Bitcoin is a decentralised digital currency introduced in a 2008 whitepaper by the pseudonymous Satoshi Nakamoto. It went live in January 2009 when the first block, called the genesis block, was mined. Unlike traditional currencies, Bitcoin operates without a central bank, relying instead on a global network of computers that validate every transaction on its blockchain.
How Bitcoin works
Bitcoin transactions are grouped into blocks and added to the chain roughly every ten minutes. Miners, participants running specialised hardware, compete to solve a cryptographic puzzle. The first to solve it earns the right to add the block and receives newly minted bitcoin plus transaction fees as a reward. This is the proof-of-work consensus mechanism.
The total supply of Bitcoin is hard-capped at 21 million coins. As of now, over 19 million have already been mined. The mining reward halves approximately every four years in an event called the halving, which gradually reduces the rate of new supply entering circulation.
Bitcoin as a store of value
Supporters compare Bitcoin to digital gold because of its fixed supply and decentralised nature. Critics point to its extreme volatility and the fact that it produces no cash flow, unlike a stock or a bond. Both perspectives have evidence behind them, and neither is settled.
Bitcoin in India
Indian investors can buy fractions of a bitcoin, often as small as Rs 100 worth, on domestic exchanges. There is no legal prohibition on holding or trading Bitcoin in India.
Tax treatment
Under Section 115BBH of the Income Tax Act, gains from selling Bitcoin are taxed at a flat 30%, with no deductions other than the cost of acquisition. A 1% TDS under Section 194S applies to every transfer above the threshold. Losses on Bitcoin cannot be offset against any other income or even against gains from other Virtual Digital Assets.
Risks
- Price volatility can be severe; drawdowns of over 50% from peak have occurred multiple times in Bitcoin's history.
- Irreversible transactions: there is no customer support line to reverse a wrong transfer.
- Environmental concerns: proof-of-work mining consumes significant electricity.
- Custody risk: losing access to your private keys means losing your coins permanently. Use a reliable crypto wallet and keep backups.