Bitcoin and Cryptocurrencies Across the Board
Bitcoin and other Cryptocurrencies are new, alluring and somewhat complex investment assets.
People see Bitcoin as currency, an investment and a store of value. Government’s do not agree on what Bitcoin is.
The US Internal Revenue sees and treats it as property,
The US Securities and Exchange Commission considers it a security.
The Financial Crimes Enforcement Network says it is money.
Bitcoin is unregulated by any central authority, it is a disruptive idea, and like all revolutionary new ideas, it likely will evolve and affect future of international financial transactions.
Currently, Bitcoin is trading at 8,237.9453,+43.8506, or +0.54% at the close 10:35a GMT Saturday, 18 March
Bitcoin is a digital currency, it has attracted attention due to its innovation, disruptive abilities and its investment potential.
There is no real coin attached to Bitcoin.
Bitcoin uses its own Internet network to enable global transfers directly between individuals so no intermediary gatekeeper between owner/users and their money, and it can be used a cash.
This 1st time in history that people everywhere are able to transact with each other in a peer-to-peer network without relying on an intermediary and without central bank oversight.
The verification for transactions is via blockchain technology.
Blockchain is the technology behind Bitcoin’s excitement. As it is a global accounting ledger that records all Bitcoin transactions.
It is transparent, anyone can view it with the appropriate software: Bitcoin protocol, which is open-source, aka free.
Bitcoin protocol is the connecting language of the Bitcoin network. Any computer that speaks the language can join the network, and any computer can be taught the language for free.
Computers speaking Bitcoin protocol make up the bitcoin network. If you send me 10 Bitcoin, the network updates the blockchain ledger with the details of the exchange, and all network computers can see it.
This transparency secures the network. If something, anything is off, everyone can see it.
The blockchain records the details of every transaction not by names but by users digital addresses. Bitcoin transactions are considered pseudonymous, not anonymous.
When I or you buy a Bitcoin, we are buying a password to a unique coin. Each bitcoin is a combination of a public and private Key, similar to a username and password.
The public Key is the address, telling people where they can send us Bitcoins. The private Key is a 64-character password to a particular Bitcoin, and no one but will ever see a private Key.
These 2 Keys are mathematically linked. One requires the other to complete a transaction.
The private Key acts as a digital signature that is used when writing a digital contract to verify ownership of the funds and we want to send them to.
Bitcoin like Gold is mined, and miners are individuals with computers on the Bitcoin network, known as mining nodes, that run specialized, open-source software.
Anyone with the software can set up a mining computer and miners must keep up with the evolving mining technology.
Miners play a Key role in clearing bitcoin transactions and reconciling them across the globe. They verify the sender has the funds available to send and to whom on a 1-time basis.
Miners compile new transactions into bundles dubbed “blocks,” which are like pages in the Bitcoin ledger. Each new block contains information from the previous block, linking them into a “blockchain.”
To complete a block, miners must solve a complex mathematical puzzle.
And this process prevents blocks from being produced easily and ensures there is just 1 valid blockchain. Once the solution has been found, all other mining computers can easily verify that it is correct.
When a miner solves the mathematical problem, the protocol allows the person behind the computer to get a predetermined number of new Bitcoins on the ledger.
The system is designed so that a new block will be completed, and new bitcoins issued about every 10 mins, no matter how many miners are trying to solve the problem. If blocks are created faster than this, the network will make the problem harder to solve.
The network also reduces the number of coins miners are rewarded over time.
About every 4 years, the time it takes to generate 210,000 blocks, the reward is pared by 50%. At that rate, the 21-M Bitcoin limit, or the maximum number of Bitcoins that can ever be created will be reached in about Y 2140.
Bitcoin shall not be thought of as Gold, as is not inherently valuable because of its finite supply; rather, Gold is valuable because people endowed it with its value.
Bitcoin will always have a floor value of Zero. It only has value because people believe it has value and want to accept it as a medium of exchange or recognize it as a store of value.
The price of Bitcoin is essentially the collective wisdom around the expectations about this network becoming valuable and useful to society. And every change in those expectations is reflected in its price, that is the reason Bitcoin’s price is volatile.
Volatility makes Bitcoin a unstable method of exchange today But that has not stopped people from using it. In addition to peer-to-peer exchanges there is a directory of businesses that accept Bitcoin.
Users cannot reverse or claw back a Bitcoin after 1 has been sent.
Bitcoin transactions are not fast or free. The computers verifying transactions on the network will prioritize those that include some compensation for themselves. The bigger the ‘Tip’ the faster the transfer.
The average fee in January 2017 was 0.3 Bitcoins, in January 2018, it was more than 40 Bitcoins, according to the data.
The US IRS treats cryptocurrencies as property for US federal tax purposes. This means, among other things, that:
- Virtual currency transactions are taxable.
- The applicable tax rate will depend on whether the transaction was short or long-term.
- Selling virtual currency will result in capital gains or losses.
- US taxpayers are responsible for determining the fair market value of their virtual currency in USDs, as of the date of payment or receipt to calculate their gain or loss.
- If the virtual currency is listed on an exchange where the exchange rate is determined by supply and demand, that exchange rate can be used to determine the fair market value of the virtual currency.
- Business transactions are subject to sales tax.
So, it is very important to keep detailed records of Bitcoin transactions as they must be reported to the IRS just like any other property transactions, including the fair market price and transaction date.
People can buy fractional Bitcoin out to 8 decimal places.
The smallest unit, 0.00000001, is called a satoshi after Satoshi Nakamoto, the pseudonym of Btcoin’s inventor. Other common units are one-one thousandth, called a milli, and one-one millionth, called a bit.
After creating an account and linking it to a valid bank or credit or debit card, a user can place an order and the Coinbase exchange will fill it. This comes with a fee to the exchange, which varies depending on the size of your transaction.
Another way to buy it is through GDAX, which enables investors to trade directly on the Coinbase exchange.
And now Bitcoin ATMs exist in major cities, they do charge a convenience fee.
An owner/user’s Bitcoin is only as secure as the private Key.
Anyone who steals a private Key can take control of the funds.
The Big Q: Where to store virtual currency is a question of where to keep the private Key?
The Big A: One could store private Key in a wallet or on a computer hard drive. This gives one full custody of the assets, it also means one must keep track of your 64-character private Key. Lose the private Key and it cannot be recovered, that is because one is really running one’s own bank, and the Bitcoins associated with that private Key will be lost forever.
An alternative to self-storage is a bitcoin wallet, software programs that operate like a digital wallet by storing users’ private Keys for them.
So, instead of having to remember the private and public Keys, these wallets allow one to create a traditional username and password to access one’s account. If one forgets the wallet’s password, the service can reset it for you.
The primary types of wallets are local, online and hardware.
Local wallets are kept on your computer or smart device. Often free to download, they give complete control over the wallet but can only be accessed from a personal device, making them only as secure as one’s computer or phone.
Online wallets like Coinbase or Blockchain.info can be accessed from anywhere.
But these sites are susceptible to hacking, like the one that hit the now-defunct Bitcoin exchange Mt. Gox in Y 2014, resulting in 850,000 Bitcoins disappearing overnight.
Since online wallets often hold large pools of cryptocurrency, hackers are more likely to target them as opposed to a personal computer. Using online wallets also means putting an intermediary between the owner and his/her funds.
Hardware wallets for storing private Keys provide self-sovereignty, security and mobility.
Similar to a USB stick, hardware wallets are easily carried and secured with their own password. But, there is the risk of losing the device or forgetting the password. A quality hardware wallet typically costs up to $200 or more.
Buying Bitcoin with the idea that its price will appreciate is like investing in a company. And there no guarantee Bitcoin won’t be replaced by another currency as the system evolves. Bitcoin in #1 now, but that does not insure its future in the space.
Blockchain has the potential to transform a variety of industries including healthcare, financials, consumer products and supply chain management.
Some money managers advise that cryptocurrency investments should be less than 5% of most investors’ portfolios and not more than 10%.
Cryptocurrencies are speculative assets, and only investors who can tolerate the risk should expose themselves to it.
The cryptocurrency market and blockchain technology are here to stay, but we do not know what it will look like or be out 10 years, thought we know it will be significant.
Before investing in cryptocurrencies, do your homework, as it is your money and your responsibility
Stay tuned, we will keep you up to date on the happenings in this revolutionary sector.
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