Even though Bitcoin is not a regular currency, you are still liable to pay income tax, sales tax, capital gains tax, etc., on it.
Bitcoin has been in the news lately for all the right reasons. Many believers say that it is the next big thing since the Internet. After all, it is a pioneer offering, the first ever decentralized and fully open-source peer-to-peer (P2P) payment network and electronic currency or "cryptocurrency" which was developed and established by a person who identifies himself pseudonymously as "Satoshi Nakamoto." There are no middle men, and the network is controlled by the Bitcoin users themselves. Therefore, there is a lot of transparency involved in the transactions. Today, there are many virtual currency payment networks; however, Bitcoin is believed to be the most profitable one. It also enables micropayment and can even be used to collect tips and donations. Here are a few things you should know before investing in bitcoins.
Understanding the Working of Bitcoin
You will have to download the Bitcoin client software from its website.
Install a digital wallet on your computer or mobile.
This will help you to connect with the decentralized network of Bitcoin users.
The algorithm will also generate two unique, mathematically linked cryptographic keys.
These keys will help to exchange bitcoins with other clients during transactions.
One of the keys is private or seed which you will use for signing transactions and is hidden on your computer.
The other one is public and also acts as your Bitcoin address for conducting transactions.
You will now have to acquire bitcoins from Bitcoin currency exchange or services.
The other user will send you their Bitcoin address where you will have to send your bitcoins for payment.
All the transactions will be publicly visible in a shared public ledger called blockchain.
The transaction is confirmed by the network through a process called mining.
It usually takes 10 minutes to give the confirmation.
High Risk is Involved in Bitcoins
As per its website, bitcoins are highly price-sensitive owing to the fact that it is a relatively novel concept, has a developing economy, and many a time, faces markets which are not liquid in nature. All this makes it a very high-risk investment option, where it is advisable that you do not invest all your savings.
What About the Profit
According to a recent report in the Wall Street Journal, a single bitcoin was priced at $13.50 on January 1, 2013 and on November 23, 2013, it had grown 54 times to $730. By the end of November 2013, it increased further and jumped above the $1,000 mark. According to digital trends, currently there are about 12 million+ bitcoins in circulation. The Bitcoin algorithm will not create new ones once it reaches the 21 million mark. This exclusivity and limitation in numbers attached to this cryptocurrency makes it even more desirable and profitable. However, remember that the owners of this currency may become filthy rich, or it may just end up to be a bubble like many others. Again in early December 2013, there was a major crash in the price of a single bitcoin.
Transactions Are Irreversible
It is important that you deal with people or organizations you know or trust. This is because, once you make a payment to a person and want it back, remember that the transaction does not have an option for reversing or correcting itself. Usually, a transaction which has been deployed can be reversed in the first 10 minutes (until the confirmation is received) only. However, the person who has received the payment can refund the amount back to your account, if he wants to.
Role in the Market
Many people are claiming that Bitcoin works like gold in the market, as only a limited number of bitcoins are available. Also, another school of thought says that it could be utilized in the remittance market in the near future. This is because money could be easily transferred without the limitations or higher fees of the traditional money transfer market. Also, as they are easily available in many countries, you can eradicate the need for a bank account and the limitations that come with it. Because of this, in future, it can also contribute largely to international trade.
Typos will be Detected
In most cases, if you create any typos while feeding in the address for Bitcoin transfer of funds, it will immediately get detected. It will not allow you to send money to an address that is wrong or invalid. Hence, ensure that you are keying in the right address.
Create New Addresses for New Transactions
Contrary to popular belief, your transactions are not a secret at all. They are visible publicly on the Bitcoin network or in the blockchain on a permanent basis. This means that though your identity remains anonymous and is only revealed during purchase or sale, people can still see your address and the transactions involved. They also know the amount of bitcoins you own. Hence, it becomes all the more important to generate and use a new address for every new transaction for the security and privacy.
Investing with Limited Risk
To limit the risk of investing in this highly volatile investment, it is advisable that you invest small amounts of surplus savings instead of risking the entire amount of your savings. If you have a diversified portfolio, only allocate a small percentage to bitcoins for a better risk-return ratio.
As mentioned earlier, a transaction can be reversed in the initial ten minutes when it is getting confirmed. This is where a fraudulent person can actually cheat you or resort to double-spending. Hence, you should wait for at least 6 confirmations for an amount which is about 1,000 US$ or more. The more the number of transactions, lesser is the amount of risk. Also, if you do not have time to wait for confirming the transaction, you should use the Bitcoin detection or charge a small transaction fee.
Crowdfunding with Bitcoin
If you are a Bitcoin investor and you have a brilliant business idea, you can raise capital for it by starting a crowdfunding campaign on the Bitcoin network, although it will materialize only if you get a certain number of money pledges. Bitcoin protocol will process these assurance contracts, and the actual transaction will happen on compliance of all the necessary conditions.
In most of the transactions, you will not be required to pay fees for processing transactions. However, you may have to pay a small voluntary fee for having a faster confirmation on the transaction. You will also need to pay a small amount as minor remuneration.
Loss of Wallet
Bitcoin secures your wallet from fraudulent transactions; however, there is nothing one can do if you lose your wallet. If one loses the private key to his Bitcoin wallet, you may lose the money. Though the lost bitcoins will lie dormant in the blockchain, it will take out money from the circulation. One cannot find the lost private keys again. It will only lead to the rise in the value of the remaining ones.
Alternatives to Bitcoin
Yes, there are many alternatives to Bitcoin which can be utilized in future; for example, feathercoin, litecoin, novacoin, peercoin, etc. These are also virtual currencies mined by computers. You can invest in these too, but they are relatively new in the market. Do not forget to read all the rules properly before investing in one.
Arguing the Upward Trend
Looking at the increasing graph of the value for one bitcoin, many people are speculating that it has shown such a surge because of the US government's decision to allow Bitcoin to operate from the country. Also, there has been a steady increase in the number of users from China. However, it is believed that this increase is temporary, and once the governments start to control it, the value will take a dip.
These are just a few things of the many to know before you invest in bitcoins; for further details, do visit the Bitcoin website. A large number of businesses and individuals are actively becoming its users. If your online wallet gets stolen, lost, or if your hard disk crashes, your balance will not be insured. As of now, this cryptocurrency cannot be used for transactions at brick-and-mortar storefronts. In the future, it may do so. As this virtual money is extremely volatile in nature, do not forget to research the current conditions before taking an investment decision.
Disclaimer: Please consult a professional financial adviser before investing in Bitcoin.