Q. With reference to ‘Bitcoins’, sometimes seen in the news, which of the following statement(s) is/are correct?

  1. Bitcoins are tracked by the Central Banks of the countries.
  2. Anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address.
  3. Online payments can be sent without either side knowing the identity of the other.

Select the correct answer using the codes given below.

  • 1 and 2 only
  • 2 and 3 only
  • 3 only
  • 1, 2 and 3

Answer: (b) 2 and 3 only

Bitcoin
  • Bitcoin is a type of digital currency that enables instant payments to anyone. Bitcoin was introduced in 2009. Bitcoin is based on an open-source protocol and is not issued by any central authority.
  • Use:
    • Originally, Bitcoin was intended to provide an alternative to fiat money and become a universally accepted medium of exchange directly between two involved parties.
  • Record of Bitcoins (Blockchain):
    • All the transactions ever made are contained in a publicly available, open ledger, although in an anonymous and an encrypted form called a blockchain.
      • Transactions can be denominated in sub-units of a Bitcoin.
        • Satoshi is the smallest fraction of a Bitcoin.
  • Acquiring Bitcoins:
    • One can either mine a new Bitcoin if they have the computing capacity, purchase them via exchanges, or acquire them in over-the-counter, person-to-person transactions.
    • Miners are the people who validate a Bitcoin transaction and secure the network with their hardware.
      • The Bitcoin protocol is designed in such a way that new Bitcoins are created at a fixed rate.
      • No developer has the power to manipulate the system to increase their profits.
      • One unique aspect of Bitcoin is that only 21 million units will ever be created.
    • A Bitcoin exchange functions like a bank where a person buys and sells Bitcoins with traditional currency. Depending on the demand and supply, the price of a Bitcoin keeps fluctuating.
  • Bitcoin Regulation:
    • The supply of bitcoins is regulated by software and the agreement of users of the system and cannot be manipulated by any government, bank, organisation or individual.
    • Bitcoin was intended to come across as a global decentralised currency, any central authority regulating it would effectively defeat that purpose.
    • It needs to be noted that multiple governments across the world are investing in developing Central Bank Digital Currencies (CBDCs), which are digital versions of national currencies.
Cryptocurrency
  • A cryptocurrency is a digital or virtual currency that uses cryptography for security.
  • It is a decentralized currency, meaning it is not controlled by any government or institution.
  • Some examples of cryptocurrencies include Bitcoin, Ethereum, and Litecoin.
  • Transactions with cryptocurrency are recorded on a public digital ledger called blockchain.
    • This ledger is maintained by a network of computers around the world, and each new transaction is verified and added to the blockchain by these computers.
    • This decentralization and use of cryptography make it difficult for anyone to manipulate the currency or the transactions recorded on the blockchain.
  • To use cryptocurrency, individuals or businesses must first acquire a digital wallet, which is a software program that stores the user’s public and private keys.
    • These keys are used to send and receive cryptocurrency, and they are also used to verify transactions on the blockchain.
  • Users can acquire cryptocurrency through a process called “mining” which involves using computer power to solve complex mathematical equations, which validate and record transactions on the blockchain, in return for a certain amount of cryptocurrency.
Blockchain Technology
  • Blockchain technology is a decentralized, digital ledger that records transactions across a network of computers.
  • Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.
    • The decentralized nature of technology ensures that no single entity can alter or delete previous transactions, providing a high degree of security and transparency.
  • Blockchain is the foundation of cryptocurrencies such as Bitcoin, but it has many potentials uses beyond digital currencies.