing them out. The money which the government offered to banks was people’s money collected in the form of taxes. It became like, the people’s money was again offered to the mis-users of the people’s money to save themselves and the economy. However, it was too late to recover and since all major global economies are inter-related, it resulted in global meltdown. This resulted in dilution of people’s confidence on banking system and government regulation. Bitcoin – to the roots
- 27. www.sbsandco.com27 Second factor that triggered bitcoin is that the fact that the actions of government constantly affect the value of currency. Government spends money for development of its country, its revenue being taxes collected from people. Now, when the government spends more money than its earns (which happens in most cases), to compensate the deficit, it may resort to printing of more money or taking loans. In the former case, it asks the central bank of the country to print more money, resulting in more availability of money with the people. (Note that there is no fixed limit to the amount of currency that a Government can print, printing of money is left to its own conscience). Bitcoin – to the roots
- 28. www.sbsandco.com28 As a result of pumping of more currency, it reduces the value of currency already in circulation. For example, if total money in circulation is Rs. 100 and you own Re.1, then you own 1% of money in the country, which reduces to 0.5% when new currency of Rs.100 is printed and circulated (total money in circulation would become Rs. 200). This way, the value of our money is constantly depleted (silently without our knowledge) by government actions, forcing us to work and earn more and more money than earlier to satisfy our needs. Bitcoin – to the roots
- 29. www.sbsandco.com29 These issues of safety and surety of money made people look for alternate money which addresses them. Bitcoin emerged at this time and has experienced exponential growth mainly due to its right time entry. When the world(or atleast US) was in confusion and doubt of the financial, banking and monetary system existing, in 2008, the idea of this new currency (‘bitcoin’), its core principles and set of rules (protocol) was released on a white paper, by the programmer identifying himself as ‘Satoshi Nakamoto’ (though his original identity is unknown till date). Bitcoin – to the roots
- 30. www.sbsandco.com30 Bitcoin addresses the above issues this way – As discussed in the earlier slides, no one controls bitcoins (or atleast theoretically). Only the owner of bitcoins can transact with his bitcoins in his wallet, thus no question of third party(like bank) using your bitcoins for investment purpose and losing them. Since the entire mechanism is decentralized, no government of this world controls the bitcoin, the bitcoins are created, transacted only as per the protocol of bitcoin. . Bitcoin – the Gamemaker
- 31. www.sbsandco.com31 Coming to the issue of decrease in value of money, Bitcoin addressed this problem by fixing the maximum number of Bitcoins that could ever be in circulation and the rate at which new Bitcoins would be produced. The maximum number and the rate of production cannot go beyond the set limit because of the coding used in its design. Also, to ensure that no more Bitcoins would be produced, this code is made visible to everyone for easy verification. This way, the value of each Bitcoin was dependent only on the supply and demand in the market and was free from all kinds of Government intervention like when the Government artificially alters the value of a currency for various reasons. Bitcoin – the Gamemaker
- 32. www.sbsandco.com32 Bitcoin rate from 2009 to 2017: o On June 2009 1 BTC = 0.0001 USD o On June 2013 1 BTC = 100 USD o On 26th May 2017 1BTC =2632 USD Issues with bitcoin: Volatility, acceptability and complexity are major issues that ordinary users face. Bitcoin isn't a very practical payment technology for ordinary users. The software is too complicated, and the risk of loss due to hackers, forgotten passwords, hard drive failures, price speculation by few and so forth are too large. Also, Bitcoin is extremely volatile right now, so your wallet could go from having $100 worth of Bitcoins one day to $50 the next day. Bitcoin – the other side
- 33. www.sbsandco.com33 For this reason, bitcoin is widespreadly used for speculation (due to volatility) and as alternative to gold investment (due to exponential upward rise of price), rather than using it as substitute for real money. Very few merchants and establishments worldwide are accepting bitcoins as mode of payment, reducing its usability. Right now, it is not a feasible mode of transacting, as it may take a hour or more, on an average for your transaction to be success due to the long process to be done in mining. There are doubts raising of our ability to realise bitcoin into money and also concerns on non- transparency and working of bitcoin exchanges. Bitcoin - the other side
- 34. www.sbsandco.com34 Legal status of bitcoin: Due to its very nature, bitcoin is highly unregulated. Anyone can transfer any sum of money to any person in the world at any time without coming into the knowledge of anyone. This is mainly because of reasons like no personal identity is required to be linked to bitcoin account, the transaction details of origin are highly untraceable (subject to exceptions) and there is no central authority monitoring and regulating the activity. Many argue (which to a larger extent is true) that bitcoin usage fuels terrorism both physical and cyber. Bitcoin –Legal ?!
- 35. www.sbsandco.com35 Coming to its recognition as legal tender, there is still widespread uncertainty in the world. Many countries (mostly EU, US, China, Australia etc have accepted (though not officially in all aspects) bitcoin as legal tender. China has permitted its people to transact in bitcoins (note that China has the largest number of bitcoin users and largest number of transactions in bitcoins). This may change as China has recently shut down the biggest bitcoin exchange in China (second biggest in the world). In India, uncertainty prevails over the issue of usage of bitcoin as legal tender, even to this date, which hopefully seems to be cleared in a short period of time by the RBI. Note that RBI issued warning to public dealing with cryptocurrency expressing its concerns of safety and security. Bitcoin – Legal ?!
- 36. www.sbsandco.com36 Wannacry Ransomware cyber attack – bitcoin: As known to everyone, in this may of 2017, the world has experienced what many say as the largest cyber attack, where over 104 countries are affected, India being one among them. This ransomware, which exploited a vulnerability in the outdated windows OS versions, had blocked all the data in the affected systems and to access the same, demanded for ransom ranging from 300 to 600 USD to be paid in bitcoins. Thus, bitcoin’s anonymity has been used by the hackers, spurring concerns on its usage as legal money. Bitcoin - wannacry
- 37. www.sbsandco.com37 To conclude – If there is this lot of fuss on bitcoin usage and its uncertain future –why one need to bother about bitcoins??? Well, until the 1990s, the internet was not a practical technology for people to use. It used complex programs and needed a computer expert to use it. But, would it not been foolishness if someone thought that this internet can never be a success. Now the whole world is connected with internet and we all are living (being stuck) in a web (not really cob-web, but the world wide web). Bitcoin –Concluding notes
- 38. www.sbsandco.com38 Had anyone imagined that mobile phones (more specifically smart phones) would become the indispensable part of one’s life in current modern day life, simplifying things and multiplying our connectivity. This being said, care need to be taken investing in Bitcoin as “pessimism is bad but vigilance is lifesaver”. Thus, though bitcoin’s probability of replacing the conventional currency in entirety is far beyond sight, one can be sure that bitcoin or similar virtual currencies would soon impact your life directly or indirectly (may be more than the nine planets’ impact on your life). Once again, lets see whether the old world will kill the new currency or the new currency will create a new world. Bitcoin – Concluding notes
- 40. www.sbsandco.com/wiki www.sbsandco.com/digest Read our monthly e-Journals SBS And Company LLP Chartered Accountants Our Presence in Telangana: Hyderabad (HO) Andhra Pradesh: Nellore, Kurnool, TADA (near Sri City), Vizag Karnataka: Bengaluru +91-40-40183366 / +91-40-64584494 / +91-9246883366 Thank you!!! Uday Kumar Panuganti PH: +91 7207 431 931 udaykumarp@sbsandco.com 40