An Introduction to Bitcoin, Crypto Currencies

“Bitcoin headed to 100K. Don’t miss out on this historic opportunity.” So promises an advertisement for a new report on “the safest way to invest in Bitcoin.”  

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An Introduction to Bitcoin, Crypto Currencies

Oct 22, 2018

An Introduction to Bitcoin, Crypto Currencies

“Bitcoin headed to 100K. Don’t miss out on this historic opportunity.” So promises an advertisement for a new report on “the safest way to invest in Bitcoin.”

It doesn’t take much searching to find this kind of ad copy on the Internet, which is typically accompanied by stories relating how people who invested in Bitcoin seven years ago have generated returns on the order of 500,000% or more.

Sounds too good to be true, right? Especially when ads go on to relate how “there are still massive gains to come.”

It’s the chance to potentially get-rich-quick that drove intense interest in Bitcoin and other crypto currencies, with the mania reaching a crescendo in mid-December 2017, when one Bitcoin was worth more than $19,000 U.S. dollars. (By comparison, one Bitcoin is worth approximately $6,500 today.)

Of course, if you’re like most merchants and small businesses, you probably don’t have the time or the patience to invest in crypto currencies, but you’re at least a little bit curious about how Bitcoin might benefit or impact your business going forward.

What is a Crypto Currency?

According to Cryptocurrency Facts, a crypto currency is “a type of digital asset” that is made possible by cryptography and (typically) meant to be used as a currency.

Some of the most popular crypto currencies are Bitcoin, Ethereum’s Ether and Litecoin, but there are currently more than 2,000 currencies listed at (up from 1,340 at the beginning of 2018), each with its own symbol—akin to a stock symbol.

To take one random example, there’s a token called No BS Crypto, which is listed on Coin Market Cap under the symbol NOBS.

But the original Bitcoin (BTC, introduced in 2009) is far and away the biggest crypto currency on the block, so to speak, with a market capitalization of more than $115 billion, according to Coin Market Cap.

What is Bitcoin?

In a nutshell, Bitcoin is “a digital peer-to-peer decentralized crypto currency that uses encryption to create and transfer funds.”1 In other words, one way you can use Bitcoin is to send or receive payments over the Internet.

Critically, though, there is no central controlling authority facilitating each payment.

“The transactions are recorded in a public ledger called a blockchain … which is available to and verified by everyone else on the network. This way, everyone can see who owns what, and you can both prove that you are the owner of some amount of Bitcoins and rightfully transfer that ownership to someone else in exchange for goods and services.”2

How do you buy and sell Bitcoin?

Crypto currencies like Bitcoin are typically acquired via digital exchanges (Coinbase and Gemini, to name but two popular examples), but the buying options depend on the crypto currency in question. Face-to-face trading is also common; meanwhile, Bitcoin ATMs are beginning to appear in select cities around the world.3

But in order to acquire Bitcoin or other crypto currencies you need a place to store your coins—that is, a wallet. It’s your so-called wallet that holds the private keys needed to facilitate transactions.

There are five types of Bitcoin wallets, each with its own advantages and disadvantages relating to security, storage and access.

  • Desktop
  • Mobile
  • Online
  • Hardware
  • Paper

The main thing you need to know is that much like physical cash and coins, Bitcoin and other crypto currencies can be lost or stolen.

A recent article by Consumer Reports (CR) highlights some of the risks of crypto currency and how it’s considered best-practice to transfer your coins to a hardware wallet (offline) after you acquire said coins.

So while you might feel justifiably comfortable having a reputable online brokerage “hold” the traditional stocks in your stock portfolio, it’s risky to leave crypto currency in the hands of a digital exchange. As CR notes, an exchange can be hacked, and there have even been cases where exchanges have shut down and made off with their users’ assets.

“One online hacking incident can wipe out an owner’s stash of Bitcoin, leaving [you] with essentially no recourse,” concludes CR.

This is one good reason why the crypto currency ecosystem has its critics, with a researcher at the International Computer Science Institute describing crypto currencies as “not fit for purpose,” saying that “they do not work as currencies, they are grossly inefficient, and they are not meaningfully distributed in terms of trust.”4

What can you do with Bitcoin?

Assuming you have not yet been dissuaded from buying Bitcoin and other crypto currencies, there are several ways they can be utilized, including:

  • As an investment
  • To buy goods and services
  • As an accepted form of payment at your business

As you might guess, investing in crypto currencies is a high-risk endeavor, and not merely because coins can be lost or stolen. The prices of crypto currencies can fluctuate wildly; also, the future of crypto currency is decidedly uncertain, with regulation and tax implications among the issues that could alter the environment going forward.

But you can use Bitcoin and other crypto currencies to buy goods and services. Cryptocurrency Facts has assembled a helpful list of things you can buy with Bitcoin, which includes everything from food to clothes to gift cards and travel services.

Accepting Bitcoin at Your Business

This begs the question: Should you accept Bitcoin at your business?

Relatively few businesses have taken the plunge to date, but generally speaking, accepting Bitcoin has earned these businesses good publicity as well as the goodwill of the small universe of consumers who champion crypto currencies.

But you need to seriously consider the potential tax implications of such a move, some of which are detailed by CNBC, which advises that “the IRS considers crypto currencies to be a form of property, which means that every crypto currency transaction, no matter how small, triggers a separate tax gain or loss.” In other words, accepting Bitcoin could become a tax and accounting nightmare.

Moreover, “the IRS has gotten more serious about ferreting out Bitcoin holders who are not reporting and paying their taxes,” adds CNBC.

Most notably, perhaps, in 2016 the Justice Department filed a court petition to access the identities of all Coinbase customers, “citing the high likelihood that Bitcoin users were evading their tax liabilities.”  That is, the IRS might view accepting crypto currency as a “red flag,” and potentially subject your business to additional scrutiny.

Meanwhile, the tax and regulatory landscape vis-à-vis crypto currencies will most likely change in the not-too-distant future, which could affect you or your business in unforeseen ways.

This explains why observers frequently invoke a well-known Latin phrase when talking about crypto currencies. Caveat emptor. Let the buyer beware.

1 What is Bitcoin? Digital Currency Facts,

2 Ibid

3 Bitcoin for Beginners, Coin Telegraph,

4 Risks of Cryptocurrencies, Nicholas Weaver, Communications of the ACM, June 2018 

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