 Hello and welcome to NewsClick. Bitcoins are in the news. Their prices have been fluctuating a lot. Bitcoin prices were about $20 per coin in February 2013. Now they are ruling at more than $11,000. To speak about this, we have here with us Rabir Porkaista, editor-in-chief of NewsClick. Welcome, Rabir. But first thing first, how do bitcoins work? What are bitcoins? As popularly known, they are cryptocurrencies. There is no government which gives the impromatur of its state about the value of the coin. So, in that sense, it is supposed to be outside old state control. That is one thing about any cryptocurrency. The bitcoin or any other cryptocurrency works by actually solving what would be called a crypto problem, a cryptographic problem. And this happens when any transaction is done. So, there are two elements to the bitcoin. One is that each bitcoin maintains essentially a list of all the transactions in it. It stores it and this is stored as a blockchain. This blockchain therefore enumerates all the transactions that this particular coin is undergone. And this blockchain is also replicated in a whole set of registers, who also then verify that this bitcoin is actually the one being transacted if a transaction of the bitcoin takes place. When such a transaction takes place, all the registries have to work to find out is this the bitcoin that is a valid bitcoin? It was held by the person who is now saying this is to be transferred to somebody else. And this is set as I said a cryptographic problem. Now, it has a randomness to it and it leads a lot of computational powers, not something which can be done trivially. So, therefore, all the ones who are working on this cryptographic problem, whoever solves it first. And I said because of the randomness all of them even with the same power are not going to solve it in the same time. Therefore, whoever solves it first gets a certain token as something that it has mined it as it is essentially mining verifying the transaction is equivalent to mining for a bitcoin. So, it gets a bitcoin as a consequence of that for the value of a bitcoin as a consequence of that. Now, this whole transaction therefore has two parts. One is verifying the transaction, one is also mining for the transaction because the bitcoin once that cryptographic problem is solved. This verification is very easy. It is difficult to solve, but once solved the verification is trivial. Then 50% of the registries have to check at least that this is a valid transfer. This is a valid solution to the cryptographic problem and then this becomes the registry update of all the registries that this particular bitcoin has now changed from A to B. So, you get a mining result, you get a bitcoin as a part of this process and you also verify that it has in the transaction has really happened and it has been certified or verified by a certain number of nodes of the system which is therefore considered that a valid transaction. This is what underlines the cryptocurrency and this is where the government has really no role in seeing that this is being done. Neither is there a bank involved which verifies the transaction. It is therefore what is called also the distributed ledger system. The registries are considered as distributed ledgers. So, there is no centralized node checking the verification like in a bank or a credit card where a centralized node verifies the transaction. You just talked about mining of cryptocurrencies. What are the costs involved in this? We have read that mining of bitcoins consumes a lot of energy in terms of electricity and so on. So, what do you have to say about that? Well, because the cryptocurrencies need computations, obviously they are related to the speed at which computations takes place. Originally, it started with PCs running the cryptographic puzzles that is soon people discovered that the graphic processors got more computational power. So, people shifted to what are called the GPUs, the graphic processing units for mining bitcoins. Then it was found that this is really could be done much faster if you shift to what are called FPGAs, gate arrays which are essentially you sort of put the programming itself into the chip. And latest in the ASICs which are application specific ICs which have configured the entire bitcoin mining algorithm in hardware itself. So, these are the four stages which has happened. Now, after you have done it, it still requires a lot of computational power because as more and more computational power is put into it, the rate at which you can mine bitcoins is also being changed. The value of the bitcoin that you mine is also being changed. So, there are various steps being taken to see that the bitcoins that are produced are not immediately do not exhaust the total possibilities with the bitcoin. I think there are X number of bitcoins which can be produced, all of it will finish by 2040 that is a projected trend. And they will keep on slowing up the amount which you can get, reduce the amount you can get as the computational power increases. So, increasing computational power is a consequence of this as well. The more you can mine, the less you get out of the mining is essentially what the algorithm has been said to do. So, that you do not mine all the bitcoins at one go. I think we have mined almost 80 percent the total possible bitcoins that need to be mined, but the rest 20 percent will take a long time. That is the plan as of now. Consequence of all this long and short of it is that it produced needs a lot of computational power. And in fact, the argument is it takes roughly per day the consumption of all the bitcoin farms, computers which are working worldwide is enough to power a small or a medium sized country. Nigeria, it seems. Pardon? As much as Nigeria's. As much as Nigeria's for Ethereum which is a smaller crypto currency as much as Cypress is. So, it already is consuming a lot of power and as the mining becomes more and more difficult, as the number of people mining become larger, as harder becomes more and more powerful, you are going to see a rise of the electricity consumption for mining bitcoin. That is only one part of it. The second part of it to verify the transaction, the bitcoin automatically has a kind of maximum number of transactions it can see. So, the number of transactions a bitcoin can see, bitcoin transactions, number of bitcoin transactions that you can see sort of maxes out about 7 transactions a second. So, that is a pretty low number. So, you also do not you are not able to get bitcoins to be transacted in large numbers. So, therefore, the considering unlike say credit card or cash or other means of transactions that you have today. Bitcoin, therefore, is not very useful for transactional purposes. So, it is a cryptocurrency, but it does not perform the role of currency which a cash or for instance a credit card does because of the very nature of the transaction that needs verification. Not many number of transactions can be verified. So, if it is not very useful for transactions, what is the purpose of having bitcoins? Well, this is the whole debate. Is bitcoin a currency for like any other currency for transactions which is what we understand the role of a currency to be basically for transactional purposes or exchange purposes. Or is bitcoin just a holder of wealth and therefore, it is a kind of asset class like any other asset class like land, like a painting, like a house. It could be considered an asset and you may decide to hold that asset because you think its price will go up. Now, this therefore is not a currency in the sense that we consider currencies as basically an instrument of exchange or an instrument of transaction by which we buy or sell other goods. It remains therefore essentially an asset class people are using for holding wealth because they think the price will go up. Or it is used for criminal transactions where you do not want it to be traced because the way bitcoin operates, being a cryptocurrency, you really can operate in the market without any government or any bank or any other body which could oversee this transaction. As a consequence, it is being used for partly for criminal purpose. The bulk of the bitcoin is really being used for speculative gains or use it as an asset class. The question is why do people regard it as an asset? Now, here is the argument. This is what is called the bigger fool argument that people who buy bitcoins think that there are bigger fools who will pay a higher price for it. It is somewhat like shall we say the baseball card markets. The baseball cards are also sold and there are rare cards which apparently have much higher values. Now, this all of it operates not in the basis of intrinsic use value that you can use them for a specific purpose like buying goods, but essentially for the fact that somebody will someday buy it at a higher price review. So, at the moment the bitcoin market to me is a market which is entirely for speculative gains. Why people think that if the value should be there? I think it is also because people think at the moment there is a war on cash, the currencies are fluctuating. Therefore, they believe that bitcoin provides them in some sense a refuge for holding wealth in a currency which the governments cannot touch. I think this is somewhere of this is what is driving the bitcoin bubble. It is clearly a bubble. Otherwise the prices have gone up by 10 times, fallen by half. All of this fluctuation all in the last 3-4 months would seem to indicate a very volatile market. And the whole underpinning of the bitcoins is supposed to be because it was pinned to the hardware speeds. Therefore, it would not see such fluctuations, but there is an objective basis to the value of the bitcoin. What is the argument with which this cryptocurrency was introduced? That has not happened. Essentially what you are seeing is just another asset class. Therefore, essentially a kind of speculative bubble in which bitcoins today are operating. Considering all these, will it be possible for governments to regulate or ban bitcoins or other cryptocurrencies? Well, I think if the governments decide that this is something that will not be allowed to be traded or it is illegal, then it will operate only in a kind of black market way. So, yes, it would still have a market, but at the same time, its existence would be far more endangered. So, I do think that the bitcoins today are operating in somewhat of grey conditions. It is to be considered as wealth. In fact, the government of India is sending income tax notices to the bitcoin exchanges, to bitcoin holders, and therefore saying, well, bitcoins have gone up. You should pay wealth tax, you should pay income tax. All of these issues are there. But at the same time, because of the nature of this currency, it is going to be difficult for governments to regulate it. But it is possible for governments, all of them put together to agree that bitcoins should be considered illegal. Therefore, anybody holds bitcoin is doing illegal operations. And as you know, if you can declare X number of things illegal, you can also declare bitcoin illegal. So, it will be with the police powers of the state to regulate. But whether they will be able to regulate within the criminal world, which could still use it as a kind of exchange for themselves? Yes, that will be more difficult. Now, there are reports that Venezuela is considering issuing a cryptocurrency of its own. Do you think that will work? Well, you know, a Venezuelan cryptocurrency would have as much traction as a fiat currency would. This comes about for two reasons. One is, Venezuela's currency is actually in a kind of free fall against the dollar, partly because the Americans have imposed very severe sanctions, have virtually thrown them out of the financial system of the world. Venezuela has been as a consequent force to renege on some of its bond payments. All of this makes Venezuela's currency extremely difficult to trade. They are thinking by creating a cryptocurrency. Maybe they could then get into a position where they could use the cryptocurrency, mine the cryptocurrency and use it for the exchange purposes. I personally think that the value of this and a fiat currency that Venezuela could float if it reforms its financial system, there would be too much of a difference between the validity of either. So, I don't see much of an advantage to be gained in floating a cryptocurrency in lieu of what currency they now have. The thing that they could look at is for external market, they could look at, for instance, the Yuan, which the Chinese are making convertible. The only problem Venezuela has in that count is their trade is largely with the neighbors in Latin America and Yuan is not a very good convertible currency for Latin America. So, if it was Asia, yes, it would be quite easy to trade with using the Yuan because all Asian countries have large amounts of Yuan, so they could use it for trade with other countries. But for Latin America, that may be more difficult. So, I think that's why they are considering what is it that they can do. But personally, I would believe that the cryptocurrency would not really solve the underlying problem they have, which is the convertible value of their currency and the kind of sanctions Americans have introduced on them. And they may be better off with some other convertible currency like the Yuan. Thank you so much, Prabir, for explaining all these two news clips. That's all the time we have for today. Thanks for watching News Clip.