Bitcoin - Deciphering the mystery

Bitcoin is the beginning of something great a currency without a government, something necessary and imperative.

It's been a buzz all around us about what exactly is bitcoin. what are its substitutes. how does it work. is it legal. its taxation in India. So lets begin our discussion

So, the first question that arises is what exactly is bitcoin?

Bitcoin is basically a cryptocurrency or digital currency which works on peer to peer basis which means there is no controlling authority or regulator to check bitcoins. Bitcoin is the first decentralized digital currency and was invented by unknown person or group of people under the name of Satoshi nakamoto as an open source software in 2009. Every bitcoin can be divided into 0.00000001 parts. Its system has been designed in such a way that the network maintains  a non-repundiable record of every transaction. Just like physical currency it can also be sent to any other person but with a difference that there is no central bank or government to track it. Record maintenance in a huge ledger is a part of block chain or we can say that it works on concept of block chain.

Next question that arises is how to generate bitcoin and how many total bitcoins can be generated?

It is said that only 21 million bitcoins can be generated through a process of bitcoin mining which involves solving of mathematical puzzles of high difficulty level by using softwares.

As on today there are around 16.8 million bitcoins in the market.

Is it legal to trade or invest in bitcoin in India?

Bitcoin is neither legal nor illegal in India. However government has issued repeated warnings saying it to be a "Ponzi Scheme" that offer unusually high returns and government has not imposed any curb till now and still around 2 lakh additional people invest in bitcoin in India every month.

Income tax department has sent tax notices to tens of thousands of people dealing in cryptocurrency.

Now coming to its taxation in India

Taxation point of view can be discussed in two aspect.

First one being in a business of trading in bitcoin. If you are in such income than income shall be taxable under the head PGBP.

Second aspect is you are a investor. If you are a investor than income shall be taxable under the head capital gains and since it is not listed period of 36 months shall be seen to judge its type i.e whether it is short term or long term and the rules of that shall accordingly apply.

(Indexation benefit shall be provided in case of long term capital gain)

Coming to our next question

There is a lot of confusion amongst people that it is risky to invest in bitcoin and this risk is similar to investing in shares through stock exchange

However it is completely wrong to say this as shares resemble ownership in company and its trading is regulated by SEBI, behind every share there are some assets and earning of company that are contributing to fall and rise in the value of share which is nowhere seen in case of bitcoin. it does not have assets of equivalent value.

So we can conclude that it is more risky than shares.

Next question that arises is how does this payment system works?

When any payment is made transaction is included in block chain and broadcast to network. Computer network validates the transaction through an algorithm so that it cannot be altered.

What is the reason behind its rising prices and how to trade in bitcoin?
The answer to this is quite simple, its basically because of demand and supply pressure.

As told earlier about mining of bitcoin, supply of bitcoin is limited and demand is at its peak leading to rising prices and mass fluctuation in it.

If you want to trade in bitcoin than you can open an account with any exchange & trade through it.

Some of the trading platform are- coinsecure, zebpay,BTCX, unocoin.

What are substitutes of bitcoin?
There are various cryptocurrencies available such as ethereum, litecoin, lisk, dash etc.

So we come to our last question that is whether to invest in it or not?

It depends upon person to person. I personally wont recommend people to invest in bitcoin as it is highly risky and it is not regulated either. just imagine if government declares it to be illegal or prices start falling which is highly anticipated, you may loose your hard earned money. There are a lot of other earning sources so better to stay away from all of these cryptocurrencies.

For additional information till date no foreign or domestic institutional investor has invested into it and it is rising just because of speculation.