Bitcoin has become highly popular as an alternative to traditional forms of fiat currency and payment methods such as credit cards, debit cards and wire transfers. Bitcoin is a cryptocurrency and global payment system, and the first decentralized digital currency. The technology works on a peer-to-peer basis, and there is no central or single governing authority or system administrator.
The Bitcoin technology allows users to facilitate transactions directly between users using cryptography. Transactions made using bitcoins are verified by network nodes and then recorded in a public ledger known as a blockchain. This type of public ledger is able to record these transactions without the need for a central administrator, and is maintained by a network of nodes that run the system’s software.
The cryptocurrency has a very intriguing history. In 2008, the domain name “bitcoin.org” was registered. Shortly after, in November of 2008, a link to a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was sent out via a cryptography mailing list. The paper was authored by Satoshi Nakamoto, who eventually put the software into action as open source code. It was released in January of 2009.
The actual identity of Satoshi Nakamoto remains a mystery, and the subject of much speculation. The name could point to a single person, or perhaps even a group of people.
Bitcoin has been widely covered in financial media, and the market often exhibits significant Bitcoin price volatility. Interest in this unique market has become so substantial that even major exchanges such as CME Group and CBOE have or are in the process of launching tradable contracts based on Bitcoin. Other exchanges may follow suit and do the same if the product is successful.
The major debate surrounding Bitcoin currently is whether or not it may be a viable alternative to paper money and other payment methods in the long run. Bitcoin is already an accepted form of payment at many merchants, and the amount of merchants that accept it is likely to grow as the technology becomes more popular.
Bitcoin does offer numerous potential advantages, such as ease of use and convenience. Bitcoin can be sent to any destination in the world, with reasonable transaction fees and without the need to convert currency. Bitcoin payments are essentially instantaneous, and cannot be undone once made. Speaking of fees, it offers a very low cost alternative to other methods of payment like bank wires and may potentially carry less risk of fraudulent use compared to credit or debit cards.
Although anyone can purchase bitcoins and participate in the network, for those seeking to invest in this technology for the long-term a Bitcoin IRA may be the way to go. A Bitcoin IRA is a self-directed IRA that allows the account owner to buy and hold or trade bitcoins. Using an IRA can have numerous potential advantages including the possibility of tax-deferred growth, a lower tax bill and flexibility. Any gains made in this type of account are non-taxable provided all of the rules and guidelines are adhered to.
Any questions about potential tax implications, rules and eligibility should be directed to your tax professional.