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Bitcoin-Is it Just a
Fad?
History, Current
Status and Future of
the Cyber-Currency
Revolution
Tracey A. Anderson, JD,
LLM, CPA*
Introduction
In the beginning of civilisation, consumer transactions
were conducted through barter,1gift exchanges,2and debt.3
This worked fairly well for family and local community
transactions. However, this was not a convenient medium
of exchange for foreigners traveling long distances to
purchase goods. This eventually led to using gold and
silver coins that could be more easily transported than
animals or goods.4Once countries were formed they
started to print their own paper currency and mint coins.5
The use of generally accepted paper currencies made it
even easier to enter into economic transactions in distant
locations.
The following terms are used in this article:
crypto-currency; cyber-currency; and cyber-crime. In
different sources these terms are shown as hyphenated,
as separate words, or as combined into one word. For
consistency purposes, the hyphenated forms will be used
in this article.
In recent years, computer technology has provided us
with the ability to purchase goods and services through
e-commerce anywhere in the world without the need for
paper currency or coinage. We can purchase items
utilising credit cards, debit cards, and third party
intermediaries like Amazon, eBay, or PayPal.6For
practical purposes, there is no longer any need to carry
large quantities of cash. Traditional e-commerce
transactions are completed using the legal currency of
either the location where the goods or services are
purchased or the location of the financial institution
utilised by the purchaser. This article will focus on the
dawn of a new frontier in currency development. More
specifically this article will address the history, current
status, and future of the cyber currency revolution.
What is a currency?
Before exploring crypto-currencies, this article will first
attempt to investigate the characteristics of currency in
general. There is significant debate regarding whether
crypto-currency even qualify as a traditional currency.
“Berkshire Hathaway Chairman and CEO Warren
Buffett stated in a recent interview that Bitcoin is
‘not a currency’ because it doesn’t meet the criteria
of a currency, including being a store of value.”7
It appears that Buffett was using the terms “money” and
“currency” interchangeably. This idea will be revisited a
little further into this article.
The definitions of currency range from the extremely
rigorous to the more flexible. A few of the stringent
definitions include the following:
• “a system of money in general use in a
particular country”8;
• “A generally accepted form of money,
including coins and paper notes, which is
issued by a government and circulated
within an economy. Used as a medium of
exchange for goods and services, currency
is the basis for trade. The standard
definition of a currency would be notes
printed by a specific country backed by the
country’s full faith and credit”9; and
• “a metal or paper medium of exchange that
is in current use in a particular country”.10
Under these rather strict definitions of currency, the
crypto-currencies would not qualify. However, let’s go
back and revisit Warren Buffett’s issues with
crypto-currencies. He stated that he did not believe
Bitcoin possessed the characteristics of currency.
Money (i.e. currency) has the following characteristics:
• Medium of exchange;
• Unit of Account; and
• Store of Value.11
*Tracey A. Anderson, JD, LLM, CPA is a Professor of Accounting at Indiana University South Bend Leighton School of Business in South Bend, Indiana. Professor
Anderson is a graduate of the University of Arizona Eller College of Management, the University of Arizona James E. Rogers College of Law, and the University of Florida
Levin College of Law.
1See http://www.barternewsweekly.com/2010/03/26/a-short-history-of-barter-1921/ [Accessed April 23, 2014].
2See http://www.britannica.com/EBchecked/topic/233393/gift-exchanRe [Accessed April 23, 2014]; Marcel Mauss, Essai sur le don (1925).
3See http://socialdemocracy21stcentury.blogspot.com/2012/01/david-graeber-on-origins-of-money.html [Accessed April 23, 2014].
4See http://www.bbc.co.uk/ahistoryoftheworld/objects/7cEz771FSeOLptGIElaquA [Accessed April 23, 2014].
5See http://www.historyworld.net/wrldhis/plaintexthistories.asp?historyid=ab14 [Accessed April 23, 2014].
6See https://www.paypal.com/uk/webapps/mpp/country-worldwide [Accessed April 23, 2014].
7See http://www.marketwatch.com/story/warren-buffett-bitcoin-is-not-a-currency-2014-03-03 [Accessed April 23, 2014].
8See https://www.google.com/search?q=What+is+a+currency&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a&channel=np&source=hp
[Accessed April 23, 2014].
9See http://www.investopedia.com/terms/c/currency.asp [Accessed April 23, 2014].
10 See http://dictionary.reference.com/browse/currency [Accessed April 23, 2014].
11 See https://www.boundless.com/economics/the-monetary-system/introducing-money/the-definition-of-money/ [Accessed April 23, 2014].
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Bitcoin has now been accepted as a medium of
exchange for many goods and services. Several retail
stores, travel companies, restaurants, bars, and movie
theaters allow for the purchase of their goods and services
using Bitcoin.12 One can currently purchase and sell
Bitcoin through designated ATMs in California.13
A unit of account is a standard unit of measure for
goods and service transactions. As indicated above, many
goods and services are now valued in terms of Bitcoin.
In addition, Bitcoin can be fractionalised and still hold
its value.14 For example, if Bitcoin is selling at $600 per
coin, one can buy 10 per cent of a Bitcoin for $60.
The last characteristic of money is a store of value. A
store of value is something that can be saved, stored, and
retrieved. Bitcoins and other crypto-currencies have
digital wallets in which the digital currency can be saved,
stored, and later retrieved.15 It would appear under an
analysis of these three criteria crypto-currencies are
indeed money and thus currency. Even the United States
Federal court system has a view different from Warren
Buffet on Bitcoin:
“An East Texas federal judge has concluded that
Bitcoin is a currency that can be regulated under
American Law. The judge found that since Bitcoins
may be used to purchase goods and services, and
more importantly, can be converted to conventional
currencies, it is a form of currency and investors
wishing to invest in the BTCST provided an
investment of money, and thus the SEC may regulate
such business.”16
History of crypto-currency
Prior to 2009 crypto-currencies did not exist. The first
crypto-currency was Bitcoin. The idea for Bitcoin was
first presented in an article by Satoshi Nakamoto in
November 2008.17 In January 2009, Bitcoin was launched
as the first digital currency.18 In a span of five years, the
number of crypto-currencies has increased exponentially
and their number currently exceeds 100.19 Five of the
largest market capitalisations of crypto-currencies include
Bitcoin ($7.42 Billion), Ripple ($1.37 Billion), Litecoin
($436 Million), Auroracoin ($157 Million) and Peercoin
($57 Million).20 Today’s crypto-currencies have values
ranging from fractions of pennies to hundreds of dollars
per coin.21
Where do Bitcoins come from?
Governments use central banks to print and distribute
money.22 The money is guaranteed by the full faith and
credit of the issuing country.23 Bitcoins, and other
cyber-currencies, are not issued by governments.
Everyone who owns Bitcoins owns part of the Bitcoin
bank.24 Bitcoin is a peer-to-peer electronic cash system.25
Bitcoins are held in encrypted digital wallets.26 A Bitcoin
wallet is protected by a private key, or password, with a
256-bit number.27
When Bitcoin was first launched, one acquired these
coins by a process called mining. Mining is a process
whereby computers using software solve increasingly
complex mathematical equations.28 Once an equation is
solved a block of coins become available. The first to
solve the equation is granted the entire block.29 Miners
began enhancing their computers by making them better
number crunchers.30 This was done by the development
of more powerful computer chips (Application-Specific
Integrated Circuit Chips) designed for numeric
calculations.31 It was also determined that gaming graphic
cards enhanced the computer’s ability to solve these
equations.32 This is reminiscent of the California gold
rush days when Levi Strauss and Samuel Brennen made
their fortunes selling equipment to the miners, not mining
themselves.33
Miners also began combining their computing
resources and formed mining pools to increase their odds
of solving the equation first. Once an equation was solved
by a pool, the block of coins was allocated among the
group members in proportion to the work conducted by
the members.34 The following is a list of the current top
12 producing pools:
• GHash.IO;
• BTC Guild;
• Eliqius;
12 See http://www.coindesk.com/information/what-can-you-buy-with-bitcoins/ [Accessed April 23, 2014].
13 See http://sanfrancisco.cbslocal.com/2014/03/20/bitcoin-atm-arrives-in-mountain-view/ [Accessed April 23, 2014].
14 See http://bitcoin.stackexchange.com/questions/3663/why-can-we-have-small-fractions-of-a-bitcoin [Accessed April 23, 2014].
15 See https://www.coinpursuit.com/pages/bitcoin-altcoin-wallets/ [Accessed April 23, 2014].
16 See http://yro-beta.slashdot.org/story/13/08/07/2059250/federal-judge-declares-bitcoin-a-currency [Accessed April 23, 2014].
17 Nakamoto, Satoshi “Bitcoin: A Peer-to-Peer Electronic Cash System” (November 1, 2008).
18 See http://www.washingtonpost.com/blogs/the-switch/wp/2014/01/03/five-years-of-bitcoin-in-one-post/ [Accessed April 23, 2014].
19 See http://readwrite.com/2013/12/03/the-bitcoin-alternative-field-guide#awesm=~oz54NyH6f48Sez [Accessed April 23, 2014].
20 See https://coinmarketcap.com/ [Accessed April 23, 2014].
21 See https://coinmarketcap.com/ [Accessed April 23, 2014].
22 See https://www.minneapolisfed.org/community_education/student/centralbankhistory/bank.cfm [Accessed April 23, 2014].
23 See http://www.calneva.com/money/runsusa.htm [Accessed April 23, 2014].
24 See http://the-gist.org/2014/03/part-2-the-crafty-design-of-bitcoin/ [Accessed April 23, 2014].
25 Nakamoto, Satoshi “Bitcoin: A Peer-to-Peer Electronic Cash System” (November 1, 2008).
26 See https://bitcoin.org/en/choose-your-wallet [Accessed April 23, 2014].
27 See https://en.bitcoin.it/wiki/Private_key [Accessed April 23, 2014].
28 See http://www.bitcoinmining.com/ [Accessed April 23, 2014].
29 See https://en.bitcoin.it/wiki/Mining [Accessed April 23, 2014].
30 See http://gizmodo.com/5994446/digital-drills-the-monster-machines-that-mine-bitcoin [Accessed April 23, 2014].
31 See http://motherboard.vice.com/blog/a-guide-to-bitcoin-mining-why-someone-bought-a-1500-bitcoin-miner-on-ebay-for-20600 [Accessed April 23, 2014].
32 See http://www.extremetech.com/gaming/176724-amd-graphics-card-pricing-skyrockets-due-to-cryptocurrency-mining-could-kill-amds-gaming-efforts [Accessed April
23, 2014].
33 See http://cdixon.org/2011/02/05/selling-pickaxes-during-a-gold-rush/ [Accessed April 23, 2014].
34 See https://mining.bitcoin.cz/ [Accessed April 23, 2014].
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[2014] J.I.B.L.R., Issue 7 © 2014 Thomson Reuters (Professional) UK Limited and Contributors
• f2pool (Discus Fish);
• slush-mining.bitcoin.cz;
• 6 Eclipse Mining Pool;
• Bitminter;
• Ozcoin;
• p2pool;
• ASIC Miner;
• Polmine; and
• 12 Bitparking Merged Mining Pool.35
At the time of the writing of this article approximately
12.1 million Bitcoins have been mined.36 The maximum
number of Bitcoins that will ever be mined is 21 million.37
In addition to mining, today Bitcoins can be purchased
through exchanges,38 received in exchanged for goods
and services,39 received directly in a peer-to-peer transfer,40
and most recently from Bitcoin ATMs.41 The following
five exchanges currently have the highest Bitcoin
transaction trade volume:
• BitStamp;
• Bitfinex;
• btc*e;
• BTC China; and
• LakeBTC.com.42
One has to use care in deciding which of the exchanges
to utilise. On February 24, 2014, the largest exchange,
Mt. Gox, located in Tokyo, Japan closed its doors and
filed for bankruptcy after losing almost half a billion
dollars of Bitcoins in a cyber-attack.43 Mt. Gox did later
find 200,000 Bitcoins in an old format digital wallet.44 A
few weeks later Flexcoin, a Bitcoin Bank, was hacked
and lost approximately $600,000 in Bitcoins.45
What’s the value of a Bitcoin?
In January of 2009, the value of Bitcoin was likely $0.
Bitcoins were just starting to be mined and no market
existed for them. The first recorded Bitcoin transaction
occurred on May 21, 2010 when programmer, Laszlo
Hanyecz, offered 10,000 Bitcoins for the purchase of a
couple of Papa John’s pizzas.46 Amazingly someone took
him up on his offer. The pizzas purchased on behalf of
Laszlo Hanyecz cost approximately $25. Thus, the value
of a Bitcoin at that time of this transaction in May of 2010
was approximately $.0025 US dollars. (i.e.
$25/10,000=$.0025) However, the cost of this pizza at
the peak value of $1,240 per Bitcoin would have been
approximately $12,400,000 (i.e. 10,000 x $1,240).47 In
hindsight that was a pretty expensive pizza. After reaching
its peak, Bitcoin quickly dropped in value. By early 2014
the value per Bitcoin had leveled off in the $400 to $700
per coin range.48 This level of support under the price of
Bitcoin has occurred in spite of the failures of the Mt.
Gox exchange and Flexcoin the Bitcoin Bank.49 In other
words, no panic sell off has occurred. Some advisors see
Bitcoin as a bubble much like just prior to the tulip bulb
crash of 1624.50 However, analysts at the Bank of America
have recently set a target of $1,300 per Bitcoin.51 The next
sections of this article will explore the advantages and
disadvantages of Bitcoin.
Advantages of Bitcoin
The advantages of digital currencies include:
• No or reduced transfer fees;
• Faster transaction completion;
• Potential protection from collapse or
devaluation of fiat currencies and reduction
of government confiscation risk;
• Potential world wide access;
• Potential investment growth in the digital
currency; and
• Relative ease of conversion into fiat and
other digital currencies.
No or reduced transfer fees
Suppose one desires to send money to someone. In order
to accomplish this transaction one would normally utilise
a third party and incur a fee for this service. For example,
sending a US Postal Service money order would cost
$1.25 for a transaction between $.01 and $500 and $1.65
for a transaction between $500.01 and $1,000.00.52
Western Union charges are based on the size of the
transaction. For transfers from $1 to $1,000, Western
Union’s charges range from $.99 to $95.53 Visa or Master
Card charge between 2–3 per cent for this service.54 One
of the advantages often touted about Bitcoin is that there
35 See http://blockorigin.pfoe.be/top.php [Accessed April 23, 2014].
36 See https://blockchain.info/charts/total-bitcoins [Accessed April 23, 2014].
37 See https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-the-money-supply [Accessed April 23, 2014].
38 See http://howtobuybitcoins.info/us.html [Accessed April 23, 2014].
39 See https://coinreport.net/coin-101/can-get-bitcoins/ [Accessed April 23, 2014].
40 See http://readwrite.com/2013/10/23/i-bought-bitcoin-in-person-and-heres-what-happened#awesm=~oBx7vUABfAcCuB [Accessed April 23, 2014].
41 See http://sanfrancisco.cbslocal.com/2014/03/20/bitcoin-atm-arrives-in-mountain-view/ [Accessed April 23, 2014].
42 See http://bitcoincharts.com/markets/ [Accessed April 23, 2014].
43 See http://online.wsj.com/news/articles/SB10001424052702303801304579410010379087576 [Accessed April 23, 2014].
44 See http://money.cnn.com/2014/03/21/technology/mt-gox-missing-bitcoin/ [Accessed April 23, 2014].
45 See http://rt.com/business/bitcoin-flexcoin-hack-closes-870/ [Accessed April 23, 2014].
46 See http://motherboard.vice.com/blog/this-pizza-is-worth-750000 [Accessed April 23, 2014].
47 See http://www.forbes.com/sites/samanthasharf/2013/12/05/bitcoin-gets-valued-bank-of-america-puts-a-price-on-the-virtual-tender/ [Accessed April 23, 2014].
48 See http://bitcoincharts.com/charts/bitstampUSD#rg60ztgSzm1g10zm2g25zv [Accessed April 23, 2014].
49 See http://www.breitbart.com/Big-Government/2014/03/04/A-Second-BitCoin-Exchange-Goes-Bankrupt [Accessed April 23, 2014].
50 See http://www.businessweek.com/2000/00_17/b3678084.htm [Accessed April 23, 2014].
51 See http://www.forbes.com/sites/samanthasharf/2013/12/05/bitcoin-gets-valued-bank-of-america-puts-a-price-on-the-virtual-tender/ [Accessed April 23, 2014].
52 See https://www.usps.com/shop/money-orders.htm [Accessed April 23, 2014].
53 See https://www.westernunion.com/price-estimator/refresh?REF_ID=KET6-WLTR-KLWJ-4OPK-T90E-GPDK-DB0Z-FWU3&14 [Accessed April 23, 2014].
54 See http://usa.visa.com/download/merchants/Visa-Interchange-Reimbursement-Fees-April-2014.pdf [Accessed April 23, 2014]; http://www.mastercard.us/merchants
/support/interchange-rates.html [Accessed April 23, 2014].
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[2014] J.I.B.L.R., Issue 7 © 2014 Thomson Reuters (Professional) UK Limited and Contributors
are no or low fees associated with the transfer of Bitcoins.
For example, a peer-to peer transfer of Bitcoin can be
accomplished without assessing any fees between the
parties.55 This does not necessarily mean that no
transaction taxes will be charged as seen in the “Potential
Use for Tax Evasion” section below. However, some
argue that there are hidden fees associated with Bitcoin
transactions in the 2–4 per cent range.56 The view here is
that the miner’s profits are in reality a fee and part of their
service in addition to mining activities is the confirmation
or validation of Bitcoin transfers.
Faster transaction completion
How long does it take to transfer money from one location
to another? In the case of a domestic wire transfer from
one bank to another, the transfer can take three to four
hours.57 PayPal transfers via e-check may take two to five
business days to clear one’s bank.58 During the past year
the average confirmation time of a Bitcoin transaction
has ranged from five to 15 minutes.59 Thus, if one needs
money somewhere quickly it appears Bitcoin offers
transfer confirmation rates much swifter than regular
banking and third party payor channels.
Potential protection from collapse or
devaluation of fiat currencies and
reduction of government confiscation
risk
Many governments keep printing more and more fiat
currency defacing its value. In history, a few countries in
desperate economic states have printed money at lightning
pace resulting in hyperinflation and a resulting collapse
of their currencies. The Weimer Republic60 and
Zimbabwe61 are examples of this economic catastrophe.
The value of the Mark and the Zimbabwe dollar dropped
in value to almost nothing overnight. The United States62
and Japan63 are modern examples of this same economic
practice ironically called quantitative easing.
Because of the poor fiscal management of many
countries in the world today government benefits have
been paid out of borrowing rather than increased taxes.64
This has resulted in the highest country debt levels of all
time.65 The only reason many countries are still able to
service their debt is the artificially low interest rates
imposed by central banks.66
Countries like Cypress have actually confiscated a
portion of customer’s bank deposits.67 Other countries
like Poland, Portugal, and Argentina have taken over part
or all of the balances of citizen’s public and private
pension plans to try to manage the countries debt
problem.68 If these last ditch efforts in propping up these
economies are not successful, currency collapse may be
the end game. It appears that other countries are already
putting appropriate measures in place for bank account
and retirement plan confiscation if their economic
condition worsens.69 Thus, owning a crypto-currency like
Bitcoin (which is not subject to debasement from
unlimited printing (i.e. their maximum number is limited
to 21 million)70 nor government confiscation71 like the
domestic bank accounts and pension plans) is a significant
advantage.
Potential world wide access
One of the problems with wealth is that it tends to be
stationary. For example, wealth in real estate is tied to
the location of the real estate. It cannot be moved. How
attractive would it be if one could have access to his
wealth, or at least a portion of it, not just in his home
country but all around the world? With Bitcoin and access
to the internet this has become a reality. As a digital
currency, Bitcoin can be accessed almost anywhere in
the world via the internet.72 Bitcoin is illegal in some
locations. More will be disclosed on this issue below.
Many countries have limits on how much wealth one
can move out of the country at one time. For instance,
the United States, limits the amount of cash leaving the
country to $10,000 per person without filing a declaration
55 See http://bitcoin.stackexchange.com/questions/18792/transfer-btcs-without-fees [Accessed April 23, 2014].
56 See http://www.bloombergview.com/articles/2014-01-02/bitcoin-is-an-expensive-way-to-pay-for-stuff [Accessed April 23, 2014].
57 See https://faqs.bellco.org/bellco/ext/kb3289-wire-transfer-routing-timeframe-long-days-hours-domestic-wire-international-wire-how-long-does-it-take-a [Accessed
April 23, 2014].
58 See https://www.paypal-community.com/t5/About-Payments-Archive/How-long-does-it-take-to-send-money-to-my-friend-s-PayPal/td-p/617900 [Accessed April 23,
2014].
59 See http://blockchain.info/charts/avg-confirmation-time?timespan=1year&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=
[Accessed April 23, 2014].
60 See http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html [Accessed April 23, 2014].
61 See http://www.economist.com/news/finance-and-economics/21576665-grubby-greenbacks-dear-credit-full-shops-and-empty-factories-dollars-they [Accessed April 23,
2014].
62 See http://topics.nytimes.com/top/reference/timestopics/subjects/q/quantitative_easing/ [Accessed April 23, 2014].
63 See http://research.stlouisfed.org/publications/es/article/10024 [Accessed April 23, 2014].
64 See https://www.globalfinancialdata.com/news/articles/government_debt.pdf [Accessed April 23, 2014].
65 See http://www.moneynews.com/Economy/IMF-debt-Rogoff-Reinhart/2014/01/03/id/545071/ [Accessed April 23, 2014].
66 See http://www.arabianmoney.net/gold-silver/2014/03/07/low-interest-rates-are-delivering-asset-price-bubbles-all-over-the-world-and-this-will-end-in-disaster-and-high
-gold-prices/ [Accessed April 23, 2014].
67 See http://wealthcycles.com/features/cypress-bailout-deal-is-pilot-program-for-bank-deposit-confiscation [Accessed April 23, 2014].
68 See http://www.forbes.com/sites/steveforbes/2013/09/17/polands-piggish-pols-theyre-not-alone/ [Accessed April 23, 2014]; http://ncrenegade.com/editorial/portugal
-confiscates-private-pension-funds-can-it-happen-in-the-united-states/ [Accessed April 23, 2014]; http://www.nytimes.com/2008/10/22/business/worldbusiness/22argentina
.html?_r=0 [Accessed April 23, 2014].
69 See http://moneyweek.com/merryns-blog/the-greatest-pension-raiders-of-all-governments/ [Accessed April 23, 2014].
70 See http://www.reddit.com/r/Bitcoin/comments/1f7xmm/how_will_bitcoin_remain_stable_once_the_21/ [Accessed April 23, 2014].
71 See http://business.time.com/2013/10/11/why-the-fbi-cant-get-its-hands-on-silk-road-kingpins-80-million-hoard/ [Accessed April 23, 2014].
72 See http://mag.newsweek.com/2014/03/14/bitcoin-satoshi-nakamoto.html [Accessed April 23, 2014].
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with the federal government.73 The European Union has
imposed a €10,000 limit per person.74 In today’s
environment it is not very easy to move even liquid assets
like currencies to other countries without attracting
unwanted attention and following complex government
reporting regulations. However, if Bitcoin is not money
(i.e. cash), it should not be subject to these transfer
restrictions and reporting provisions.75 This appears to be
another important advantage of Bitcoin.
Potential investment growth in the digital
currency
There is little doubt that investment in digital currency is
very speculative. In the past five years the number of such
currencies has increased from one (i.e. Bitcoin) to more
than 100. It is truly anyone’s guess on which of these
crypto-currencies will survive and thrive. It is also likely
that other digital currencies will be developed attempting
to minimise some of the inherent weaknesses in the
original ones. With the current overpriced stock market76
and dismal yields on fixed rate investments,77 investors
are looking at other investment options. Bitcoin and other
digital currencies may just be the place for at least a
portion of one’s investment dollars. A small amount in
the right cyber-currency investment can turn an investor
into a millionaire overnight. Bitcoin has turned a
substantial number of investors into multimillionaires.78
However, as all investors know, just the opposite can
happen. If the investment moves in the wrong direction,
it is possible to turn a lot of wealth into very little wealth
in a short period of time.
Relative ease of conversion into fiat and
other digital currencies
Another advantage of Bitcoin is that it can also be easily
converted into other currencies. On many exchanges
Bitcoin can be exchanged for several of the most active
and popular digital currencies.79 In addition, many of the
exchanges also allow exchange into the most common
fiat currencies.80 This ability to easily convert between
digital and fiat currencies makes Bitcoin very attractive.
Disadvantages of Bitcoin
The potential disadvantages of digital currencies include
the following:
• Potential government and central bank
regulation of cyber-currencies;
• Lack of government backed insurance
programs;
• Limited number of goods and services
exchangeable for cyber-currencies;
• Potential use in illegal activities;
• Potential use for tax evasion;
• Loss of value due to drop in demand;
• Loss of coins due to loss of private keys
and exchange passwords;
• Loss of coins due to cyber-crime;
• The ultimate breakdown of the digital
currency due to collusion of a majority of
the currency owners; and
• Loss of internet access through solar
weather, electromagnetic pulse (EMP)
events, government mandate or
cyber-warfare.
Potential government and central bank
regulation of cyber-currencies
The digital currency movement is relatively new. Because
of this novelty governments and central banks have until
recently taken little note of their existence. However, the
market capitalisation of digital currencies and the
magnitude of economic transactions has caused both
governments and central banks to take notice of these
digital currencies. China recently moved to restrict its
banks from using Bitcoin as currency.81 Governments
such as the United States and several European countries
have chosen not to prohibit Bitcoin transactions. However,
as indicated below, these governments want to make sure
they get their share of taxes on these transactions. The
United States Federal Reserve Bank takes the position
that Bitcoin is not a currency but a payment innovation:
“‘The Federal Reserve simply does not have
authority to supervise or regulate Bitcoin in any
way,’ Ms Yellen said at a Senate Banking
Committee hearing Thursday. ‘This is a payment
innovation that is taking place entirely outside the
banking industry.’”82
As indicated earlier in this article, the US court system
takes the position that the Securities Exchange
Commission (SEC) has regulatory authority over Bitcoins
to the extent that their use can affect the stock markets.83
Thus, regulation out of existence is a primary concern for
the future of digital currencies. Other governments could
73 See http://news.nationalpost.com/2013/04/02/man-has-undeclared-10000-seized-at-border-after-exchange-rate-pushes-him-over-limit-to-take-from-country/ [Accessed
April 23, 2014].
74 See http://www.revenue.ie/en/customs/leaflets/customs-excise-cash-controls.html [Accessed April 23, 2014].
75 See http://www.usatoday.com/story/money/business/2014/03/25/irs-says-bitcoin-is-property/6873569/ [Accessed April 23, 2014].
76 See http://etfdailynews.com/2014/01/13/goldman-sachs-group-inc-warns-of-stock-market-crash/ [Accessed April 23, 2014].
77 See http://www.nytimes.com/2013/02/02/business/a-prize-winning-plan-for-investing-when-interest-rates-are-low.html [Accessed April 23, 2014].
78 See http://www.businessweek.com/articles/2013-04-10/meet-the-bitcoin-millionaires [Accessed April 23, 2014].
79 See http://planetbtc.com/complete-list-of-bitcoin-exchanges/ [Accessed April 23, 2014].
80 See http://www.coindesk.com/companies/exchanges/ [Accessed April 23, 2014].
81 See http://www.nytimes.com/2013/12/06/business/international/china-bars-banks-from-using-bitcoin.html [Accessed April 23, 2014].
82 See http://online.wsj.com/news/articles/SB10001424052702304071004579409552545220612 [Accessed April 23, 2014].
83 See http://www.economicpolicyjournal.com/2014/03/hot-sec-is-investigating-major-bitcoin.html [Accessed April 23, 2014].
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follow the lead of Russia and Vietnam and declare
cyber-currencies illegal.84 That would likely be a fatal
blow for Bitcoin and the other cyber-currencies.
Lack of government backed insurance
programs
One of the complaints about Bitcoin is its lack of
protected status as an investment. Deposits in US banks85
and credit unions86 are federally insured for up to
$250,000. Bitcoin does not benefit from this federal
deposit protection program since it is not a cash deposit
in a bank or savings and loan.87
Limited number of goods and services
exchangeable for cyber-currencies
As indicated earlier in this article, the purchase of goods
and services with Bitcoins is relatively new. For that
reason, today there are only a limited number of vendors
who readily accept Bitcoins in exchange for goods and
services. As each day passes, however, more and more
vendors are accepting payment in Bitcoins. Vendors do
not want to lose out on these transactions in case digital
currency is the wave of the future. For that reason,
vendors are making every effort to accommodate Bitcoin,
and a few other digital currencies, as a medium of
exchange. For example, companies such as Square Market
and Overstocked.com are accepting Bitcoin in exchange
for payment of goods.88
Potential use in illegal activities
Another potential problem with Bitcoin is its likely use
in illegal activities.89 It is interesting to note that the first
internet transaction ever was likely a drug deal90:
“In 1971 or 1972, Stanford students using Arpanet
accounts at Stanford University’s Artificial
Intelligence Laboratory engaged in a commercial
transaction with their counterparts at Massachusetts
Institute of Technology. Before Amazon, before
eBay, the seminal act of e-commerce was a drug
deal. The students used the network to quietly
arrange the sale of an undetermined amount of
marijuana.”91
Bitcoin transactions are conducted in anonymity. This
makes Bitcoin an excellent exchange medium for the
purchase of illegal items such as guns, drugs, and illicit
sex. The site Silk Road was busted for just such activity.92
Using Bitcoin to launder money for illegal activities is
also a major concern.93 China recently restricted its banks
from using Bitcoin as currency, citing concerns about
money laundering.94
Potential use for tax evasion
Some argue that Bitcoin and other cyber-currencies can
be used to avoid the payment of tax.95 Until recently the
Internal Revenue Service of the United States did not
have a position on the taxation of Bitcoin.96 However, on
March 25, 2014 the IRS finally took a position on Bitcoin
transactions.97 The IRS takes the position that miners of
Bitcoin must recognise income on the value of the coins
at the time they earn them. Since miners are in the trade
or business of mining, the income is considered to be
ordinary income. Currently ordinary income is taxed at
maximum rates of up to 39.6 per cent.98 Transactions of
individuals who are in the trade or business of buying
and selling Bitcoin are also taxed as ordinary income.99
The IRS has determined that Bitcoin is not a currency but
property. Thus, it is not subject to foreign currency
translations gains or losses but as a property transaction.
Thus, for individual investors Bitcoins are capital assets
subject the capital gains rules. A few weeks after the IRS
first broached the subject of Bitcoin, it thereafter
expanded its position. Taxpayers must report the
following for Bitcoin transactions:
• Gains and losses on Bitcoins received in
retail transactions;
• W-2s for wages paid in Bitcoins;
• 1099s for miscellaneous income paid in
Bitcoin;
•Bitcoin miners must report
self-employment tax;
• Bitcoins are subject to the backup
withholding rules; and
• Bitcoins used in retail goods sales
transaction are subject to the sales tax.100
84 See https://coinreport.net/vietnam-bitcoin-digital-currency-exchange-illegal-vietnam/ [Accessed April 23, 2014]; http://www.reuters.com/article/2014/02/09/us-russia
-bitcoin-idUSBREA1806620140209 [Accessed April 23, 2014].
85 See http://www.fdic.gov/ [Accessed April 23, 2014].
86 See http://www.fdic.gov/regulations/laws/rules/1000-1300.html [Accessed April 23, 2014].
87 See http://betabeat.com/2012/12/bitcoin-central-becomes-first-bitcoin-exchange-to-operate-as-a-bank/ [Accessed April 23, 2014].
88 See http://www.overstock.com/bitcoin [Accessed April 23, 2014].; http://cointelegraph.com/post/square_market_ready_to_accept_bitcoin#.U0r9IFc9AWA [Accessed
April 23, 2014].
89 See http://guardianlv.com/2014/02/bitcoin-illegal-markets-created-by-government/ [Accessed April 23, 2014].
90 See http://www.neatorama.com/2013/04/21/The-Worlds-First-E-Commerce-Transaction-Was-a-Drug-Deal/#udsMN [Accessed April 23, 2014].
91 See http://motherboard.vice.com/blog/the-first-thing-to-be-bought-and-sold-on-the-internet-was-some-weed [Accessed April 23, 2014].
92 See http://silkroaddrugs.org/ [Accessed April 23, 2014].
93 See http://money.cnn.com/2014/01/27/technology/security/bitcoin-arrest/ [Accessed April 23, 2014].
94 See http://www.nytimes.com/2013/12/06/business/international/china-bars-banks-from-using-bitcoin.html [Accessed April 23, 2014].
95 See http://www.forbes.com/sites/robertwood/2013/08/07/bitcoin-tax-evasion-currency/ [Accessed April 23, 2014]; http://kernelmag.dailydot.com/features/report/9122
/bitcoin-is-the-offshore-tax-haven-of-the-future/# [Accessed April 23, 2014].
96 See http://www.nationaljournal.com/economy/how-is-bitcoin-taxed-the-irs-doesn-t-know-20140126 [Accessed April 23, 2014].
97 See http://dealbook.nytimes.com/2014/03/25/i-r-s-says-bitcoin-should-be-considered-property-not-currency/?_php=true&_type=blogs&_r=0 [Accessed April 23, 2014].
98 See http://taxes.about.com/od/Federal-Income-Taxes/qt/Tax-Rates-For-The-2013-Tax-Year.htm [Accessed April 23, 2014].
99 See http://blog.sfgate.com/pender/2014/03/25/buying-with-bitcoin-gets-complicated-under-irs-ruling/ [Accessed April 23, 2014].
100 See http://www.wallstreetdaily.com/2014/04/02/bitcoin-4/ [Accessed April 23, 2014].
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Germany has declared that Bitcoin is private money
and a unit of account.101 Therefore, Bitcoins are subject
to the capital gains tax in Germany and retail transactions
utilising Bitcoin are subject to the sales tax. The Tax
Board in Denmark takes the position that casual sales of
Bitcoins are not subject to taxation.102 On the other hand,
Norway takes the same position as Germany that Bitcoins
are subject to the capital gains tax.103 The additional tax
reporting and tax payment burden for Bitcoin transactions
is truly a major disadvantage.
Loss of value due to drop in demand
The almost constant loss in value of fiat currencies due
to excessive printing makes investors look to other
investment opportunities. For some this opportunity has
led them to invest in cyber-currencies like Bitcoin. Bitcoin
has held its value fairly well in spite of the recent major
cyber-crimes perpetuated against it. However, should
Bitcoin investor confidence dissipate, the coin value could
plummet.104
Loss of coins due to loss of private keys
and exchange passwords
Private keys and exchange password are both a blessing
and a curse. These safety measures are designed to protect
the coins from loss due to an outside attack. However, if
one permanently loses his private key, password, or digital
wallet, he will not be able to regain access to his Bitcoins.
It is estimated that approximately 64 per cent of all
Bitcoins have been forever lost due to the loss of private
keys, passwords, and digital wallets.105
Loss of coins due to cyber-crime
In the early years of fiat currency counterfeiting was a
big problem.106 This has actually continued to today. Many
strides have been made in recent years to curb this
continuing problem. Some of these advances have
included special paper, metal strips, colored money, and
water marks.107 Since currency is a bearer instrument theft
is a real problem. In order to protect larger amounts of
cash, it must be kept in a safe, transported by armored
vehicle, or deposited in the bank. However, home
robberies and bank robberies are still very common. Is it
surprising that cyber-thieves are attempting to do the same
thing? The Mt. Gox and Flexcoin cyber-theft scandals
were not to be unexpected. The question now is how the
creators of cyber-currencies intend to prevent such thefts
in the future. This appears to be just a normal growing
pain in the development of this new technology.108
The ultimate breakdown of the digital
currency due to collusion of a majority
of the currency owners
It appears that Bitcoin has some apparent design flaws.
One of the potential problems with Bitcoin can occur if
owners of more than 50 per cent of the total number of
coins decide to manipulate the system. Below the 50 per
cent threshold several independent Bitcoin miners can
confirm Bitcoin transfer transactions. This serves as a
form of check and balance on the system. However, if a
group exceeds the 50 per cent ownership mark it alone
can confirm, send out false confirmations, or reverse
transactions.109 The majority group would even have the
power to shut down the transfer of Bitcoins effectively
making them worthless. This seems like a pretty big flaw.
Loss of internet access through solar
weather, electromagnetic pulse (EMP)
events, government mandate or
cyber-warfare
A relatively rare astronomical event occurred in 1859.
The sun constantly throws off solar flares. Most of the
time these flares are relatively small and pose little
consequence to the world. However, back in 1859 a
massive solar flare had a direct collision with the earth.
This storm caused aura borealis that were so bright they
could be seen as far south as Cuba. It was said people
could read their newspapers by the light of the aura.110
However, that was the good part of the solar storm. The
bad part was that the solar winds caused powerful electric
currents to flow through the telegraph lines effectively
shorting out the lines making them unusable for
communication.111 Scientists believe that if a similar storm
were to happen today that:
• the interrelated electric grids in both the
United States and Europe could collapse
for months if not years;
•Satellite communications would cease; and
• GPS systems would no longer work.112
NASA sees an increase in sun spot activity in the next
few years which generally precedes times of active and
powerful solar flare activity.113 If such a storm were to
101 See http://techcrunch.com/2013/08/19/germany-recognizes-bitcoin-as-private-money-sales-tax-coming-soon/ [Accessed April 23, 2014].
102 See http://www.coindesk.com/denmark-declares-bitcoin-trades-tax-free/ [Accessed April 23, 2014].
103 See http://blogs.marketwatch.com/thetell/2013/12/16/bitcoins-arent-real-but-theyre-taxable-norway-says/ [Accessed April 23, 2014].
104 See http://tamascalderwood.com/category/economics/ [Accessed April 23, 2014].
105 See http://readwrite.com/2014/01/13/what-happens-to-lost-bitcoins#awesm=~oBmmgeHW5q8wAJ [Accessed April 23, 2014].
106 See http://www.history.org/Foundation/journal/Summer07/counterfeit.cfm [Accessed April 23, 2014].
107 See http://www.fraudfighter.com/counterfeit-detection-id-verification/bid/82282/5-Ways-To-Spot-Fake-Money [Accessed April 23, 2014].
108 See http://www.cyberrisknetwork.com/2014/03/07/latest-digital-currency-news-keep-insurers-away/ [Accessed April 23, 2014].
109 See http://www.businessinsider.com/bitcoin-miners-approach-dangers-threshold-2014-1 [Accessed April 23, 2014].
110 See http://www.solarstorms.org/SRefStorms.html [Accessed April 23, 2014].
111 See http://www.foxnews.com/story/2009/01/09/powerful-solar-storm-could-shut-down-us-for-months/ [Accessed April 23, 2014].
112 See http://www.history.com/news/a-perfect-solar-superstorm-the-1859-carrington-event [Accessed April 23, 2014].
113 See http://space.about.com/od/sunsol/a/Solar_Flare_2012_Conspiracy.htm [Accessed April 23, 2014].
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happen and the electric grid no longer worked, it seems
likely that the internet would also be inaccessible making
internet and peer to peer Bitcoin transfers impossible.
In addition to solar flares there are several other ways
the internet could be brought down.114 The internet could
be shut down intentionally through government mandate
as recently seen in China. The internet could be shut down
by an electro magnetic pulse (EMP) through either an
EMP device or the EMP caused by nuclear weapons.115
The internet could be brought down by simply cutting
the cables.116 One author indicates that over 90 per cent
of the internet runs over cables.117 The internet could also
be shut down through cyber-warfare.118 The ability to
transfer Bitcoin to anywhere in the world over the internet
was seen as a major advantage for the cyber-currency.
However, the total dependency of cyber-currencies on
the internet is a great disadvantage should the internet
ever be shut down for any length of time.
Conclusion
This article has provided the reader with information
regarding the history, advantages and disadvantages of
Bitcoin as a cyber-currency. It is truly amazing how little
even knowledgeable people know about this topic. That
revelation was a motivating factor in my writing this
article. Bitcoin has grown exponentially in importance
during the past five years. As the first cyber-currency it
has been successful in many ways. Bitcoin has crossed a
significant milestone attaining a market capitalisation of
$7.4 billion. It can be transferred almost anywhere around
the world that the internet reaches at minimal cost. It has
gained the acceptance of a significant number of vendors
as a medium of exchange for the purchase of goods and
services. It also provides an investment opportunity as
well potential protection against government confiscation
and currency debasement.
Bitcoin is not without its shortfalls. The collapse of
Mt. Gox and Flexcoin has shaken at least some investor
confidence in the security of Bitcoin transactions. The
recent news from taxing authorities increasing the tax
reporting and tax payment requirement for Bitcoin
transactions is a significant setback. Bitcoin is also
tarnished in the eyes of many due to its known connection
with tax evasion and illegal activity. It also suffers from
some of the same problems that have plagued fiat
currencies for centuries such as how to safely store it and
prevent its loss. Its almost total dependence on the internet
is both a blessing and a curse. The voluntary (due to war)
or involuntary (due to natural events) collapse of the
internet world wide would be a devastating blow to
Bitcoin.
The ultimate success of Bitcoin and the other
cyber-currencies will likely depend on a multitude of
factors. However, the most significant factor appears to
be whether central banks and governments will regulate
it out of existence. If other countries follow the lead of
China, Russia and Vietnam, the Bitcoin story will come
to an end. However, if Bitcoin and the other
cyber-currencies can work in harmony with traditional
fiat currencies offering alternative transaction completion
methods and investment opportunities, both Bitcoin and
other cyber-currencies are likely to be very successful.
In the near-term it appears that Bitcoin is here to stay.
The long-term status is open to much speculation.
114 See http://www.cnn.com/2012/07/10/tech/web/internet-down-eagleman/ [Accessed April 23, 2014].
115 See http://www.offthegridnews.com/2013/08/28/power-grid-down-drill-to-be-conducted-by-us-government/ [Accessed April 23, 2014].
116 See http://www.bbc.com/news/technology-18366007 [Accessed April 23, 2014].
117 See http://www.cnn.com/2012/07/10/tech/web/internet-down-eagleman/ [Accessed April 23, 2014].
118 See http://www.newyorker.com/online/blogs/comment/2013/05/why-did-syria-shut-down-the-internet.html [Accessed April 23, 2014].
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