David Lerner Associates: Bitcoin Just a Trend or the Future

(Newswire.net — August 7, 2014) Syosset, NEW YORK — 

An alternate unit of currency that exists strictly as digital code, Bitcoin has received a great deal of attention in the last year. Not everyone agrees on what this five-year-old digital phenomenon is – an investment, a scam or the potential future of currency. In part that’s because speculation in Bitcoin has led to wild gyrations in its value.

Over its five-year history, its value has fluctuated wildly as both speculation and confidence in it as a currency have ebbed and surged. In April 2013, after rising from $90 to $260 over two weeks, a bitcoin’s value plummeted to $130 in just six hours. Since mid-2010, it has gone from a low of $2 USD to as high as $1,200 last November, with multiple double-digit crashes in between.

This volatility has resulted in problems for people trying to make payments in bitcoins. It’s hard to use a currency when you’re not sure from day to day whether the amount in your virtual wallet is worth enough to buy a Range Rover or a tank of gas. Complicating the issue is the fact that the value can vary on different Bitcoin exchanges.

Bitcoin as currency

Unlike traditional currency or coins that are minted, Bitcoin is created by “mining”– using complex software to solve complicated mathematical computations (or contracting with a mining company to do it for you).*

However, most users acquire them by either buying them with physical currencies such as dollars or accepting them as payment for goods and services. The total number of bitcoins readily available to be mined eventually is claimed to be limited to 21 million, with approximately 12.5 million already in circulation.

How are bitcoins used to pay for something?

Just as a physical wallet holds paper money and change, a virtual wallet holds the private software keys that are bitcoins. It makes or receives payments by communicating with the network of other Bitcoin wallets. Physical bitcoins, which have a software key embedded in them, have begun to be minted. Acceptance of bitcoins as payment is entirely at a seller’s discretion and there is no guarantee you’ll be able to spend them where you want to or get the value you expect.

Speculating in Bitcoin

Bitcoin’s usage as a currency is a ripple compared with the tidal waves of investment speculation it has fueled. “Investing” in bitcoins merely means acquiring them through one of the methods outlined above. However, the wild fluctuations in value make Bitcoin a very volatile investment.

Cyber Attacks on Bitcoin

Another problem is security. Worse than not knowing how much your bitcoins will buy is not knowing whether they’re available to buy anything at all.

Earlier this year, one exchange announced that a hacker had made off with some of the funds stored there and cyberattacks halted trading briefly on two major exchanges in February. Days later, Mt. Gox, at one point said to be the world’s largest Bitcoin exchange, shuttered its website, leaving customers with their money in limbo for days before declaring that the company was bankrupt and nearly half a billion dollars’ worth of bitcoins had vanished (though some were subsequently located).

The Wild West rides again

So far, regulatory oversight of Bitcoin has been spotty; the closest thing to a regulatory body is the Bitcoin Foundation, a private organization that “standardizes, protects, and promotes” Bitcoin usage. The currency is not backed by either a government or any physical asset such as gold. Major exchanges are located around the world, and the decentralized nature of the system makes things more challenging for governmental regulators to get a handle on it.

Up until now there has been little oversight by any U.S. regulatory body; in fact, testimony before a U.S. Senate committee that no new regulations were necessary for virtual currencies helped send Bitcoin to its peak last November. Unlike accounts at FDIC-insured banks, there is no protection for possible loss from a digital wallet. Also, unlike credit card charges, Bitcoin transactions are irreversible.

Certainly, virtual currency still faces a great deal of challenges. If you’re considering exploring it, either for transactions or as a speculative investment, you should become much more familiar with it than simply relying on this dialogue. And due to the problems outlined above, you should be readied for dramatic price swings and only use money that you aren’t depending on for something else.

* Source: www.coindesk.com, March 26, 2014.

 

IMPORTANT DISCLOSURES

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.

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