Written by Andrew Roth
Money has taken many forms over the course of history—from rocks and shells to precious metals and paper, and now primarily to electronic exchange. Bitcoin was invented anonymously in 2008 by someone using the alias “Satoshi Nakamoto” in an effort to create a new medium of exchange, a “crypto currency," that could be used without the need for financial intermediaries.
The main breakthrough of Bitcoin was the use of a technology called “blockchain.” Because of blockchain, Bitcoin is decentralized with no administrator and Bitcoins can change hands using open-source software and peer-to-peer exchanges. One of Bitcoin’s original attractions was the level of privacy and anonymity granted to its users because of this structure.
Bitcoins are obtained by solving complex equations, a process referred to as “mining.” The computing power required to mine Bitcoin is substantial and gets increasingly more difficult by design as more bitcoins are mined around the globe. If I attempted to mine Bitcoin on the same machine that I am using to write this article, it would take me thousands of years. Today, mining is typically done on specialized and expensive machines. The increase in power required to mine additional coins keeps the total Bitcoin in circulation limited.
Opinions on Bitcoin are varied, with Bitcoin enthusiasts advocating that it could supplant the use of sovereign currencies in huge numbers and provide a means of exchange free from central bank interference. Surprisingly, several of the features that have made Bitcoin an exciting speculative asset for some, have also made it unattractive in its envisioned role as “money.” For people to use something as “money,” its value must be reasonably stable. If I held ten dollars, I would be hesitant to spend it if I thought it might be worth twenty dollars next week. The price volatility of Bitcoin seems to work against it as a widely used exchange medium, at least for now. Another drawback of Bitcoin as “money” is that it’s not friction free and is generally treated as a taxable asset in the eyes of regulators.
Other than its scarcity and the idea that others will accept it as payment, there is no intrinsic value of Bitcoin. There is nothing backing Bitcoin other than the underlying computer code. This is one of the main points of debate when it comes to the craze of crypto currencies. Regardless of what Bitcoin is worth one year or ten years from when I write this article, it has created interest in the application of blockchain technology in a variety of industries to create more secure exchanges and transactions. Additionally, governments around the globe have monitored the public’s willingness to adopt crypto currencies and some have floated the idea to launch their own sovereign “crypto-currency”—the key differentiator being control of the currency in-line with their national aspirations and fiscal policies. Ironically, this application generally runs counter to the original ideal of Bitcoin.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
This article is not a solicitation or recommendation to engage in cryptocurrency transactions.