The recent buzz about Bitcoin in the whole country after the Income Tax Department is set to send notices to 400K-500K HNI’s (High-Net Individuals) have caused commotion in the entire cryptocurrency community. The traders have gone for a toss about how the recent development is going to impact the trade and investments. Here is everything you need to know about the digital currency, Bitcoin:
What is a Bitcoin?
The word “Bitcoin” first came into existence in the year 2008 when the world was battling the infamous 2008 financial crisis. It is a decentralized, independent and secure payment system which involved electronic transaction between two parties without intervention of a third party such as bank or payment gateway.
But, the digital currency was first mentioned in year in 1989 by the company, DigiCash Inc. which aimed at carrying out online transactions. The technology could not rise due to major security lapses associated with online transactions back then in 90’s.
In the year 2009, A man named Satoshi Nakamoto published an open-source software to carry out Bitcoin transactions.
The bitcoin generation algorithm has already defined the number of bitcoins that can be generated i.e 21 million bitcoins and by June 2017, 16.4 million bitcoins have already been generated which is 78% of the total bitcoins.
The smallest unit of Bitcoin is Satoshi. It is a one hundred millionth of a single bitcoin (0.00000001 BTC). The value as on 2014, 10,000 BTC = 1$ and in 2017, 19,783 $ = 1 Bitcoin.
It is cheaper: Regular transactions involves third party which requires us to pay commission to the medium to make the transfer successful. Bit coin transaction charges minimum or no fees.
High anonymity is maintained: The transaction details are recorded with all three parties associated in the transaction which is not the case with Bitcoin transaction as it is a peer-to-peer transfer.
Unregulated by government: Possession of bitcoins is not regulated by the government and law enforcement. You are not taxed for the profit you earn from the transactions.
Highly secure: Cryptographic protocols are used to secure the system where the cryptographic keys are randomly generated and chances of misuse are sleek.
How does Bitcoin transaction work?
For carrying out Bitcoin transactions, both sender and receiver needs to have Bitcoin wallets and the transaction contains three pieces of information:
Input: This is piece of information which contains the bitcoin address from where the sender received the previous bitcoin.
Amount: The amount of BTC he wants to transfer.
Output: Sender’s bitcoin address.
To send a bitcoin, two things are required: Bitcoin Address and Private Key.
Bitcoin address (Public Key) is randomly generated series of letters and number and can be used only once. It is similar to the e-mail address which can be shared with anyone.
Private Key is also randomly generated letters and numbers, but is kept private unlike the bitcoin address. It is like a key to a lock. It is used to sign the transaction (input, amount and output) to maintain the authenticity of the owner.
Then, the transaction is passed on to wider bitcoin network where the transaction gets verified by the bitcoin miners. Every miner gets rewarded by some bitcoins on solving a block.
Why Bitcoin is a threat?
1) Since it is unregulated, it has become strong platform for illegal trading and money laundering. It is one of the major challenges for any government’s taxation policies.
2) There are no spending and withdrawing limits on Bitcoin assets. The total control is in hands of the owner, which maximizes the chances of misuse.
3) Bitcoin transactions are irreversible. Once bitcoins are given, cannot be brought back to the sender which can cause major loss in case of faulty transactions.
4) Even though the electronic system is infallible, the Internet world is vulnerable to advanced cyber attacks. There are number of malware such as CryptoShuffler, which can pose a threat to your precious Bitcoin wallets. One needs to be updated with security solutions and hacking/phishing schemes to secure their wallets.
The notice has been sent by the IT department to Bitcoin and cryptocurrency holders to monitor the transactions during demonetization period i.e 1st November, 2016 to 31st December, 2016. The taxman has asked the holders to submit information related to acquired wallets. This may help in crackdown of illegal trade, investment and tax evaders post demonetization in our country.