Bitcoin(BTC) value has raised from around INR 40,000 to INR 2,50,000 and now a days it’s hovering around INR 10,00,000. It’s been a roller coaster ride for both Bitcoin and it’s investors. Everyone wants to know more about bitcoins. Everyone wants to invest and become rich in shorter period.

source: www.coingecko.com

So what is Bitcoin? Is it illegal to hold bitcoins or trade them? How can we trade them? What’s the stand of Indian Government on bitcoins? How much can one invest in bitcoins? What should be the strategy? How will my tax be calculated if I gain profit from Bitcoin trading? People are asking a number of questions.

Here is a quick Bitcoin for dummies guide for all of you who are excited about this new way a world can transact without the fear of their governments monitoring their transactions.

There are several other cryptocurrencies like ether(ETH), litcoin(LTC) etc. Bitcoin is the most popular of them all and people use word “bitcoin” when they talk about cryptocurrencies. To keep it simple and easy to understand I am also going to use Bitcoin as a de-facto for cryptocurrencies. Everything written in this article more or less applies to all the cryptocurrencies.

 

Why bitcoins are important in today’s world of economy?

We use Dollars, Rupees and other currencies for doing transactions and their rates are controlled by respective governments.

These governments not just control the rate but as you know they can even make your hard earned money obsolete ( Yes. I am talking about Demonetization.)

Till late 90s, we used to get our transaction records printed on the passbook.

Source: www.thehindubusinessline.com

You can verify your credits and debits from this passbook. After the internet and digitization, these passbooks got replaced by e-statements which banks share with you over an email or you can download them from the app. You can see various charges applied by the bank for the transactions that you carry out with your own money. Banks use this centralized method of book-keeping. The problem with this system is that if a bank server goes down, you don’t have access to your own money or even worst cyber-attack on any bank server might result in loss of money that might not be traceable.

Source: http://downdetector.in/problems/hdfc-bank

Banks get the cut from your transactions, by lending your money to others, by investing them in the bonds etc. You save your money in the bank and you get some interest rate which is actually very lower than the inflation rate.

Moreover you put your money in the banks as savings or fix deposit accounts. You expect your bank to keep your money safe. If you do fixed deposit, you will probably get somewhere around 8% interest on your amount. Banks don’t give this interest amount from their pockets. They lend the money to other needy people like Vijay Mallya.

Yup, the part of your money you thought is safe is given as the loan at high interest amount of around 15-18%. As per the news published in December 2016, the loan amount of 7000 crore given to Vijay Mallya might get a write off.

According to the news published in Indian Express on 4th December 2017, PSU banks write off INR 55356 Crore in last 6 months. Now, how can a bank or a government waive off such a big amount? They waive off the loan by giving taxpayers money to the bank. Tax payers? Who?

Tax payers like you and me, who pay income tax between 10% – 30%. Basically we pay our taxes, we keep money in the banks thinking that banks are safe and yes proud nationalist in you wants to support cashless economy. And you are getting robbed off, every time government gives any waiver.

But hey, you can’t avoid taxes, right? What can you do if any bank defaults or gets robbed? You don’t have control over your own money.

There has to be a way where you can keep track of your money and not be dependent on some intermediary like banks to keep your money safe.

And the way out is this Distributed way of book-keeping called Blockchain. All the cryptocurrencies rely on this concept of blockchain. You won’t require a bank to keep track of money. It’s been taken care by everyone in the system.

 

What is Bitcoin? How does it work?

Primary use of currency is transactions. These transactions should be traceable and well managed. Distributed ledger system was introduced to solve the problem arose from centralized ledger system. In this each owner of the currency is the banker and verifies the transaction before debit or credit takes place from any account. Wait… WTF???

Let’s take a simple example. In distributed ledger system each transaction is approved by every participant of the system. Everyone in the system has to approve the transaction. Say Narendra, Amit and Rahul each have 10 BTC with them. If Narendra transfers 5 BTC to Amit, it will be updated in Rahul’s passbook as well and the entry will mention Narendra – credit – 5BTC. Amit – debit – 5 BTC. This transaction is then updated on all the three participant’s passbook. This is the most foolproof and secure way to update transactions in ideal world scenario where no one wants to hide any black money. I know that’s a very stupid example and crypto fans are going to kill me for defining it in this way. But this is a very basic example.

Now to respect the privacy of each user we will have to make sure that total amount of currency earned by any individual should be known to him only, unless he wants to share the details with someone else. These users will be given a secure vault with 2 keys. Users will keep their passbook in this vaults. 1 key will be available to the public and 1 will be given to the individual. Now in case Amit trusts Rahul then he can share his private key with Rahul. using this public key and private key Rahul can open Amit’s vault and view his passbook. This entire offline system explained above looks very complicated and tedious.

But with the help of technology it can be achieved very easily. And this is nothing but blockchain. This is what the underlying architecture of Bitcoin and any other cryptocurrencies is.

This eliminates the need of centralized authority like banks to keep track of your transactions and your money can be kept safely within your wallet as long as you don’t lose it.

 

Does that mean banks will shut down or countries will demonetize their currency and will accept cryptocurrency as a de-facto?

No. It won’t happen. Since Bitcoins cannot be controlled by any centralised system. Government cannot regulate them. Government need money to run various welfare schemes and this money is recovered from the citizens by means of various taxes. For this exact reason government needs banks. Government have made it easier for them to monitor individual bank accounts by making it mandatory to link Aadhaar to bank accounts.

Banks and our regular mode of transactions using rupees or dollars is here to stay as long as we need government! This makes me curious are citizens of India really free? Anyways that’s a debate for some other day.

 

Bitcoin is encouraging black money or is it?

No. It’s certainly not. What is the definition of black money? “income illegally obtained or not declared for tax purposes.” Government cannot tax bitcoins. Black money is getting generated from within the system of government defined currencies that is rupees. Government of India did demonetization of Indian rupees to curb black money. Did that help curb the menace of black money? It is the sole responsibility of the individual government to regulate its own currency and make sure citizens pay due taxes.

Yes, people have purchased Bitcoins using their black money.

 

How will government recover losses it has encountered because of tax evasion?

Make it mandatory to link Aadhaar to individual cryptocurrency wallet address. Cryptocurrencies should be recognized as an asset class just like gold. Investment declaration of each individual should include number of Bitcoins he or she owns just like we include house, mutual funds, etc. Government should charge for every Bitcoin to Indian Rupees conversion. These transactions can be easily tracked as they involve Indian Rupees and are done through e-commerce.

In the past as well, government has given a 60 day window for black money(Rupees) holders to declare their amount and Government will levy 40% taxes on the declared amount. Same process can be carried out for the people who have purchased bitcoins without any documentation.

 

Is it illegal in India to possess or transact in Bitcoin?

Yes and No. Indian government has not made its stance clear on any cryptocurrency. Keep the record of your transactions and make sure you pay your taxes and purchase Bitcoins from exchanges which are giving tax break-up of every purchase.

 

Can Indian government ban Bitcoin?

No, government can’t. You can’t ban anything which you don’t have power to regulate. Bitcoin is not a legal tender from the Reserve Bank of India. Government cannot demonitize Bitcoin. However, they can ban the purchase of Bitcoins using legal tender issued by RBI which is Rupees.

Government can do this on the pretext of curbing the black money. But hey, no one stored their black money in Indian banks. Black money gets transferred to the banks outside of India and gets converted to some other currency. Does that mean Indian government will ban transactions in all the other currencies. No it cannot. Moreover, people will find a way to purchase Bitcoins using overseas bank accounts.

The only way to control it is by accepting and regulating Bitcoins.

 

What is the position of Bitcoin in developed countries?

I have good news and a bad news. Bad news is transactions in Bitcoin and other types of crypto-currencies are banned in Iceland, Bolivia, Vietnam, Ecuador and China. Good news is none of these are developed countries. No-one effing cares the stance taken by these countries. These countries are more volatile than Bitcoin itself  😛

Countries like USA, Japan, Canada, Australia has a positive approach towards Bitcoin. Prominent businesses have started accepting Bitcoin as a mode of payment. Bitcoins have also entered in derivative markets in USA, which speaks about its legitimacy.

Canada considers them to be Money Service Business. This has made sure that crypto currencies come under Anti-money laundering law.

Indian Government should take the advice from all these governments and regularise the crypto-currency which will help not just citizens but also the government itself.

Everything looks positive, I want to purchase Bitcoins. Where can I get them?

 

How can I buy bitcoins in India?

You can buy bitcoins through various Indian Exchanges like Zebpay, btcxindia, koinex etc. There are small startups opening and shutting in this space. People should only trade using exchanges who provide invoices with the tax break-up for obvious reasons.

There are many other exchanges out there but based on the ratings, online forum reviews and the discussion with the experts, I have shortlisted the following 2 exchanges –

Zebpay

Depending on the ease of use I would suggest to use Zebpay for initial investors. Individual needs to complete KYC process, link their Bank account before starting the actual trading. We have to link our Aadhaar and PAN number with the wallet. It’s very simple to use. It provides simple buy and sell option while hiding underlying complexity of real time trading and finding buyer or seller. Zebpay is an app only exchange. Currently, Zebpay only offers transactions in Bitcoin. It also uses fingerprint as an additional mode of security.
 

 

Koinex

Once you are comfortable with the process transacting in cryptocurrencies and start understanding the process you can explore more trader friendly exchanges like Koinex. Koinex offers transactions in multiple currencies like Bitcoin, Ripple, Bitcoin Cash, Ether, Litcoin etc. The process of enrollment is same as Zebpay and users need to provide their Aadhaar, PAN number and bank account details. It works on browsers like Chrome or Mozilla on desktops. Due to security reasons they support only “Firefox fast and private” in mobile phones. Koinex uses Google authenticator as a standard for accessing your account.

   

 

Is there any minimum or maximum amount required to start the investment? How much risk can I take?

Bitcoins are for rich. You cannot invest if you don’t own a Ferrari, Mercedes or BMW.
Nope, that’s not the case.

You can buy bitcoins with as low as INR 2000.

But it’s a volatile currency. You don’t put your hard earned money on something which is as volatile as bitcoins.

Real estate, Mutual funds, Stock markets come before bitcoins. Make sure you have your traditional investments in place. Make sure all of your daily and monthly expenses are taken care of. Then you can go ahead and start testing with small amounts which you can afford to lose or anyways are going to waste on beers, cigarettes etc.

 

How much tax do I need to pay if I gain profit by trading bitcoins?

Government of India has not categorized bitcoin as any asset type as of now. Its neither a capital gain. Zebpay and Koinex provide taxed invoice with all the transactions you do on their platform. You will have to make sure you get in touch with a good CA for your yearly tax filing. This is definitely going to bring jobs boom for Indian CAs  😛  if not –

 

Bitcoins are too expensive. Are there any alternative cryptocurrencies I can trade in?

There are more than 300 cryptocurrencies.

Obviously not all of them are available on Indian exchanges. Ether, Litcoin, ripple, Bitcoin Gold, Bitcoin Cash are the leading ones. Some of them are either forked from Bitcoin or have similar underlying architecture. Most of them are not owned or developed by any corporate organization. Ripple on the other hand is developed by OpenCoin and RippleLabs.

Ripple(XRP) was developed with the sole purpose of reducing remittance time and transaction fees.

While BTC is trading at INR 10,73,000; XRP is trading at INR 76 at the time of writing this article. People who think they have missed the BTC wave can hop on XRP.

Even traditional investment routes like mutual funds and share markets come with statutory warning. Investing in unregulated and volatile Bitcoins is obviously riskier.

So here’s the statutory warning before investing in bitcoins

Bitcoin (Crypto-currency) investments are subject to market risks. Please read news (stay up to date), understand the concept (Know what are you getting into), follow government policy reform (Obey the low of the land), keep the details of all the transactions and pay your taxes before investing (Make sure transactions are white).

I hope  this will suffice the curiosity of most of you who are not tech savvy and are looking at non-technical way of understanding this new market.

Do write in the comments below if you agree or disagree with my views or still have doubts!

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