Posted by Karen Munoz, EA

Understanding the Concept of Bitcoin

Understanding the Concept of Bitcoin

You may have already heard about bitcoin before due to the attention the world has given to cryptocurrencies and digital transactions. But what is Bitcoin? How does it relate to how you invest, and why should you know all about it? Read on for answers!


The first idea to have about Bitcoin is that it is a currency but not like the dollars or pounds you know; it is a digital currency released in January 2009. The identity of the person(s) who released it remains unknown as we only see the pseudonym, Satoshi Nakamoto who is attributed as the creator. 


Bitcoin offers users a different transactional experience with low transaction fees that are even better than traditional digital payment platforms. Bitcoin’s operations are run by a decentralized system that eliminates intermediaries and other parties that slows down the transactional process. 


There are numerous cryptocurrencies, but Bitcoin has the first known one and has since maintained its spot as the leading crypto coin in the market. Of course, other crypto coins continue to progress online, but bitcoin has remained consistent with an ever-increasing value despite being volatile. 

There are no physical coins with bitcoin: you only have balances that are kept in a public ledger, with everyone having access to this ledger. A substantial amount of computing power confirms the bitcoin transactions. 


Unlike fiat, bitcoin is not backed by any financial institution, individual, or government. Its success has led to the creation of many other cryptocurrencies, which are now referred to as altcoins. Bitcoin is also known as one of the leading digital currencies that relies on a peer-to-peer system that enables instant payments. 


With the world evolving into a highly placed digital era, one can understand why bitcoin and cryptocurrencies have so much emphasis. Despite many governments still trying to prevent bitcoin from becoming a recognized legal tender, millions of people in such countries still trade and invest in bitcoin. 


Since it is evident that digital currencies are the future, bitcoin supporters are endorsing them and buying a lot of them to be ready for the anticipated digital future. Making money off bitcoin is akin to making money from regular investment processes: you buy bitcoin at a lower price, hold onto it for a while and sell it off when it is now at a higher price. So you get the initial amount for which you bought the coin and additional returns.


Bitcoin and taxes

In 2014, bitcoin and many other cryptocurrencies gained a lot of traction, and then the IRS announced that these cryptocurrencies would be taxed like other properties and not like currencies. The IRS maintained that the gains or losses from bitcoin viewed as “Capital” would be accounted for as “Capital gains.” 


They further said that selling bitcoin you mined or bought from another person is paying for goods with bitcoin will be labeled under taxable transactions. The tax implication of this announcement is that before anyone uses bitcoin to purchase goods, pay for services, or even as a means of investment, he must read the tax laws regarding cryptocurrencies first. 


 Yes, bitcoin is gearing up to take over the future of digital finance, but please note some risks linked with investing in bitcoin. The fact that there is no guaranteed value with bitcoin or any other cryptocurrency means that it has many risks.


Additionally, bitcoin is highly volatile because of a lack of central governing and regulatory authorities. Its volatile nature explains why you are strongly advised to use the money you can afford to lose whenever you want to buy cryptocurrency. 


If you have never transacted with bitcoin, now is an excellent time to get started. As you trade with bitcoin, you will find that there are so many lessons to be learned, and the lessons will help you decide if you want to go forward with cryptocurrencies or watch from the sidelines. 


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Karen Munoz, EA
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