Bitcoin cryptocurrency guide advises where to buy and how to buy Bitcoin. This guide also contains the markets, value, trading, investing, buying, selling, transactions, blockchain, mining, technology, advantages, risks, history, legislation, regulation, security, payment, networks and many other interesting facts about Bitcoin as well its status in the world of cryptocurrencies.
Bitcoin, Thursday, 2018-02-22
- 1 What Is Bitcoin?
- 2 Beginner's Guide to Bitcoin
- 3 Where and How to Buy Bitcoin?
- 4 Bitcoin Markets
- 5 Where to Spend or Use Bitcoin?
- 6 How Does Bitcoin Work?
- 7 Bitcoin Regulation
- 8 Is Bitcoin Secure?
- 9 History of Bitcoin
- 10 Bitcoin Videos and Tutorials
- 10.1 History of Money and Where Did Cryptocurrencies Come from?
- 10.2 Bitcoin FAQ: What is Mining?
- 10.3 How the Bitcoin Bubble Will Pop
- 10.4 Documentary - The Bitcoin Phenomenon
- 10.5 Bitcoin: How Does it Work? (Roger Ver Interview)
- 10.6 Top 10 Bitcoin Facts
- 10.7 What You Need To Know Before Investing in Bitcoin
- 11 See Also
What Is Bitcoin?
Bitcoin is a cryptocurrency, and a digital asset designed to utilize cryptography for creation and management control. It is the latest form of decentralized digital currency and digital payment network invented in 2008 and launched in January 2009 by an alias Satoshi Nakamoto.
The cryptocurrency operates as open source software on a peer-to-peer model (transactions take place directly between the payer and payee). This means that no trusted intermediary such a banks or PayPal is required to verify the details of the sender and receiver. Rather, the transactions are verified by nodes (the network of computers/users spread globally) and recorded in an open ledger referred as blockchain.
The main idea of creating Bitcoin was to establish an electronic payment model that was purely based on mathematical proof. This is a system that is independent of influence from centralized authorities, a currency transferable electronically, and instantly at a very small fee.
Bitcoins are created by miners on its network as a reward for confirming transactions. The founder pointed that only 21 million Bitcoins (BTC) will ever exist when all the coins are mined. Each coin can be divided into eight decimal places (100 millionths of a single Bitcoin)/ smallest part of a Bitcoin called Satoshi.
Since Bitcoin was established, its operations and price have been bumpy. Many people are still finding it hard to comprehend the cryptocurrency and how it operates while authorities are mixed up on how to legislate the new digital technology. The value of one Bitcoin hit an all-time high on the third quarter of 2017 when it reached the $10,000/BTC mark. It is expected to continue growing rapidly in 2018.
After Satoshi Nakamoto launched Bitcoin, it appears he was simply opening a lid and letting out a new type of technology. In nine years, over 1100 cryptocurrencies have been released. This has made many people get a lot of interest in cryptocurrencies.
This guide is a candid dissection of Bitcoin to provide a clear analysis of the cryptocurrency that is changing the global financial model and opening way to a whole new world.
Beginner's Guide to Bitcoin
When the price of Bitcoin broke the ceiling recently by surpassing the $10,000/BTC mark in the third quarter of 2017, everybody paused to take a glace. The emerging popularity of Bitcoin has endeared it to everybody including merchants and traders. This is not all. Many people are now seeing Bitcoin as a better alternative to trading in the conventional forex. But, what exactly is Bitcoin? Where did it start? How exactly does it operate?
The journey to where Bitcoin is today has been lengthy. Indeed, it has been very bumpy and full of uncertainty. In 2009 when Satoshi Nakamoto founded Bitcoin, little did he know that he was ushering a new era of a cashless system. Now, there are more than 1100 cryptocurrencies that either ride on the Bitcoin core code or follow the same blockchain technology.
Even as newer cryptocurrencies emerge, none of them is close to the level of Bitcoin. It has weathered many battles, improved its system, and matured in every sense. For those who initially thought that Bitcoin was a passing cloud, well, it has proven them wrong. The cryptocurrency is getting better, gaining value and it is here to stay.
Now, even as Cryptocurrencies take center stage in the new era of cashless transactions, many questions still abound. People are still tied to the old myths that compromise understanding of Bitcoin and how it operates. Some of these questions include; is Bitcoin a printed legal tender? Can I use Bitcoin to clear my mortgage? Is Bitcoin legal? What about Bitcoin and taxes? Here are some crucial facts about Bitcoin.
- The cryptocurrency was founded in 2009 by Satoshi Nakamoto.
- Bitcoin uses a peer-to-peer model and blockchain technology.
- It is legal in most countries.
- The cryptocurrency has never been hacked.
- Its value hit the highest mark in the third quarter of 2017 by surpassing $10,000/BTC.
- It is the most traded cryptocurrency in the crypto exchanges today.
This guide is a comprehensive look at the Bitcoin network to get you everything there is to know to make informed decision whether to join or not. Some of the critical components to expect in the guide include the founders, security, legislation, and common markets. We also cover the Bitcoin blockchain technology, Bitcoin security, history, and specific methods of buying and selling the highly valued native BTC among others.
Where and How to Buy Bitcoin?
While Bitcoin has become very popular today, many people are unclear on where to buy and how to do it. Before you can consider buying Bitcoins, the first step should be acquiring an appropriate crypto wallet. Just like a conventional wallet, the digital wallet holds your Bitcoins and allows you to use them for payment or exchanges. Some common wallets include web-based wallets, hardware wallets, mobile wallets, and desktop wallets. The following are the best places to buy Bitcoins.
- Buy from top Bitcoin exchanges
- These are marketplaces that operate just like the conventional forex markets. In cryptocurrency exchanges, you can buy as many Bitcoins as you want based on the latest market value. Note that the method of payment in such exchanges depends on their policies. Some exchanges only accept trading using other cryptocurrencies while others take both fiat and cryptocurrencies.
- Note that most of the exchanges require users to signup for accounts on their network before a purchase can be effected. Besides, a fee will also be charged based on the percentage of amount transacted. Some of the top Bitcoin exchanges include Coinbase, Changelly, and Gemini.
- Face-to-face purchases
- For those who do not want to go through the lengthy process of buying Bitcoins via banks or exchanges, they can consider a face-to-face buyout. In cities such as New York where Bitcoin communities have been growing rapidly, you can to join and buy Bitcoins directly from other owners.
- Consider communities such as LocalBitcoins that arranges for prices and even negotiations between buyers and sellers. The payments can be made based on the seller’s preference. In many cases, these payments are effected in Escrow. Note that though you are meeting face-to-face, a Bitcoin wallet will still be required.
- Bitcoin ATM
- This is perhaps the easiest and direct method of getting Bitcoins into your wallet. The ATMs are run by different exchanges and brokers to help people buy Bitcoins based on the latest value in the market. Some of the top ATM vendors include CoinOutlet, Genesis Coin, and BitAccess. The good thing about the ATM is that they are direct and will allow you to buy using fiat currencies. Just like the standard ATM, a fee is levied for using the ATM.
To start trading, mining, or using Bitcoin, the first thing you need to acquire is an appropriate Bitcoin wallet. Bitcoin wallets are used to hold your coins and allow transactions such as buying, selling, or exchange for other cryptos.
Note that though Bitcoin wallets are sold as stores for your Bitcoin, the description is a misnomer. The wallets do not store the coins in the actual sense. What they store are the secret private keys that are used when making transactions. They also store the public keys that are given to those who want to pay you. Therefore, what are the main types of Bitcoin wallets?
- The desktop wallet
- Desktop wallets are downloaded from providers and installed on the user’s desktop or laptop. The desktop wallets are very easy to use even when the computer is offline. Make sure to select the wallet that is designed for your operating system because some of them are highly specific. Some of these Desktop Bitcoin wallets include Hive, Msigna, Armorym, and MultiBit.
- Mobile wallets
- These are Bitcoin wallets that are designed to operate on your phones. They are pretty like mobile apps. Like the Desktop wallets, these Bitcoin wallets are designed for a specific operating system such as Android, IOS or Windows. Notably, the mobile Bitcoin wallets allow you to access and make Bitcoin-related transactions on the go. They are also lighter compared to the desktop and web wallets.
- Online web wallets
- These are Bitcoin web-based wallets that are provided by third-party companies. You can only access the wallets through the internet. Good examples include Coinbase and Bitgo. Remember that because they are internet-based, they cannot be lost or deleted like in the case of mobile and desktop options. However, they are easy targets for fraudsters because users can only operate when connected to the internet.
- Paper wallets
- Paper wallets are used to raise the level of security for your Bitcoins. They involve generating the main private keys and storing them together with other valuables at home. It is like storing cash in a safe. It is very important to ensure third parties do not access the codes.
- The hardware wallets
- These are the most secure of all the Bitcoin wallets. They are finger-sized devices that store the private and public keys for extra portability. Notably, the hardware wallets are considered the most secure for sending and receiving Bitcoins because the keys never leave the device even when confirming the transactions. They are also stored offline.
- The main disadvantages of the hardware wallets are that they are very expensive and can get lost easily. To keep Bitcoins safe, some people opt acquiring several hardware wallets and storing one as a backup in a safe at home or bank.
Where to Buy Bitcoin with Credit Card?
Even as we move towards a cashless society, people are still connected to their conventional methods such as Credit cards and bank. When Bitcoin started, it was very difficult to buy Bitcoins using credit cards because many companies viewed it with suspicion. However, many exchanges and marketplaces have started accepting credit cards. Here are the four main places you can buy Bitcoin using a credit card.
- Coinbase: This is a US based cryptocurrency exchange that allows users to buy up to $150 of Bitcoins every week. The exchange can be used in the US, Australia, Europe, the UK, and Singapore. A flat fee of 3.99% is charged on all Bitcoin purchases via Credit Card.
- CoinMama: This is a Bitcoin broker that specializes in linking credit cards to the Bitcoin market. The broker charges about 6% for processing the transaction. You can buy up to $5000 or $20000 worth of Bitcoin per day and month respectively.
- BitPanda: Like CoinMama, BitPanda is a broker that allows users an opportunity to buy BTC directly using their credit cards. The broker is based in Austria and is only open to people from Europe. A fee of 3-4% is charged on every transaction.
- CEX.io: This is one of the oldest and most trusted Bitcoin exchanges in the market today. It allows traders to buy Bitcoins using either debit or credit cards. While the verification process is tedious, CEX.io is preferred by many because it has a very low fee of 0.2% and is available in very many countries.
Note that all the services that allow traders to buy Bitcoins using credit cards require the user to open an account with them. Also, you must have a Bitcoin wallet. For those who do not have wallets, Coinbase can also act as their wallet. Once the account is set, the option of buying Bitcoins with credit card is included in the settings. For example, Coinbase requires you to navigate to the Account Settings and select Credit Card to start the process of buying Bitcoin with the card.
Where to Buy Bitcoin with PayPal?
PayPal is perhaps the digital wallet that most people are used to. It is a market leader that has gained acceptance in most digital stores especially e-commerce sites. However, many people with money in their PayPal wallets still find it difficult to buy Bitcoins directly. Here are three main places that you can buy Bitcoins with PayPal.
How to Buy Bitcoin with Wire Transfer?
Many people trust their banks. Even though Bitcoin and other cryptocurrencies promise very high profits, most people still have a special attachment to their bank accounts. The banks process their salaries, facilitate loans, and give a unique link to personal success. Therefore, a path for buying Bitcoins directly using a wire transfer is preferable to avoid falling prey to scammers.
The main issue with banks is that the process is lengthy and involves a lot of processing. Besides, it is also more expensive compared to buying Bitcoins using other cryptocurrencies, PayPal, or credit card.
One of the best places to buy Bitcoins using wire transfer in the US is probably the Coinbase. They were among the pioneers in the Bitcoin ecosystem and have grown to become the most preferred exchange for Bitcoin. For people in Europe, some of the great places to buy Bitcoins using wire transfer include CoinFloor and CEX.io.
To buy Bitcoins from them via Wire Transfer, you need to provide bank credentials and demonstrate that the account belongs to you. Then, you are required to authorize your bank to make the preferred payment to the exchange. A fee will be charged for using the exchange of choice to buy Bitcoins. Most of the exchanges will charge about 1.5% to complete the transaction. For example, Coinbase charges clients 1.49% for every transaction. Note that transfers to the exchange of choice are slower compared to using Credit Card.
Where to Sell and Trade Bitcoin?
After acquiring Bitcoins through mining, as payment or purchasing from an exchange, you might also be interested in selling. Many people who look at Bitcoin as investment buy and hold before selling when the price shoots up. For example, the last quarter of 2017 has seen a boom in Bitcoin value as more people enter the market to make a profit. Therefore, where do you sell and trade Bitcoins?
- This is one of the top Bitcoin exchanges on the market today. The exchange also serves as a Bitcoin wallet to users who do not have a wallet. It has over 4.5 million users including developers and merchants. The market is based in the US and allows traders to only sell and trade Bitcoins, Ethereum, and Litecoin.
- The only challenge for using Coinbase is its difficult verification procedure. They also have a very high fee of 1% per transaction.
- This is a very popular exchange platform for person-to-person trading. Unlike the other exchanges that simply facilitate buying from their network, the LocalBitcoins.com facilitates direct interaction between sellers and buyers. It has recently gained a lot of popularity because people have the confidence they are dealing with actual sellers. The network links buyers and sellers, facilitates negotiations, and finally ensures that the two meet face to face.
- The good thing about the network is that there are no verifications required and you can get to know other people in the network. Besides, there are no specific payments. You can pay based on the agreement with the buyer.
- Despite the emerging preference for person-to-person platforms such as localbitcoins.com, the process is very slow. Besides, some banks might get suspicious when huge amounts are suddenly deposited into your account.
- This is an international Bitcoin exchange that allows traders to sell Bitcoins for fiat currencies such as US dollars, British Pounds, and Euros. You can also trade Bitcoins for different cryptocurrencies such as Ethereum, Dash, Bitcoin Cash, and Zcash.
- Notably, the exchange is very straightforward. It does not provide offers that are used to lure people to buy Bitcoins like in other exchanges. It stands taller compared to other exchanges because it accepts traders to use even bank transfers and credit cards.
- This is a reputable Bitcoin Broker that allows users to trade their cryptocurrencies. The platform has set itself apart from others by using teams with great knowledge of cryptography and online security. They also have very low fees that allow traders to sell Bitcoin and keep the bulk of the profit.
- Though the platform is very popular, its interface is not intuitive. Besides, issues such as page timeouts, and generating new deposit addresses have become very common recently.
- This is a Coinbase’s innovative platform that was established exclusively for traders moving high volumes of Bitcoin. It means that you enjoy all other benefits of Coinbase such as its great interface and Bitcoin wallet while getting optimized services. It comes with unique features to follow the latest markets, statistics, and expert predictions. It also has a stop loss feature to help you avoid making losses when the target markets slump.
How Much Are the Transaction Fees of Bitcoin?
When Bitcoin was founded, the main objective was to lower the transaction fee by a huge margin. Satoshi also wanted to make the process of every transaction easy and direct. While it is possible to make transactions for free, such processes take very long before they are confirmed because miners focus on creating blocks with greater rewards.
Though the transaction fee may change over time, it is usually very small. However, your respective Bitcoin wallet provider could add a small fee on top to cover the expenses of maintaining the wallet. In many cases, the transactions provide users with a chance to check the expected fee before flagging off payments.
The transaction fees are aimed at preventing those with an objective of overloading the network. Notably, the fee is not related to the number of Bitcoins that one sends. This means that the fee for sending 1BTC could be the same for sending 100BTC. This might make it look too high or too low depending on the amount under consideration.
The fee charged on transactions is dependent on the number of bytes involved. For example, Bitcoin fee of 200 Satoshis per byte is enough for a transaction to go through in approximately 30 minutes. Therefore, if you are spending amounts sent from multiple sources, the transaction fee could be higher compared to simpler transactions. If the activity is classified as conventional, the fee will be relatively low.
Bitcoin markets are the digital marketplaces where users and miners can sell Bitcoin for different currencies. In most exchanges, Bitcoin can be exchanged for fiat currencies or other cryptocurrencies such as Ethereum or Litecoin.
Note that the first step of using an exchange is getting the authority to participate. This means signing up to the exchange, following the set rules, having a cryptocurrency wallet, and enough finances for the targeted Bitcoin buyout. Also, note that Bitcoin is unregulated in most countries. This means that if you fall into scammers, the chances are that getting help from the legal system can be a challenge. The following are the main Bitcoin markets.
- The Coinbase
- This is one of the top Bitcoin markets started in 2012. The exchange is based in the US and supports more than 32 countries. It is mainly used for trading Bitcoin, Ethereum, and Litecoin. These are the leading cryptocurrencies regarding price and market capitalization.
- Today, Coinbase claims it is the largest Bitcoin exchange market with over $20 billion in currency exchange. To make trading easier for people who deal with very high volumes of cryptocurrencies, Coinbase created a new arm of its exchange called GDAX (Global Digital Asset Exchange).
- In addition to offering exchange services, Coinbase also offers mobile cryptocurrency wallet, insurance protection, and offline storage. Using Coinbase, you can buy or sell Bitcoins for US Dollar, Sterling Pound, Australian Dollars, Canadian Dollars, Euros, and Singapore Dollars.
- To use the exchange, Coinbase charges a flat fee of 1%. However, deposits and withdrawals from the wallet are free. The wallet has also won the hearts of many because of its lovely interface that makes trading easy even for novices.
- Gemini Exchange
- Like Coinbase, Gemini is a US-based outfit started and ran by the Winklevoss. Winklevoss hit the news for suing Zuckerberg (Facebook CEO) and got awarded $65 million. They invested all the cash in venture capitalists. The exchange runs from the New York, but it is also available in 45 states and jurisdictions such as Singapore, the UK, Hong Kong and South Korea.
- The exchange only supports trading of cryptocurrencies in US dollars. Besides, it only handles the top two cryptocurrencies; Bitcoin and Ethereum. This means that your options for trading in Bitcoin will be very limited because you can only buy or sell in US dollars or Ethereum.
- To trade on the Gemini platform, a flat rate of 0.25% is charged. However, deposits and withdrawals do not attract any fee. This makes it one of the cheapest exchanges to use in the cryptocurrency market today.
- Notably, Gemini operates as a limited liability company in the state of New York. This means that it is regulated by the State’s Department of Financial Services. The proximity to the highly revered Wall Street financial markets makes it possible for the exchange to provide more traditional investment opportunities.
- The main issue with Gemini is that its user interface is very complicated. A user has to take a lot of time learning it before starting to trade efficiently. It can be very intimidating for novices.
- Unlike Coinbase and Gemini, Changelly supports many cryptocurrencies. This means that a Bitcoin owner has more opportunities to invest in newer cryptocurrencies that have huge potential for growth. Some of the cryptos supported by Changelly include Bitcoin, Monero, Ethereum, Dash, and DigiNote. It is particularly valuable for users mining new or less popular currencies.
- The exchange came from the popular MinerGate, a mining pool designed for Android, Linux, Windows, and Mac. Though the main focus of Changelly is trade between cryptocurrencies, it also allows users to buy cryptos using Euro and US dollars.
- The fees for using the platform is 0.5% on all transactions. Remember that this exchange only entered the market in 2016. This indicates that most of their systems and features might still be undergoing initial testing.
- This exchange was started in 2014 with the main objective of making trading in cryptocurrencies easy, direct, and fun. It also offers crypto wallet services for Bitcoin and other cryptocurrencies users.
- The exchange is located in New Zealand. To make the user experience more enjoyable, the exchange verification process works very fast. You only need to add personal email to pass through the first verification.
- Notably, Cryptopia only supports trade in cryptocurrencies and no fiat currencies. The trading fee at the exchange is only 0.20% on every transaction. This is considered fair compared to other exchanges such as Coinbase that charge 1%.
- Unlike other Bitcoin markets that support only one or several cryptocurrencies, Cryptopia supports more than 400 cryptocurrencies. This means that your most reveled cryptocurrency is likely to be included. However, the large number of cryptocurrencies has also made the interface to look highly complicated especially for new traders.
Value of Bitcoin
Since its establishment in 2009, Bitcoin value has had a very rough ride. At first, many people considered the coins and took them for fun. But the price rose to surpass that of Gold a few years later. By the end of November 2017, the value surpassed the $10,000/BTC mark. The value seems to increase during 2018.
The Bitcoin value fluctuation in the top markets
The price fluctuation of Bitcoin in various exchanges is driven by multiple factors that either work for or against this new crypto asset. In the traditional currency markets, volatility is evaluated using the CBOE volatility index (VIX). Here are the main causes of price volatility in Bitcoin.
- Bad press that hurts Bitcoin adoption
- Many geopolitical events and statements from governments have made some people start casting doubts about Bitcoin. For example, the argument that Bitcoin is going to be regulated has sent shockwaves and made investors to reconsider their positions. Other news that pulled down the value of Bitcoin included the Silk-road Scandal and the Bankruptcy of Mt. Gox.
- The Bitcoin perceived value against fiat currencies
- Bitcoin properties make it look similar to gold. However, they are designed and generated using core technology that maintains a fixed amount of 21 million coins. Because central authorities do not manage this process, investors are building more trust in Bitcoin for anticipated stability.
- High variance on the store value of Bitcoin
- Volatility is largely driven by perception about the intrinsic value of a crypto asset. The current changes in Bitcoin value make it somewhat unclear about the store value. However, Bitcoin promises near frictionless value transfer.
- Reports on Bitcoin value volatility
- Bitcoin value fluctuates when the community is exposed to security vulnerabilities. For example, the recent OpenSSL vulnerabilities hit by Heartbleed bug in April 2014 forced the Bitcoin value to shift downwards by 10%.
- Tax treatment
- Recent IRS announcement that Bitcoin should be considered an asset for tax purposes sent mixed perceptions about the cryptocurrency. Many people who thought that their transactions and investments would be fully anonymous are holding back or considering other options such as Zcash. The impact is a downward price surge.
The journey of Bitcoin value
When Bitcoin was founded in 2009, the value was technically $0. A few months later, it grew to $0.39/BTC. In 2011, the value continued growing as groups and corporates such as Electronic Frontier Foundation and Wikileaks started accepting Bitcoins for donations.
The Bitcoin Magazine that was co-founded by Bitcoin, and Vitalik Butein (founder of Ethereum) was established to publicize cryptocurrencies. This was the beginning of rapid Bitcoin growth as more people started understanding the unique operation of the cryptocurrency.
By 2013, Coinbase (a Bitcoin exchange platform) sold about $1 million worth of Bitcoin at $22/BTC. The price grew to $48/BTC before falling sharply by 23% when the scandal of Mt. Gox hit the news. Between June and Dec 2013, the price rose from $70/BTC to $1,000/BTC before stabilizing at around $800/BTC.
The price was leveraged in late 2014 and 2015 when Commodity Futures Trading Commission approved the TeraExchange, LLC, to swap products for Bitcoins. It was the first ever moment for an exchange dealing with cryptocurrencies got approval from US authorities. Microsoft also started accepting Bitcoins for purchase of Windows and Xbox games software.
The BTC value boom in 2017
Having weathered multiple battles prior to 2017, it appears that Bitcoin has already approached the exponential potential stage. The price started at very low levels of $750/BTC in January 2017 and rose to $3,000 by May before price shocks sent afterbanning of Bitcoin ICO in China.
In the last quarter of 2017, Bitcoin value has grown sharply and edged past $10,000/BTC mark at some point. It is predicted that Bitcoin could follow the same trend in the next several years. But this has attracted a lot of attention from the authorities. The European Union has indicated it is closely studying Bitcoin, Bitcoin progress, and the blockchain technology to establish appropriate legislation.
Is It Profitable to Invest in Bitcoin?
Bitcoin was the first person2person currency in the globe. When it was first introduced, many people did not even know what it was about. It appears that Bitcoin ushered a new era of cryptocurrencies that could disrupt people’s lifestyle completely. Like in fiat currency trading, Bitcoin has also opened a new investment opportunity. But some keep asking whether it is really profitable to invest in Bitcoin.
The past painted a bad image of Bitcoin
Investing in Bitcoin is highly profitable. The early years of Bitcoin were very bumpy. As people came across the key terms such as cryptocurrencies, the blockchain, and hashing algorithm, multiple myths that pulled the value of the coins were released. This made investing in Bitcoin very unattractive. For some, it was very difficult to figure out whether rapid uptake and growth of cryptocurrencies were possible.
The scams that followed in years such as 2012 and 2013 only made the situation worse. For example, the Silk-road Scandal and the Bankruptcy of Mt. Gox pulled the value of Bitcoin down with over 10%. People could only imagine Ponzi schemes ahead of them. But this was not all.
The biggest blow to investing in Bitcoin was perhaps the outlawing of Bitcoin ICO in China. This was seen as a precedent as more governments set out to establish regulations for Bitcoin operations. While investors had always thought that their operations would be anonymous, some governments such as the US have declared that Bitcoin could be considered a tax asset. However, these situations appear to be passive as Bitcoin value continues skyrocketing.
Bitcoin has emerged stronger and the best place to place your cash
Despite a rough ride in the past, Bitcoin has triumphed all the battles to emerge a better investment opportunity. Today, its value has surpassed that of Gold, and it is anticipated to continue growing at the current fast pace in the next years. But the rising value is not just the reason for investing in Bitcoin. Here are more reasons to go crypto and particularly Bitcoin.
- Bitcoin is the most valuable cryptocurrency today. Whether you invest in Bitcoin right away or in the coming years, the growth curve guarantees huge returns.
- The cryptocurrency has demonstrated great resilience. This means that no matter the handles that lay ahead, your investment will be secure and continue growing.
- The network helps to keep the investment safe and free from manipulation. Because no single entity owns Bitcoin network, there is no risk of getting affected by political and central administrations’ decisions.
- The chances of losing your investment are very low. Because your investment is anonymous and transactions fully encrypted, you cannot be targeted through litigations. This means that courts cannot freeze your Bitcoin account in case a lawsuit finds it way to your doorsteps.
- Unlike other cryptocurrencies, Bitcoin provides an easy way to convert to fiat and take advantage of emerging opportunities. For example, if you find a great real estate and want to invest there, payment can be done directly in Bitcoin or have the coins converted to fiat in an exchange.
- The cryptocurrency era appears to have just dawned. Now, more companies such as Amazon, Microsoft, and multiple shopping centers are accepting payments in Bitcoin. This opens a new way to do shopping and make payments without incurring huge costs.
To invest in Bitcoin, make sure to have an appropriate digital wallet for holding Bitcoins. Besides, you should also draw long-term objectives and not simply target the current price surge. The surge will no doubt slow down at some point. But this does not mean that your investment will not continue to grow over time.
Where to Spend or Use Bitcoin?
When Satoshi Nakamoto invented Bitcoin, the main objective was making it a unique and reliable model of payment. At first, many traders were skeptical about using Bitcoin because of concerns about its legal status. However, it has become the order of the day to hear more traders adding Bitcoin to their payment list.
Note that to spend Bitcoins, you need an appropriate wallet and ample Bitcoins. You also need to confirm that the store or trader accepts Bitcoin. This is important so that the right services value is calculated all the time before payments are effected. For example, it is important to follow the pricing of services closely because of the fast-shifting value of Bitcoin in the exchanges. The following are the top places one can spend Bitcoins.
(iv) Virgin Galactic.
(v) Jerritt Clark.
Can Bitcoin Grow to Become a Major Payment Network?
As more people get used to Bitcoin, the emerging question is whether it can grow to become a major payment network. Notably, many payment networks such as Visa are capable of handling very many transactions up to 2000/second. However, such services only offer money transfer services. Bitcoin on the other hand only handles about 7 transactions every second.
Despite the lower numbers of transactions done in the Bitcoin network, many people still prefer it for other reasons. For example, it is cheaper, and all transactions are anonymous. Besides, there is no involvement of third parties to verify transactions because the network operates on a peer-to-peer basis.
Bitcoin could become a major payment network as more people learn about its operations and join to benefit in different ways. For example, companies such as Microsoft are accepting Bitcoins for software sales while major stores such as Overstock.com are allowing users to buy using Bitcoins. With more traders joining in and the ensuing sense of attachment, there is no doubt that Bitcoin will ultimately become a great payment network.
However, the Bitcoin team needs to work on scalability progressively. They need to ensure that more transactions can be completed in a second without affecting the integrity of the network.
How Does Bitcoin Work?
As one of the latest types of currencies, Bitcoin is seen as a solution to myriads of issues that characterize the fiat currencies. The currency is very easy to store, transfer, and designate for a specific purpose. But the question of how Bitcoin works never fades away especially from new enthusiasts.
When finding out how Bitcoin works, it is important to knit together the main objective of the founder. The main goal was to create an anonymous digital currency that could operate without the influence of central authorities. This was achieved through the creation of a peer-to-peer model that allows senders and receivers to make transactions without involving central authorities such as banks. This principle is the bedrock of Bitcoin operations starting from the Bitcoin blockchain, transactions, and mining through different nodes.
Here, do not be fooled by the lovely images printed Bitcoin that you get everywhere online. Bitcoin is a virtual currency. Bitcoin is software, a digital phenomenon, protocols, and procedures. Here is an account of how Bitcoin works.
- The Bitcoin Public ledger
- To use Bitcoin, the first step is installing the Bitcoin Wallet on your computer or smartphone. The wallet is the pouch that will hold the digital crypto coins. The wallet will allow you to receive Bitcoins, send Bitcoins, or start mining.
- Bitcoin network operates as a shared public ledger/ blockchain. A blockchain is made of a single chain of distinct blocks or information arranged chronologically. Though other blockchains can be made of different components based on what the network deals with, Bitcoin ledger only consists of transactions.
- All the transactions that have been confirmed in the network are stored in the ledger that communicates with the Bitcoin wallet to determine how many spendable coins are there. The integrity and chronology of the blockchains are implemented with cryptography.
- The Bitcoin transactions
- A transaction in the Bitcoin network means the transfer of value between two users (two wallets). Though Bitcoin wallets are commonly known as stores for your coins, the reference is actually a misnomer. In reality, the wallet only stores private keys (seed) and public keys used for signing transactions to generate mathematical proof that you are the owner of the wallet. The signature also ascertains whether there are enough coins and guards the wallet against being altered. Once a user initiates a transaction, it takes about 10 minutes for it to be confirmed and a new block added to the network every 10 minutes through a process referred as mining.
- Bitcoin mining
- Mining in Bitcoin is a distributed consensus system applied to confirm transactions and adding them to the public ledger/ blockchain. It helps to arrange the transactions in chronological order, protecting the network’s neutrality, and ensuring the nodes agree about the status of the system.
- The agreement helps to prevent a scenario where previous transactions are confirmed again. Such a situation would invalidate all the previous transactions. The process of Bitcoin mining also prevents one entity adding consecutive blocks such that no one party can replace a section of the blocks already added to the system.
- Putting together the Bitcoin's proof-of-work algorithm and cryptography was probably the biggest breakthrough for Satoshi. The Bitcoin software alters the mining difficulty and limits every new transaction or 1-MB transaction for every 10 minutes. This gives the miners and network ample time to digest the transactions and keep the system well updated.
- Remember that miners are rewarded in Bitcoins for helping to confirm the transactions. This is the main method that Bitcoin uses to release its 21 million coins into circulation. Therefore, if you want to get some Bitcoins, one of the popular methods is mining.
Does Bitcoin Use Blockchain Technology?
Yes, Bitcoin is based on blockchain technology.
Before Bitcoin was launched, Satoshi Nakamoto released a white paper that described how the network would operate on the blockchain technology. The blockchain’s decentralized as well as cryptographic nature enable users in the Bitcoin network to develop inherent trust and transact on a peer2peer basis without bringing intermediaries.
Bitcoin blockchain is an algorithm and well-distributed data structure used for managing the Bitcoin native asset on the network without a central administration. The motivation for Bitcoin public ledger was the rejection of government-guaranteed funds and bank-controlled payments.
Notably, the digital money is simply data. No printed notes and coins. Therefore, people would easily be tempted to use the digital cash several times. To address the issue, Bitcoin blockchain monitors and verifies all transactions by calling the decentralized network of nodes to confirm through a vote on the transactions that should take place. The blockchain algorithm ensures that every transaction is unique and reconciled.
Hundreds of thousands of nodes that form the Bitcoin network work with each other to form a consensus indicating that the transactions are unique. Once this is confirmed, the transactions are sealed into a block and added into the network. Bitcoin network creates a new block every ten minutes. This means that all the verified transactions are preserved and attached to the system’s history.
The security of Bitcoin network comes from the thousands of nodes distributed in the network. They help to store the data and maintain its security. The transactions and network remain completely secure as far as a simple majority of 51% of all nodes are independent. This means that the integrity of Bitcoin system strongly relies on the number of participants (the more the nodes, the greater the security).
One of the most innovative aspects of Bitcoin is its focus on incentivizing the nodes to participate in consensus building. Every time that a new block is created, the confirming node is rewarded with 12.5 BTC. This process of exchanging participation for a reward is referred as mining.
One thing that many people with interest in Bitcoin always want to know in detail is where the Bitcoins come from. With fiat currencies, the governments print the notes and coins and distribute them. However, Bitcoin does not have a central authority and Bitcoins are not printed currencies. Take it this way, Bitcoin is simply data and only exists in its networks.
Bitcoin mining is the process of confirming transactions in the Bitcoin network for a reward. The reward is what Bitcoin network uses to release the targeted 21 million coins. From a bigger picture, Bitcoin mining is used to secure transactions and create new blocks that form part of the distributed open ledger.
The technical background
During a mining process, Bitcoin mining hardware operates a cryptographic hashing function referred as the block header (two rounds of SHA256). For every new hash tried in the process, the mining software applies a different random number of the block header. This number is referred as a nonce. Based on nonce and details of the block, the hashing function generates a hexadecimal number that looks like this;
To ensure that new blocks are founded in every 10 minutes and added to the network, you must identify the difficulty target and outdo it by identifying a hash that is below the difficulty target. Let us say that the difficulty target is something like this;
Any figure that starts with zero would be below the target. Here is an example;
To be right on the mark, you should ensure to have two zeros at the beginning. Here is an example;
Since the target is a very unwieldy figure with very many digits, miners use simpler numbers to express the present target. The number is referred as the mining difficulty. This defines how hard it is to mine the current block compared to the original one. To break this down, let us consider mining difficulty of 70,000. This means that you need to do 70,000 more work compared to what Satoshi did to mine the first ever Bitcoin block.
The Bitcoin network adjusts the difficulty formula every 2016 blocks. This is approximately 14 days. It is because of this that power usage rises for your mining system after the mining difficulty is adjusted.
The mining hardware
- When Bitcoin was launched in 2009, the only method of mining was the CPU. This was accomplished using the original Satoshi client. In an effort to secure the network and earn more Bitcoins, tech experts and miners got extra creative by exploring new hardware. Today, it is very difficult to mine using a standard computer or laptop. You would actually need years, and it is not viable.
- High-end graphics cards were found to be highly effective in Bitcoin mining. CPU was giving way to GPU which allowed miners to increase their mining hash power up to 100 times or even more. Now, GPU card manufacturers such as NVIDIA have refined their cards design to make mining easier and effective.
- From GPU, the mining landscape continued to evolve, and Field Programmable Gate Arrays were invented. These are special hardware dedicated to Bitcoin mining. The FPGA provides higher power efficiency and greater ease of mining. For example, a typical FPGA mining device that generates a hashrate of 826MG/s will only require 80 watts. This is a great improvement of the power required for using GPU.
- Today, Bitcoin mining is largely dependent on ASIC (Application Specific Integrated Circuit). This is a unique chip designed to only mine Bitcoins. Note that the chip cannot mine any other crypto asset apart Bitcoin. While the high specificity is considered a great disadvantage for using ASIC, many people still prefer it because it provides very high hashing power that makes mining Bitcoins a lot easier.
- Many Bitcoin mining rigs comprise of multiples of ASIC chips arranged together to deliver higher hashing power. Some companies are even investing in ASIC rigs and lending the hashing power to miners.
- Bitcoin mining software and mining pools
- As mining continue getting extra difficult, many people are finding it impossible to make significant returns. A better way to mine Bitcoins is joining mining pools. These are groups of miners who come together to consolidate their hashing power and raise the chances of confirming blocks. However, the mining rewards are shared among the members of the pool.
- Today, cloud mining companies have also emerged to help people with interest in mining to work without worrying about the hardware. The target is trying to remove the bottlenecks of having to acquire expensive hardware before starting significant mining. The cloud mining services such as Genesis Mining allow its clients to start mining immediately after subscribing to the preferred plans. With cloud mining, it is possible to start mining Bitcoins with standard computer or software.
What Are the Advantages of Bitcoin?
The blockchain technology has continued to grow and manifest itself in every aspect of the modern lifestyle. From a controversial alternative currency to the most valuable digital cryptocurrency, Bitcoin has now become an irresistible investment. Here are the most notable advantages that come with Bitcoin.
- It is anonymous and private
- The underlying factor for most blockchain technologies is the ability to maintain their transactions fully anonymous. This was the main driving force behind Satoshi’s move when he engineered Bitcoin. Unlike other payment models through banks where the sender and receiver’s details must be revealed, it is totally different in Bitcoin. The much that you can know is the address of the Bitcoins to be spent.
- Notably, even the address is still encrypted so that miners in the network can only confirm whether the address has ample coins to make the anticipated transaction. This means you can make payments, receive payments, and grow your investment portfolio without being noticed by anyone. Now, you do not need to look for a tax haven to keep personal cash safe, simply buy Bitcoins.
- Freedom of payment across the globe
- Unlike making payments through fiat currencies where a lot of verifications must be made by central authorities such as banks, the transactions in the Bitcoin network are peer-to-peer. This means that it is only the sender and receiver are involved. The miners who confirm the transactions cannot know the personal details of the sender or recipient.
- The peer2peer model breaks all the disruptions and bottlenecks that come with standard organizations such as weekends, holidays, strikes, and boundary limitations. No matter the time of the day or night, you can still make direct payments.
- Because no third parties are involved when making payment, the charges for maintaining the network are very low. The charges do not go to paying staff, paying banking space, and calculating profit margins the way banks operate. The cash helps engineers to maintain and improve the network.
- Bitcoin is the best way to control your money
- With Bitcoin, it is only you (the wallet/private key holder) that can make a transaction. It is not like a credit card where third parties can access the card, and siphon all cash. Only you who can make or receive payment. Besides, you can follow the details of your wallet to check on personal spending.
- Ability to pick transaction fees
- The amount of money charged for receiving or sending Bitcoins is very small. In fact, it depends on the wallet you are using to receive cryptocurrencies. In most of the cases, the cost of sending 1000 BTC is the same as sending 1BTC. To enjoy very low rates for sending and receiving BTC, make sure to pick great wallets such as Coinbase that were established to popularize Bitcoin and its network.
- The risks for merchants are fewer
- The transactions on Bitcoin are secure, irreversible and do not capture details of the respective parties. This means that you will not suffer from chargebacks because clients follow the nature of the business. For example, if you have a product that the client likes, there is no way to check on related transactions and decline payment because he does not ascribe to your principles.
- Bitcoin transactions are very fast
- When you decide to make payment using Bitcoin, the transactions complete within minutes. You only need to have enough Bitcoins in your wallet and address of the payee. In less than 10 minutes, the payment will be completed no matter the difference in time zone. It is because of this that many stores are preferring Bitcoin because payments can be cleared fast and are completely irreversible.
- No third party seizures
- Recently, many people have developed some fear that central authorities could easily target their cash stored in banks through legislation. This can happen through legislation that imposes taxes on deposits or other related deductions. Your cash in the bank account could also be targeted through lawsuits. However, Bitcoin is immune to these seizures because no single authority owns the network. This means that the parties that know about your investment or funds are only you and the cryptocurrency wallet.
- In the event of a lawsuit, it will be impossible for the court to freeze your account because nothing is known about it. Therefore, this is the best way to stay protected from political interference and other parties that can easily threaten your hard earned cash.
- Bitcoin is non-inflationary
- The main reason why Bitcoin is being referred to as the Future of Money is that it is non-inflationary. When central governments want to add more currency to the market, they simply print it. This has been one of the main causes of inflation and lowering of the price of commodities. However, Bitcoin only created 21 million BTC that will ever exist in its network. Because the number of Bitcoins is known, it will not be possible to add new coins and, therefore, inflation will not be an issue once all the coins mature. Coin owners can, therefore, be sure that the value of the coins will keep growing progressively.
What Are the Risks of Bitcoin?
The last quarter of 2017 is considered the Bitcoin boom period. The price of 1BTC has climbed from about $3000 in August to near $10,000 mark. This has resulted in the sudden rush for BTC as everyone wants to cash in on the price surge to make handsome returns by close of the year. This has led to one question; what are the risks of Bitcoin? Here are the main risks that you need to be aware of when joining Bitcoin.
- Risk of Bitcoin losing its appeal
- The actual value of any cryptocurrency is in its blockchain. The respective blockchain is driven by the appeal that keeps drawing people to it. In the case of Bitcoin, the appeal has worked to its advantage and helped to weather most of the hurdles on the way. However, the risk of losing appeal from supporters still looms.
- In August when Bitcoin effected the first fork resulting in Bitcoin Cash, some info from Bitcoin was moved. The main goal was to boost the Bitcoin capacity and cut transaction costs. However, some people have been asking what would happen if the fork fails to appeal to businesses?
- Today, a lot of cryptocurrencies have entered the market with very innovative products. For example, a lot of organizations are trying the Smart Contracts under Ethereum. Another cryptocurrency that is following closely is Zcash. Zcash has identified key flaws in Bitcoin and improved on anonymity and block size requirements. When these are coupled with other emerging, and equally competitive cryptocurrencies, interest in Bitcoin could wane with time.
- Risk of losing the private keys
- Bitcoin, just like other cryptocurrencies, strongly relies on the digital wallets that store private keys. But the digital wallets are not immune to getting lost. People could end up losing their Bitcoins if the hard drive where the digital wallet is stored is formatted. In other cases, the computer with the digital wallet or smartphone could get lost together with the wallet.
- In the case when people use hardware wallets such as Ledger Nano S and Trezor among others, the risk of losing the wallet still looms. The hardware wallets are finger-sized devices that can easily get misplaced.
- To avoid the risk of losing the wallet and stored Bitcoins, it is very important to ensure that a backup is maintained all the time. For example, you could acquire several hardware wallets and keep one under lock and key at home or in a bank. You should also maintain the computer in top condition all the time. In some instances, people who handle a lot of BTC usually designate a high-performance computer to deal with Bitcoin only.
- The danger of cyber attacks
- While the Bitcoin Network designers might have thought carefully about the blockchain application and enhanced the security with peer-2-peer model, third parties are still involved in transactions. For example, a lot of users prefer using third-party wallets so that they can also deal with multiple cryptocurrencies. This is where security lapses that threaten to siphon your BTC arise.
- In August 2016, Bitfinex Exchange in Hong Kong was attacked and 120 million Bitcoins stolen. The impact was a drop by about 23% of BTC pricing on the exchange. Approximately one year earlier, BitPay was also hit and lost $1.8 million worth of Bitcoins in a Phishing attack. Besides, the formation of specialized mining pools with advanced mining equipment could easily result in a small group controlling the entire network.
- The danger of being drawn to scam
- In addition to operational risks, the danger of scams still abound. Today, cryptocurrencies are only emerging. Even with the current publicity, many are the people who do not understand how the cryptocurrencies work. For example, some people are being lured to cloud mining while others are buying faulty video cards and mining equipment. Many people who invested in Bitcoin never realized about the infamous Silk-road Scandal and the Bankruptcy of Mt. Gox until everything had gone too far to be rectified.
- Since cryptocurrencies are meant to operate in the highest possible anonymity, most Ponzi schemes are very difficult to detect. The scams risk tarnishing the name of Bitcoin, waning interest in the network, and pulling down its value.
- The looming regulations could restrict digital currencies
- Many governments see digital currencies as threats. Notably, the main focus of governments is enhancing industrial and enterprise growth so that revenue generation can grow. But Bitcoin and other networks are siphoning this capability completely from governments. For example, if you send several Bitcoins, the charges are very low because there are no intermediaries. The bank gets nothing, no employment is enhanced, and the government equally gets nothing. However, sending with using a bank would have multiple ripple effects through bank growth, employment, and tax to the government.
- The looming legislation is, therefore, expected to alter how cryptocurrencies operate. The chances are that Bitcoin operations could be limited to a very great extent. This means that the current fast appreciation of BTC and other cryptocurrencies is likely to take a downward trend immediately such laws are installed.
- Already, the federal government has indicated that it could declare BTC a tax asset. Just like the FATCA had far-reaching implications after the 2008/2009 global recession, the chances are that Bitcoin will ultimately get regulated. This has made experts to advice people not to place all their resources on the Bitcoin network alone. Instead, they should put some significant focus on crypto assets without cutting links with the fiat currencies.
- Very high volatility
- When Bitcoin was launched in 2009, its value was $0. The value of the cryptocurrency has had a very bumpy ride to-date because of high volatility. Issues on and outside the network easily cause serious fluctuations in the Bitcoin value. For example, when China outlawed Bitcoin ICO, the price seriously shot down. This should be used as a caution to investors who are rushing to get BTC because of the rapid growth. Just like the price has shot up very fast in 2 months, it can also drop sharply because of issues such as a new legislation and cybercrime.
What Happens if Bitcoin Gets Lost?
Bitcoin is digital money that you can only hold in a crypto wallet. Because you already own the coins after mining, getting paid, or buying from an exchange, losing them means they remain in the network but in a dormant state. For example, if you lose the crypto wallet that holds the coins, they will forever remain there since only your private keys can unlock them.
The impact of losing Bitcoins can cause a ripple effect on the demand and supply of Bitcoins. Since fewer Bitcoins are left, the implication is that the demand will go higher as supply slumps. This could sharply raise the value of the remaining coins.
Four common ways that people lose Bitcoins
- Formatting the computer hard drive with the installed Bitcoin wallet.
- Losing the mobile phone with the mobile Bitcoin wallet.
- A cyber attack on your computer because the operating system is not updated.
- Your computer getting stolen or damaged.
Since Bitcoin was established, a lot of concerns have been raised about its operations and legality. In particular, governments have seen Bitcoin as a threat. This comes from the fact that most of them are seeing their main sources of taxes slipping away. The main sources of revenue for governments are taxes. These are paid by institutions such as banks and individuals when making transactions.
Now, enters Bitcoin. The anonymous nature of Bitcoin network makes it difficult to trace the involved users, their transactions, and amount. Besides, the main objective of Bitcoin to lower the transaction cost in a peer2peer model means that no bank is involved and no taxes are paid to the government. This opens a theater for confrontations between cryptocurrencies and governments.
As a new form of cryptocurrency, many governments have had different views about Bitcoin and its regulation. Here are some of them and what to expect.
- The United States
- Bitcoin is legal in the US. Most of the cryptocurrencies including Bitcoin have their roots in the US. This is because of the tech advancement in areas such as the Silicon Valley and New York. In 2013, the US Treasury classified Bitcoins as convertible decentralized virtual currencies. Also, Bitcoin was classified as a commodity by the Commodity Futures Trading Commission. This means that Bitcoin is subject to tax as a property. Recently in 2016, a federal judge ruled that Bitcoins are funds. This means that they have to be treated as currency.
- While there are no clear regulations to guide cryptocurrencies in the US, signs are that legislation could hit them hard by indicating they are taxable.
- One example that is making investors from the US tread carefully when dealing with Bitcoin is the radical approach taken by FATCA. While many people had thought that they could simply stash cash abroad, FATCA was passed after the 2008-2009 financial recession, making it a must for Americans to reveal their cash in foreign banks.
- Today, offshore banks even fear opening bank accounts for Americans because of FATCA compliance. It is feared the looming legislation could force people to reveal their status in Bitcoin network for tax compliance. The network could also be forced to reveal all Americans and their related transactions.
- The European Union
- Bitcoin is legal in the EU. There is no specific legislation concerning the status or operation of Bitcoin in EU. The only mention in the EU is that VAT/VGS still apply to any transactions that relate to Bitcoin use for purchase of services and goods.
- In one of the rulings in the European Union Court of Justice, Bitcoin was ruled to be a means of payment and not a legal tender. This means that as a virtual currency, it should not be taxed. The European Central Bank, in its input, pointed that Bitcoin is a convertible virtual currency. Earlier in 2014, the Banking Authority had advised banks to avoid dealing with Bitcoins.
- In 2016, the EU has set a task force to monitor Bitcoin and other cryptocurrencies intending to establish clear legislation. One of the requirements is that Cryptocurrency wallets will be required to identify and notify authorities about suspicious activities. The EU appears focused and willing to go to any lengths to anchor the blockchain technology growth by tapping the positive aspects.
- Russia has ruled that Bitcoins are not illegal at the moment. The Russia Central Bank has indicated it is not willing to regulate cryptocurrencies as money. However, the Deputy Finance Minister has pointed that though people are free to trade in Bitcoins, they could be criminalized in future. The country could base its arguments on the numerous cases of drugs users and Ponzi schemes that are hiding behind Bitcoin networks.
- United Kingdom
- In the UK, Bitcoin is legal and considered as private money. The government has indicated it is following Bitcoin and other digital currencies closely with a target of drawing clear legislation. The administration has indicated that when Bitcoin is exchanged for other cryptocurrencies, no taxes are supposed to be charged. However, profits that accrue from cryptocurrencies are subject to capital gains taxes.
- A closer look at the state of legislation in most countries indicates that Bitcoin is legal. Most countries including Netherlands, France, Ireland, Spain, Italy, Malta, Portugal, Sweden, and Iceland do not have legislation on Bitcoins. Therefore, using Bitcoins or trading them remains legal.
It is important to point that while legislations are looming in most countries, the way to go about them remains very tricky. The technology is disruptive and highly encrypted. This presents a headache because some cryptocurrencies such as Bitcoin do not have formal organizations. They are owned by people in the network across the globe. Therefore, legislating them in one country could fail to have a significant impact because operations will continue in other countries.
It will be very interesting to see how different nations go about Bitcoin and general digital cryptocurrencies regulation.
Is Bitcoin Legal?
Yes, Bitcoin is legal. Most countries do not have clear legislation on Bitcoin and other digital cryptocurrencies. But some people have been asking; why a full decade has lapsed without passing appropriate legislation since Bitcoin was launched? Why is the status of cryptocurrencies still unclear even after more than 1100 cryptocurrencies entering the market?
Bitcoin remains legal in most countries including the US, EU, Morocco, Russia, Netherlands, South Africa and others because the administrations are playing catch up with technology. While Bitcoin technology could, perhaps, have been easier to comprehend if it was alone, entry of others has complicated the equation. Now, over 1100 cryptos have entered the market using different technologies. Therefore, governments are caught between a rock and a hard place to legislate Bitcoin.
Dealing with anonymous currencies is very tricky. First, most cryptocurrencies are anonymous with founders being completely mysterious. For example, Satoshi Nakamoto who founded Bitcoin is a mystery. Bitcoin network itself is a mystery. Therefore, how do you even legislate an almost virtual organization with no admin but owned by all the people using it? Experts have pointed that the intent to legalize or illegalize Bitcoin and other networks is more complicated than it appears.
Bitcoin and other blockchain technologies indicate that we are in a new technological era. The current fiat currencies have demonstrated numerous flaws such as direct interference and inflation. Therefore, the administrations are looking at the positive side of blockchains to avoid lagging behind.
Notably, Bitcoin is not just a currency. It presents people with a new line of work through mining. This means that just like the fiat currencies, people can expect to invest and reap handsomely. Therefore, many countries are not willing to shut down Bitcoin because it will also harm the emerging opportunities.
Though Bitcoin is legal today, there is no doubt that the looming legislation could make its future bumpy and unpredictable. It could even slow down the current fast growing value.
Bitcoin and Taxes
One of the key attractions to Bitcoin is that it is fully anonymous. Therefore, if all transactions and wealth growth is invisible, the expectation is that one is insulated from taxes. The subject has become very slippery because of lack of legislation. But this does not mean you are completely off the hook when it comes to taxes. We are going to look at the case of the US to shed more light on Bitcoin and taxes. Note that other countries are mainly looking at the US model to implement similar systems and ensure that Bitcoin users in their jurisdictions pay taxes.
The US federal system spares no effort in ensuring that everyone pays taxes. Just like with other cases of personal finances, the secret is ensuring that you have the right records of transactions on the Bitcoin network. This is crucial in ensuring that when the time comes, computing tax to be paid to IRS is easy and direct.
- A closer look at taxes from the viewpoint of Bitcoin
- After the US declared Bitcoin and virtual currencies as properties in 2012, it means that holders are subject to capital gains when disposing off the currency. It is pretty the same way as having a real estate for sale. The income you make for trading or other activity on Bitcoin is, therefore, taxable. Note that sending the cryptocurrencies can be in two ways; disposing the Bitcoin and spending dollars-equivalent amounts.
- All business transactions that are done using Bitcoin should follow the normal rules of taxation and information reporting. By keeping the records of transactions on the virtual currencies, it means that the income can be evaluated clearly and the relevant taxes remitted to IRS. This is the best way to avoid getting caught up in the emerging cryptos and existing tax rules.
- The reference of Bitcoin by IRS
- IRS took a bold measure to define Bitcoin and ensure that users and businesses remain on the right side of tax laws. It pointed that Bitcoin and other digital currencies are digital representations of value that operates as a medium of exchange or for storing value.
- IRS pointed that Bitcoin can be traded between two users or even purchased and exchanged for Euro and Dollars among other currencies. This has been interpreted to mean some legitimacy for the Bitcoin.
- For federal tax purposes, Bitcoin must be treated as a property. This means that whoever receives Bitcoins as payment for services and goods must capture it in his tax returns details as per the equivalent value at that moment in US dollars.
- The entry and emphasis that Bitcoin is a commodity have created a new way to look at cryptocurrencies. As a user, one is expected to closely follow the transactions and ensure that gains are reported and appropriate taxes remitted. It is expected that the virtual currency legislation being worked on will follow the IRS model of argument.
Tax tips for Bitcoin users and traders
- Ensure to create a good model of record keeping.
- Follow your tracks when the Bitcoins are acquired and their value in US dollars at every point.
- Make sure that every purchase in Bitcoin is captured in two mode transactions; expense and implied disposition.
- Consider using a single exchange and use it consistently.
- Make sure to include sales tax when clients buy products from your shop.
- If making payment to staff in Bitcoins, ensure to start by withholding the applicable payroll taxes. The net pay can be implemented in Bitcoins.
- Make sure to pay taxes in dollars and not in Bitcoins.
To ensure that you do not fail to capture a transaction and attract tax-related penalties, consider using appropriate BTC tracking software such as Libra Tax and Bitcoin Taxes.
It is important to note that though cryptocurrencies are unregulated at the moment, they will at some point. Therefore, you had better take advantage of the fast-rising value while keeping an eye on how you meet all tax obligations. The bottom line is getting the books done appropriately and seeking expert help when unsure of where the tax line passes.
Does Bitcoin Have a Consumer Protection?
Today, Bitcoin has emerged as a great investment destination for users. The value is growing very fast as more companies start accepting it for payment. But even as more people join as miners, users, and investors, how well are the consumers protected?
To understand how protection works in Bitcoin, it is important to revisit the whole idea of Bitcoin operation. When Satoshi created and activated the Bitcoin protocol, he let go the entire system. Now, even he (Satoshi) does not have absolute control of the system. The decisions are made through consensus by people operating as nodes on the system.
The ultimate consumer protection in Bitcoin is you. Unlike the fiat currencies that are owned by the federal government, no central authority controls Bitcoin. This is the reason that many hacking in the early years regarding Bitcoin caused a lot of losses to users.
Because governments barely recognize Bitcoin, it is a gray area between a currency and asset. Therefore, there is no solid consumer protection. If you send funds to the wrong address, the loss is permanent. There is no way to recover it. If the wallet gets lost, it is gone completely unless a backup had been created and stored safely.
Bitcoin is not going to act on any losses because there is no specific company called Bitcoin. This means that you must use Bitcoin with extra care. It is particularly crucial to keep the wallet safe, maintain a backup, and only use the same computer when making transactions.
The furthest that Bitcoin went to protecting the consumers was creating the Bitcoin Foundation. While the foundation is thought to have been established and run by the founders of the network, they totally dissociate with it. They only argue that the aim is promoting Bitcoin and not taking responsibilities for issues taking place in the cryptocurrency network.
Illegal Activities with Bitcoin
As an anonymous network, one side effect of Bitcoin is that fraudsters are likely to find it a haven. This is one of the fears that FBI has held since Bitcoin was launched. Here are specific illegal activities related to Bitcoin.
In May 2017, there was a spread of cyber attacks on institutions and companies across Europe. A Ransomware strain called WannaCry hit the institutions and companies, encrypted all the data, and the criminals demanded being paid in Bitcoin. They knew that once the money found itself in the network, there was no way authorities could track them. Though the malware was finally stopped, millions had finally been sent to the criminals.
In Maryland, a scammer defrauded a car buyer thousands of dollars after placing an ad and asked to be paid in Bitcoins. An unsuspecting buyer went to a Bitcoin ATM and faithfully made the payment expecting to get a cool ride back home. When the buyer realized it was a scam, it was too late because the Bitcoins were already sent and transactions on the network are irreversible. Lucky enough for the man, Bitexpress (the exchange that runs the Bitcoin ATM) refunded the buyer all his cash. Because the transactions are anonymous and irreversible, scammers find it very easy to defraud clients.
As the popularity of Bitcoins continues to grow, more people are easily falling prey to anything that barely mentions cryptocurrency. With about 1100 cryptos in the market today, scammers are releasing fake ICOs with a target of defrauding the target clients. If you send Bitcoins without verifying that the ICO is real, the chances of getting defrauded are very high.
Seven South Koreans were arrested recently for running a $38 million scam that targeted new cryptocurrency investors. The scammers promised investors 180% profit on a regular basis if they invested in Bitcoin. In about 2 years, the group was able to rake nearly $38 million because they targeted those with little knowledge about Bitcoins.
As Bitcoin investment becomes even more lucrative, everyone is running to get a piece of it. This has opened opportunities for scammers to target unsuspecting individuals. If you are targeting to invest, it is crucial to learn how Bitcoin operates and use the right exchange to buy the coins. The best method is targeting well-established markets with years of operations as opposed to using third parties.
Is Bitcoin Secure?
The Bitcoin protocol and cryptography makes the blockchain one of the most secure in the cryptocurrency industry today. Since inception, the Bitcoin team has ensured they follow the occurrences closely to redefine the blockchain technology against the emerging threats.
The fact that every transaction strongly requires a consensus mechanism before getting confirmed and added to the public ledger has made it impossible for people with malware to attack, damage, or steal Bitcoins directly. It is this strict model that has prevented the Bitcoin network from getting hacked to date. Besides, the Bitcoin team also remains very active even if it never comes out to share info about its work.
The main point of weakness in the Bitcoin system is the wallets. Note that the wallets are just like the physical cash because each user has absolute control. For example, if you have a mobile wallet or hardware wallet, the responsibility of keeping it safe is solely personal. If the wallet gets lost, you cannot say that the Bitcoin network is insecure.
However, a lot of support is provided by wallet providers to help their clients understand the wallets and keep them safe. For example, you are encouraged to keep the operating system on the computer with the wallet updated always. Besides, you should always use the same computer to access the Bitcoin network as opposed to multiple devices.
Is Bitcoin Anonymous?
The design of Bitcoin targeted allowing users make transactions anonymously. The transactions are encrypted such that only the sender and receiver in every transaction get to know about the details. The peer-to-peer model envisaged by Satoshi anticipated a setup where even miners would only confirm the transactions without knowing the involved individuals. This means that if a fashion shop selling clothes advertises its products and asks anticipating clients to pay in Bitcoin, only an encrypted address that confirms the buyer would be shared. The high level of anonymity has been the main reason for huge interest in Bitcoin. Many traders are even opting for Bitcoins because the anonymity does not allow chargebacks. There is no way a trader can follow back and know details of the clients and decline payments if he does not follow the seller’s operational principles.
- Emerging flaws in Bitcoin anonymous model
- After operating anonymously for years, cracks have emerged in the Bitcoin operational code. It is now accepted that Bitcoin only offers anonymity to an acceptable level. Because Bitcoin works as a Public Ledger, a strain of public records is left. These records can be put together to narrow down to specific addresses and identify the users.
- Note that digging these records and narrowing down to respective users is a monumental task. But a focused and sophisticated person can still follow and identify you. Of particular focus is the transaction between the Bitcoin network and the respective cryptocurrency wallet. For example; in 2013, the Bitcoin transactions helped to track down one of the largest drug markets that used the cryptocurrency.
- This fear is also believed to be the reason behind WannaCry scammers’ fear of withdrawing their Bitcoins after the attacks on companies in Europe. They fear that their cryptocurrency wallets and network transactions could easily trace back to them. Therefore, all the cash paid in Bitcoins remain in the wallet they used.
- However, Bitcoin has been working on new measures to enhance the network’s efficiency. Despite the cracks in the anonymity, more people have come out to support the current system because it keeps the fraudsters away from the network. Some experts are even pointing that this could be the reason for the current high demand for Bitcoin and surging value.
Has Bitcoin Ever Been Hacked?
The Bitcoin protocol and cryptography are still working effectively close to 10 years after inception. The main reason for this efficiency is a highly responsive team that promptly picks on every flaw and fixes it with speed. Bitcoin network has been using these security updates and redesign for its protocol to demonstrate maturity.
In many cases, there have been a lot of misconceptions about exchanges as well as businesses that have been hacked and a lot of Bitcoins stolen. While these security issues are indeed unfortunate and distressing, none of them involved Bitcoin itself getting hacked. They also do not imply there are security lapses at Bitcoin. Think of it this way. If someone steals your ATM and password and goes ahead to withdraw cash, it does not mean your bank is faulty.
Many exchanges and wallet designers have come up with multiple security methods including wallet encryption, hardware wallets, and even offline wallets that add layers of protection to your Bitcoins. This means that the first step to staying fully protected is ensuring you pick an appropriate wallet and protecting it from intruders, theft, and loss.
How Can I Restore Bitcoin?
The problem of lost Bitcoins is perhaps the most worrying to investors. At this point, it is important to understand that your Bitcoins are stored in the Cryptocurrency wallet and not in the Bitcoin network. Therefore, what gets lost is the wallet or the private keys.
Sometimes back, getting your wallet lost was the end of it. In fact, it is even today unless you take some precautions. To restore the Bitcoins, you need to remember the keys explicitly and have a backup wallet. This is very important. It is because of this that users are advised to ensure they have multiple backups of their keys.
Though some tools and companies can help to recover data about the wallet if a computer crashes or hard drive breaks down, the best option is maintaining a good offline backup. You could even generate the key codes and store them under lock and key. In such a case, ensure that no third party gets access to them. If you have the private and public keys, the process of restoring the Bitcoins is pretty direct.
- Locate the wallet's private keys.
- Locate the backup copy of the Bitcoin wallet.
- Input the private keys and restart the process.
Note that the outlined process is the most familiar model with most wallets. Some of them might have a different model of restoring Bitcoins. Therefore, make sure to get familiar with the restoration process provided by your respective wallet company.
Why Do People Trust Bitcoin?
Bulk of the trust that people have in Bitcoin comes from the reality that it needs no trust at all. Bitcoin network is an open-source and fully decentralized network. What this means is that anybody can access the whole source code at any place and anytime. A developer can easily demonstrate how Bitcoin operates easily.
People joining the Bitcoin system own and control the network. As a system based on consensus operations, everyone on the network is entitled to a section of it. Whether you are sending money or works as a miner, the network cannot be complete without you. This feeling of identity has made more people to associate, protect, and commit to taking Bitcoin ahead.
To make payments, there is no third party required. As a peer2peer network, people are assured of making prompt payments at very low costs. This means that you can stay away from expensive institutions such as banks. By slashing away the bureaucracies, more people have come to trust the system. Why go to a bank that charges over $10 to send cash and takes about 2 days while there is an option of paying less than $1 to make payment instantly?
Over the years, heavy taxation has driven people into the endless path of searching for alternatives. In some cases, people are forced to open bank accounts abroad in jurisdictions with subtle tax rates. Now, Bitcoin has presented a new destination for investing hard earned cash. The trust comes from the fact that your Bitcoins are anonymous and, therefore, cannot be easily reached for heavy taxation or frozen by courts.
At a time when a lot of Cryptocurrencies have hit the market, the main objective of investors is picking the most stable, valuable, and promising option. Bitcoin has not disappointed. It is the only crypto that has weathered many storms to emerge stronger and give a ray of hope to investors.
History of Bitcoin
Today Bitcoin continues to grow at a very rapid rate. The unregulated digital currency has moved from only about $0.14 a few months after creation to more than $10,000 in the last quarter of 2017. This growth and the mystery associated with the founders have made more people start digging into the Bitcoin history. Here is the complete history of Bitcoin.
The early years of Bitcoin
- On August of 2008, Bitcoin.org domain was registered. Two months down the line, a white paper with a title Bitcoin: A pee2peer electronic cash system written by Satoshi Nakamoto was linked to the domain. This paper provided an account of how the peer2peer cash system would work to make payment easy, direct, and prompt.
- In January of 2009, Nakamoto implemented the open source code or Bitcoin software that marked the birth of Bitcoin. He also mined the first block referred as the genesis block on the Bitcoin network. Notably, Hal Finney was the first supporter of the Bitcoin network by downloading the software the same day it was released. He received 10 Bitcoins as a reward. Other early supporters included Nick Zabo of bit gold and Wei Dai of b-money.
- Nakamoto is believed to have handed the leadership of Bitcoin to a developer called Gavin Andresen who heads the Bitcoin Foundation. The foundation is the entity that goes closest to the Bitcoin official face.
The phase of costly scandals in Bitcoin
- In 2011, Wikileaks (a non-profit organization that gained notoriety in recording and releasing secret cables between government officials) started accepting Bitcoins for donations. This followed the organization getting dropped by banks and other payment services such as PayPal.
- In June the same year, Bitcoin also saw the first bubble burst after its value fell from $30 to $10 and then to $3. The Mt. Gox Bitcoin exchange was also hacked resulting in huge losses in Bitcoins. Owner of Bitomat (third largest Bitcoin Exchange) incurred a loss of 17,000 BTC for its clients. Another hacking attack was reported by the end of 2011 with 78,000 Bitcoins getting lost.
- Short on the heels of these attacks, an illicit marketplace for drugs famously referred as Silk Road started accepting payments in Bitcoins. This involvement painted the young cryptocurrency in a bad light at a time it wanted to reach more people.
- Early in 2012, TradeHill Bitcoin exchange closed its doors. It also sued another Bitcoin exchange, Dwolla. Within the same period, another Bitcoin exchange called Bitcoinica was hacked and more than 43000 Bitcoins stolen.
- A leaked FBI report uncovered the fears of the government that Bitcoin was becoming a tool to facilitate drugs and sale of weapons. It was thought that because the payments were fully anonymous, the network could also be used to fund terrorist activities.
- Other dangerous occurrences in Bitcoin that pulled its value down and threatened to cripple it included the Shutdown of Bitcoin Savings and Trust after it was declared a Ponzi scheme in 2012, and hacking of Bitfloor exchange.
The rapid growth of Bitcoin after 2013
- After suffering the tumultuous entry and trying early years, Bitcoin weathered to reach the current highly revered status. In December 2012, the first Bitcoin bank opened its doors. This was the work of Bitcoin exchange Bitcoin-Central partnering with French bank Credit Mutuel to operate the bank.
- In 2013, more companies started accepting Bitcoin. Dominos and Pizza Hut started accepting Bitcoin for pizzas. It also started getting accepted into online gambling. Other entities that accepted Bitcoin included Internet Archive and Kim Dotcom Mega. Bitcoin broke the record by touching over $100/BTC by close of 2013.
- The value of Bitcoin was further leveraged between 2014 and 2016 when more exchanges and companies started accepting BTC. Microsoft started taking BTC for windows and XBOX software. The biggest boost was however reported when Commodity Futures Trading approved TeraExchange to swap its products for Bitcoins in 2014.
- Between 2016 and the last quarter of 2017, the Bitcoin value shot to more than $10,000. This has made Bitcoin the largest cryptocurrency by value and market capitalization. While there are indications that governments are likely to pass legislation targeting cryptocurrencies, Bitcoin is expected to continue growing after weathering the previous battles.
Who Created Bitcoin?
Today, people only know that Satoshi Nakamoto founded Bitcoin. But who is this Satoshi Nakamoto? After releasing the white paper and mining the genesis Bitcoin block, Satoshi vanished, and little has been heard from him.
A closer look at the name reveals that the word ‘Satoshi’ means very clear thinking, ‘Naka’ is a medium or relationship, while ‘Moto’ means origin. Therefore, it is clear that Satoshi Nakamoto was not the name of a person, but a pseudo name of an individual or group of individuals.
Some of the people thought to be or comprise the group that referred itself as Satoshi Nakamoto include a Satoshi Nakamoto who is a cryptographer in Dublin. Others who have been thought to be Satoshi include Neal King, Charles Bry, Martii Malmi, and Jed McCaleb. All the personalities deny being Satoshi.
On 2nd May in 2016, CNBC reported of an Australian entrepreneur who came out to claim he was the Satoshi. Craig Wright told BBC that he was indeed the Satoshi and wanted to come out from the blues to make everything right. He indicated that after looking at screens for many hours and myths that characterize the identity of the Bitcoin Founder, he decided to reveal his identity.
He indicated that he has all along been involved in Bitcoin and was doing more research to make it better. To demonstrate that he was the Satoshi, Craig signed the message with the keys that were used to mine the first block. Those were the blocks used for sending 10 Bitcoins to Hal Finney (the second person to mine Bitcoin after Satoshi). Craig claims that Finney helped to make the dream of Bitcoin become a reality.
Craig’s argument has, however, not been accepted by all as some people indicate that he is out to gain publicity. With more people coming out to claim they are Satoshi, it is clear that the actual identity of Satoshi Nakamoto might never get revealed.