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Should you invest in Bitcoin?

Topics Covered: Awareness in the fields of IT, Space, Computers, robotics, nano-technology, bio-technology and issues relating to intellectual property rights.

Should you invest in Bitcoin?


Context:

Bitcoin, the cryptocurrency, has crossed $20,000 in value.

What is a Bitcoin?

An electronic cash system, which would “allow online payments to be sent directly from one party to another without going through a financial institution”.

How does a Bitcoin work?

A person, or a group of people, who went by the identity of Satoshi Nakamoto are said to have conceptualised an accounting system in the aftermath of the 2008 financial crisis.

  1. Bitcoin from a user’s perspective is “nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive Bitcoins with them”.
  2. Bitcoins are generally identified with a Bitcoin address, which comprises 26-35 alphanumeric characters starting with either “1” or “3”.
  3. This address, which remains anonymous, represents the destination of a Bitcoin, or a fraction.

How are transactions maintained?

Nakamoto mooted an idea for a publicly available, open ledger that would contain all the transactions ever made, albeit in an anonymous and an encrypted form. This ledger is called blockchain.

  • Considering the public and open nature of the ledger, proponents of this currency system believe it could help weed out corruption and inefficiencies in the system.

What has led to the rise in Bitcoin prices?

The prices have been driven by various factors, including increased acceptance during the pandemic.

  1. Globally, large players like payments firm PayPal, and Indian lenders like State Bank of India, ICICI Bank, HDFC Bank and Yes Bank, have given legitimacy to cryptocurrency through some of their decisions.
  2. In India, accounts of several exchanges were frozen by financial institutions back in 2018 following a fiat from the Reserve Bank of India that barred banks from using their systems for cryptocurrency-related transactions. However, the Supreme Court ruled against this order in March this year.
  3. The biggest factor (in the recent rise of Bitcoin prices) has been the fact that some pension funds and insurance funds took permission to park a small part of their portfolio in Bitcoins.

How is it being regulated worldwide?

While many regulators around the world have been warning against trading in Bitcoin, some have backed it. In 2017, Japan accepted Bitcoin as legal currency and even officially recognised exchanges dealing in the cryptocurrency.

InstaLinks:

Prelims Link:

  1. Various cryptocurrencies.
  2. Cryptocurrencies launched by various countries.
  3. What is Blockchain technology?

Mains Link:

What are Cryptocurrencies? Why there is a need for regulation? Discuss.

 Sources: Indian Express.