World Coins

Vartian column for 051914

This month’s column is about Bitcoin, which many readers will say is not a “coin” at all, and shouldn’t be discussed in Coin World.

The media hype accorded to every twist and turn in the Bitcoin universe has prompted at least one newspaper to quip that “Bitcoin is currently a more reliable store of value for journalists than it is for investors.” Nevertheless, it is my experience that some people who buy coins are also very interested in alternative currencies such as Bitcoin, and the past few weeks and months have been particularly eventful for Bitcoin enthusiasts. Besides, whatever one thinks of Bitcoin, it is being accepted as “money” in some places, and for that reason alone is worth knowing about.

Bitcoin is a virtual (digital) payment system that is not controlled or regulated by any central governmental or private body and, unlike PayPal, has its own units of currency (called “bitcoins”), rather than using U.S. dollars or other governmental fiat currencies.

No physical ‘bitcoins’

There are, strictly speaking, no physical “bitcoins” to collect.

Rather, Bitcoin transactions are online, and users store their bitcoins in a “digital wallet.”

Where does one obtain bitcoins? One way is to “mine” for them, a process that was never easy but now requires more computing power than anyone reading this is likely to be able to comprehend. 

Or one can buy them online with conventional currency from a Bitcoin “exchanger,” the largest of which was, until recently, Mt. Gox in Japan.

The value of bitcoins has grown spectacularly, but not without some serious ups and downs. In June 2010, a bitcoin was worth approximately 8 cents.

The value reached parity with the U.S. dollar in the period between February and April 2011.

On Nov. 29, 2013, bitcoins were trading at $1,124.76 apiece, and the current value is about $487. I’ve read about a Norwegian man who bought 5,000 bitcoins in 2009 for the equivalent of $26.60, and then sold them for $886,000 in 2013.

However, obviously someone who purchased bitcoins last November will have seen more than half his or her investment evaporate.

Carries risks

In addition to the market fluctuations that can be expected with any unit of exchange that isn’t regulated (or supported) by a conventional government, bitcoins’ lack of physical form carries risks.

For example, the Norwegian man described above forgot the password for his digital wallet, and rather painstakingly reconstructed it through a process of elimination.

More ominously, Mt. Gox suspended trading Feb. 25, and subsequently filed for bankruptcy protection, after announcing the disappearance of roughly 550,000 bitcoins, valued at $473 million at the time, and constituting 7 percent of all bitcoins in circulation.

Mt. Gox’s attorneys told the court that this loss may have been caused by a “bug in the bitcoin software algorithm, which was exploited by one or more persons who hacked the bitcoin network.” 

Moreover, the U.S. government doesn’t like Bitcoin. In 2013, special agents from the Department of Homeland Security seized more than $5.1 million from accounts belonging to Mt. Gox, claiming that the funds were the proceeds of a criminal network called Silk Road, and recently a member of Mt. Gox’s board was indicted on money laundering charges.

But even customers who intend to use Bitcoin for honest commercial purposes are being faced with obstacles and liabilities not present in the traditional “money” economy.

In March, the IRS issued a statement declaring bitcoins to be property, and not currency.

The implications of this are significant, as U.S. taxpayers who spend Bitcoins must now calculate the difference between the amount they paid for the Bitcoins they used and the value of the items they purchased, and pay capital gains tax on the difference.

Bitcoin miners also must declare the value of their bitcoins as of the date they “find” them, rather than when they spend them, meaning that tax is due even if the miner retains the bitcoins and does not spend them.

The good news for Bitcoin supporters, I suppose, is the implicit recognition of the bitcoin’s existence as a legitimate unit of exchange.

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