By now you have probably heard of Bitcoin, but can you define it?
My own way of describing Bitcoin is different. It is store credit, but without the store. It's a prepaid phone that doesn't require the phone. Precious metal without its metal. Legal tender for all debts, public and private, except the party to which it is offered wishes to accept it. A document backed only by the full faith of its anonymous creators. I do not place any faith in them and I don't give credit for their ingenuity.
A 10-foot USB cable would not be able to connect a bitcoin to my computer. However, a lot of people have it and many more will soon.
Partly because Tyler Winklevoss and Cameron Winklevoss are entrepreneurs best known for their role as founders of Facebook. They now want to use their technological savvy and money to bring Bitcoin mainstream.
The Winklevosses plan to create an exchange-traded bitcoin fund. An ETF would allow investors to buy bitcoins more easily than if they had to do so directly. The Winklevosses were believed to hold around 1% of all bitcoins existent as of April.
Bitcoin was created in 2009 by an anonymous cryptographer. It is based on the idea that any object, even code bits, can have value as long as it is valued enough. Bitcoins are digital representations of traditional currencies and do not have a pegged value.
The Bitcoin website states that Bitcoin is based on the idea of a new type of money that relies less on central authorities and uses cryptography to manage its creation and transactions. (1) Users solve computer algorithms to find virtual coins and create new bitcoins. The purported creators of bitcoins claim that there will be 21 million bitcoins in the end.
Although Bitcoin is touted as "a very safe and affordable way to make payments", (2) few businesses have actually made the decision to accept bitcoins. A significant number of those who have accepted bitcoins are on the black market.
Bitcoins can be traded anonymously via the Internet without the involvement of financial institutions. According to the Mt. Bitcoin exchange, 20 percent of bitcoin transactions were made from black-market items and drugs in 2012. Gox. Gox.
Many Bitcoin users also believe that the currency can be used to avoid taxes. This may be true in the sense bitcoins can aid in illegal tax evasion but not in the sense they serve any real role in tax planning. Federal tax law states that a transaction can only be taxable if no cash is involved. Barter and any other non-cash transactions are fully taxable. Transactions involving bitcoins should not be treated differently.
Bitcoin's most loyal supporters, outside of the criminal element are speculators who do not intend to use bitcoins for any purchase. They believe that bitcoin's limited supply will cause their value to continue its upward trend.
Bitcoin has seen significant increases in its value. It has also suffered major losses, including a 80 percent drop in 24 hours in April. Bitcoins fell to $90 at the beginning of the month from $266 in April, when they were at their highest. According to mtgox.com, they were trading at $97 earlier in the week.
The Winklevosses would simplify Bitcoin investing by allowing small-scale investors to make a profit or lose without having to actually buy and store the electronic coins. Although Bitcoin storage is claimed to be secure, it has proven difficult. An attack on the Mt. The Mt. Bitcoin transactions are anonymous so it is difficult to track down the perpetrators if your digital wallet suddenly disappears. Their ETF could help investors protect themselves from individual theft if it is approved by the regulatory authorities. However, the ETF would not address the volatility problem caused by large-scale thefts in other parts of the Bitcoin market.
Although Bitcoin is wrapped in high-tech technology, the newest currency has surprising similarities to gold. This connection is highlighted by Bitcoin's own terminology, especially the term "mining," which is intentionally used. As a way to control supply, the mining process mimics the extraction of other conventional resources from the ground. This rhetoric should not be taken as a guarantee of safety, but rather, it should be a warning.
The last resort investment is gold. It is of little intrinsic value. It doesn't generate interest. It is more stable than other forms of money because it has a finite supply.
The problem with gold? It doesn't do anything. Most of the world's gold is now in the vaults at central banks and other financial institutions, as gold coins have ceased to be used. Because gold is not directly linked to the real economy, it has become a commodity that is almost untouchable. This can be a good thing, especially if the real economy is scary. However, gold begins to lose its shine when there are more attractive investment options. This is exactly what we've seen with recent falls in gold prices.
Bitcoin promoters have accepted and sought increased regulation in their efforts to make Bitcoin mainstream. Mt. Gox was registered as a money service business with the Treasury Department’s Financial Crimes Enforcement Network. It also has increased customer verification. These changes were made in response to a March directive by Financial Crimes Enforcement Network that clarified the application of its rules for virtual currencies. The Winklevosses proposed ETF would add a new level to accountability.
However, I believe that Bitcoin will eventually fade into the shadows of black markets. People who are looking for a secure, regulated currency they can use to conduct legitimate business transactions can choose from any of the currencies that have been sponsored by a government with sufficient resources. They will be able to choose from one of many currencies that has been supported by a country.
