Years ago, if you tried to invent your own currency, you’d end up getting a house call from the IRS or the FBI. Yet in recent years, new currencies have appeared out of the blue like strange new fashion fads. Virtual currencies, or “cryptocurrencies,” like Dogecoin and Coinye, appeared as one-off jokes that went on too long with a small but adoring fan base. Yet bitcoin, the one cryptocurrency to rule them all, went from niche idea to mass market seemingly overnight.
To most people, bitcoin seems like a step above Monopoly money or the points you accumulate in Candy Crush. In the real world, bitcoin is an actual, tradable asset you can buy, sell, and make money on. Sure, it comes from an anonymous creator and can be used to fund some terrible, awful things. It also happens to be part of a multi-billion-dollar market, one where small-time investors and big finance firms are quickly putting more money.
Before you write bitcoin off as a gimmick, or before your mom asks you what it’s all about, there are a few things you need to know about the world’s most popular cryptocurrency.
You can quickly profit from buying and selling bitcoin.
Bitcoin rapidly increases and decreases in value. It could be worth $2,300 one day and $2,900 the next. Savvy investors enjoy this because it lets them make gains in a short period of time. Though no one can predict when bitcoin will increase or decrease, those who play it smart and safe can make a profit in far less time than they would on the stock market. It’s worth noting that bitcoin doesn’t always increase; in fact, it can decrease rather quickly, too, making it a highly volatile investment.
Paying taxes on bitcoin is up the air.
When you sell a stock at a profit, you have to pay capital gains taxes. The IRS always gets wind of your year-end gains, and trying to avoid it could mean harsh legal penalties (read: jail). When you sell bitcoin at a profit, you have to report those gains to the IRS. Yet few people are actually reporting their cryptocurrency gains, and the IRS isn’t going after individual crypto investors. The government also doesn’t have a set way to treat bitcoin as an asset or currency, so paying taxes and the legal status of bitcoin in the U.S. is anyone’s guess.
No one country can determine bitcoin’s value.
Unlike single-country currencies (the U.S. Dollar, the British Pound), bitcoin’s value isn’t tied to any one country’s economy. If the American economy tanks, the value of bitcoin won’t be directly affected by an economic downturn. In fact, bitcoin’s value might increase as more people turn to different solutions from stocks, bonds, and gold.
Bitcoin can’t be counterfeited.
Every bitcoin user has the anonymized “ledger” of all other bitcoin users. This makes it so that “fake” bitcoins cannot exist, as all other bitcoin users will see it. New bitcoins can only be created through a legal, complicated, and energy-intensive process called mining. Mining keeps supply of bitcoins steady and its built into bitcoin’s very framework. In layman’s terms, you can create new coins, but you can’t duplicate or fake existing ones.
You can do some really illegal things with it.
Bitcoin is untraceable. Once you spend or send it, the bitcoin(s) you exchanged for goods, services, or other currencies cannot be traced back to you. This is why users on the Dark Web take to bitcoin to buy illegal drugs, guns, fake IDs, and products much worse than whatever you’re imagining. Hackers also hold computers and entire networks ransom with viral ransomware, demanding untraceable bitcoin payments in exchange. The majority of bitcoin users are upstanding citizens like you and I, but there are a handful of nefarious crypto-junkies using it, too.
It’s new, exciting, and people don’t fully understand it.
The stock market has over a century of data to support why stocks go up and markets go down. Bitcoin is less than a decade old, and people are still learning about what makes it change in value. Some see it as a way to make millions of dollars in a short period of time. Others are scared of it and think it could wipe out billions of dollars’ worth of investments. Nonetheless, there are millions of investors in bitcoin and other cryptocurrencies, and new companies like Coinbase are legitimizing its usage.
These are just a handful of the many reasons why people are talking about and investing in bitcoin. To learn more about this new currency, how to use it, and what to avoid, check out our comprehensive bitcoin guide.