March 28, 2015

Understanding Bitcoin

bitcoin

Understanding Bitcoin can be a bit daunting for most folks. There is a wealth of information on Bitcoin out there on what it is and how to use it and of course stories of the black markets and exchanges that disappeared with folks money. Let me try to cut through the noise and give you my layman’s view of bitcoin and it’s advantages and disadvantages from money and credit cards.

First off, think of bitcoin as walking around with cash. You go to the store and pay for stuff and you are pretty much  anonymous who you are to the store and you get goods. If you want to buy illegal stuff in some internet based black market with bitcoin, there is a good chance you could be scammed and lose your money. If you go to some black market to buy illegal stuff with cash in person there is a chance that not only can you lose your cash but injured or killed. So in a nutshell, bitcoin is cash except you don’t need a middle man to send the bitcoins to anyone in the world.

Next, lets talk about credit cards vs bitcoin. Credit cards are highly profitable for banks, Visa, MasterCard, etc. Why? Well the obvious thing is they make money off of interest rates. They also make money off of merchants by taking a percent of the money they charged your for a cup of coffee. Another reason is they sell your data. They know everything you buy, your purchase habits, where you buy the whole nine yards. Even in the bankruptcy, Radio Shack is auctioning off their customer data. Remember that bit about paying cash and the merchant doesn’t know anything about you?

Advantages:

  • Anonymity – Cash, Bitcoin
  • Fees – Cash, Bitcoin
  • Physical Safety – Bitcoin

So if Bitcoin is so great what is the downside?

Volatility.   There have been wild swings in the price of a Bitcoin.   At time of writing 1 Bitcoin = $249.70 USD.   That price has gone as high as $1000 USD.   Does that mean cash is better then bitcoins for stability?   Not necessarily, just ask a Russian or Cyprus citizen what they think the strength of their currency has been.   Also, unlike governments just printing off money and flooding the money supply, Bitcoin has an upper limit to the number of coins that can be created.

Where to spend is probably the biggest thing to slowing adoption but that is changing.   You can buy goods online such as Overstocked.com and even here locally go to Reed’s Jewelers.   Of course money is accepted everywhere and most places take credit cards.  There are also directories Coinbase clients as well as plenty of other directories where you can spend bitcoins.

In the United States the IRS guidelines classify bitcoins as property.   If you are a U.S. citizen the short answer is you need to keep track of what price you paid for your bitcoins and the price of the sale and treat it as capital gains.   For a merchant that can be a headache come tax filing.   However companies like Coinbase and Bitpay will convert the sale to cash immediately so the merchant does not need to track the buying or selling of bitcoins unless they decide to hold on to bitcoins over a period of time.   There is a well written article at CoinDesk “What the IRS Bitcoin Guideline Means To You?” if you would like to read more about it.

Why is Bitcoin cool?

Well being able to send bitcoins anywhere in the world without fees is pretty darn cool.   It is cheaper then using a credit card and it keeps you anonymous in a world where increasingly your behavior is recorded and sold. Once merchant adoption picks up, it would be possible to go from country to country without paying exchange rates to buy anything or trying to figure out conversion rates.    Cool things like tipping people online for articles or posts that you find valuable such as ChangeTip is one I use on this blog and is used on Reddit and many other social sites to show appreciation and avoid high fee credit cards.    You can tip fractions of a Bitcoin.

Darkside?

To blame bitcoin for creating illegal marketplaces is a false cause.  Yes illegal activity takes place with bitcoin it also takes place with cash.   Does it make it impossible for the FBI to crack down?   No.  Look at the take down of Silk Road and Silk Road 2.0.

Every once in a while some idiot also thinks he can beat paying taxes by falsifying bitcoin payments.   Any legitimate business both client and vendor will keep records.   Those records will be asked for in an IRS audit.   If you don’t have them, good luck.

How do I get started?

Bitcoin.org’s “How to get started with Bitcoin” is a great place to learn about Bitcoins.  Also head over to Reddit’s /r/bitcoin and /r/bitcoinbeginners for help or advice.

I personally use Coinbase exchange to buy/sell bitcoins.   You can also read about how I setup an online bank account with Simple to use with my Coinbase account.   For new accounts deposit checks are held for 9 days with Simple.   With Coinbase you can buy from your linked account but due to ACH it will not be settled for 6 days.   There are other options if you need bitcoins immediately but you will likely pay a 2% fee instead of only 50 cents for a small a transaction with Coinbase.

To be safe I transfer from the Coinbase exchange wallet to a personal wallet I setup on my home machine via Armory.   Armory has some nice tutorials on all the features of their application for the truly paranoid.