The digital currency, bitcoin, has frequently been in the news. What is this controversial financial product and how does it work? Is it something you should invest in?
Bitcoin – A Cryptocurrency
Bitcoin is a decentralized digital currency known as a cryptocurrency. Essentially, it is a form of money that exists only as computer code and is not overseen by any central bank. Created in 2009, it is maturing as a recognized asset class on Wall Street. Already, bitcoin futures trade on major markets — allowing investors to bet on bitcoin’s price without holding the coin itself. Although it is not the only cryptocurrency, it has become the most famous.
New Highs and Volatility
This virtual currency surged to new highs as a frenzy of investors wanted to get in on the action. In fact, the price of all cryptocurrencies soared and then crashed back down. Prices of bitcoin approached $20,000 by the end of 2017 and then plunged to below $11,000. Some considered it a correction. The plummet took some of the shine off what had been an incredible year for bitcoin. In December, two major U.S. financial exchanges launched trading in bitcoin futures, giving it more clout. The question today: Is this only the beginning of cryptocurrency madness?
Another major consideration is extreme volatility, with scammers capitalizing on the booms and preying on victims of the busts. The hustles are diverse, including many different types of phishing, spamming and the notorious development of bogus initial coin offerings. It appears that social media impersonation has a role in many of the scams, where so much discussion, speculation and misinformation about cryptocurrency take place.
It is not surprising that the reliability of digital currency is questioned because no government or central bank is regulating the market. In fact, many doubters still cannot believe things have come this far. There are cryptocurrency exchanges. Coinbase is probably the best known, although there are others. At least one was shut down due to accusations about money laundering.
Slow and Expensive
Still, bitcoin is a difficult currency to use in the real world: The network is slow and too expensive for small transactions. The mined block is broadcast to the network to receive confirmations, which can take over an hour or longer, to process. Depending on the kind of traffic the network is receiving, bitcoin’s protocol will require a longer or shorter string.
Bitcoin can be exchanged for other currencies, products, or services. By 2015, there were already more than 100,000 merchants and vendors who accepted bitcoin as payment. International payments are easy and cheap because bitcoin is not tied to any country or subject to regulations. Also, there are no credit card fees for small businesses to pay.
Currency of Choice for Illicit Activities
In 2017, research produced by Cambridge University had estimated that there were 2.9 to 5.8 million people using a cryptocurrency wallet, most of them using bitcoin. Wallets exist in the cloud or on a user’s computer. They are not insured by the FDIC, and the names of buyers and sellers are never revealed; only their wallet IDs are made public. Unfortunately, this has made it the currency of choice for buying drugs or taking part in other illicit activities because buying and selling is not easily traceable to those responsible.
IRS Considers Bitcoin a Real Thing
Although secrecy surrounds these currencies, the IRS considers bitcoin a real thing and it is taxable. If you buy bitcoin and sell it at a profit, it is a capital gain, pure and simple. The bottom line? Be very careful regarding the largely unregulated world of digital currencies. Keep in mind that even though you will hear that these currencies are beyond government control, the IRS still wants its cut.