Recently, there has been a lot of media exposure surrounding Bitcoins and their potential to become a virtual currency that could revolutionize global trade. However, despite all of the media coverage, I have found that I still struggle to understand what a Bitcoin truly is. This weekend I spent some time developing a better understanding so that I could share my findings with you, the reader.
Bitcoins were designed to be digital coins sent through the internet. They are similar to the U.S. Dollar or the euro, except that they are not tangible, and aren't controlled by any one country. You can't buy many goods with the virtual currency right now, but some companies are beginning to accept payments in Bitcoins. Through an automated mathematical process Bitcoins are 'mined' through computer software and stored in online wallets.
As it stands right now the virtual currency and payment method are not regulated by any government. Earlier this month the value of Bitcoins plummeted because China's central bank announced that it would not allow financial institutions to sell, trade or store Bitcoins because they do not consider it to be a real currency. Despite supposedly being beyond the reach of government, many investors in the virtual currency are realizing that may not be the case moving forward. Another concern for Bitcoin investors are the taxes imposed on income achieved from selling the virtual currency. If Bitcoins were to be recognized as a currency any gains generated by holding the coins would be taxed at ordinary income rates, whereas, if they are treated as an asset, they could potentially be taxed at capital gains rates.
Whether or not Bitcoins are a good investment ultimately depends on the level of risk you are willing to take. Given all of the regulatory uncertainty they are surely a speculative investment with an immense amount of volatility. For me, I will stick to my physical wallet and currency, but am interested to see if virtual currencies will be successful in revolutionizing global trade.
Ethan Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).