Bitcoin Breakdown

If you have turned on a TV or radio recently or surfed the web, you are sure to have come across the term "Bitcoin." I would like to explain what Bitcoin is and maybe shed a little light on why there is so much talk of it currently in the news, online, and everywhere.

Bitcoin is the specific name of one of many types of cryptocurrency. Now, let me start off by saying; don't let these big words scare you. There are many descriptions out there that are generally the same thing. Cryptocurrencies can also be referred to as virtual currency, altcoins, and I'm sure, several other names. To put it in other terms, these are all types of digital currency. Instead of paying for goods or services with a dollar bill, Bitcoin (and others like it) are a form of digital currency that can be used in place of a dollar. It's a concept. For the folks investing in Bitcoin, they will never have a tangible coin to hold in their hand.

Bitcoin is an online currency with no bank fees and no middleman. You can store your Bitcoins in a virtual wallet, which resides in a cloud or on your computer. I hope you are getting the picture here...it's all digital; the coin, the account, the wallet are all concepts.

There are several other names you should probably familiarize yourself with, such as Etherum, Ripple, Iota and Dash as well as Coinbase (a wallet). They are different names of cryptocurrency brands. I think an easy way to understand would be to use cereal as an analogy; you have Frosted Flakes, Cheerios, Fruit Loops and Apple Jacks. These are all cereals, but they are all a little bit different, while serving the same purpose. Bitcoin, Etherum, Ripple and the others are all types of cryptocurrency but they are each just a little different.

Bitcoin was developed in 2009 by an unknown source using an alias. Bitcoin became something to take notice of in 2013 when people started buying into the concept (literally). Bitcoin, as of Sunday, December 3, reached an all-time high on the stock market, trading at approximately $11K per share before it shrank back to a still-generous $9+K per share. There were so many Bitcoins being sold that websites were crashing because of the influx of activity.

Now, you may be wondering how safe is a digital currency? Good question. Apparently, there is anti-fraud technology known as Blockchain which is a "wallet" for cryptocurrencies. Blockchain (and others like it) apparently also offers encryption for your Bitcoin transactions so that you may maintain your anonymity. There are several "blockchains" that act as roadblocks, or a checks and balance system to maintain the integrity of your wallet. Unfortunately, hackers have been able to breach all of these security measures, creating several major fallouts for cryptocurrencies.

I think it is also worthy to mention the tax issues associated with Bitcoin, along with other cryptocurrencies. If an investor has earned capital gains, the IRS is requiring taxes to be paid on this form of income. This has recently presented a problem, as between 2013 and 2015 there are roughly 13K people who were investing in Bitcoin and did not pay capital gains taxes. For those folks, Uncle Sam has recently started coming around to collect; and not only collect on capital gain taxes but also to collect for fines and fees for not having paid the taxes in the first place. Yikes!

My opinion on Bitcoin is this; buyer beware. I think there are some people who will make a ton of money investing in cryptocurrencies and particularly Bitcoin. However, for the smalltime investor, and especially those who are unfamiliar with the stock market, I think there are a lot of risks involved. Security of my investment would be a primary concern. As well, the fact that an unknown source created this currency leaves the door open for too many existentials to play into the sustainability of cryptocurrency. While it seems to be the general consensus that digital currency is here to stay, I would rather wait it out and see how things unfold and how much security can actually do to protect my investment. As with all investments, as is my philosophy; never put all your eggs in one basket. If you have a few dollars to throw at cryptocurrency, best of luck! You may very well make a small fortune.

However, until cryptocurrencies are all the rage, keep investing your dollars and cents the old-fashioned way. It's sure to pay off one day!

Stephanie