Enabling Beginners and Experienced Users to Understand Crypto Currencies
So you”re not living under a rock, and you have already heard about Bitcoin, Litecoin, Peercoin, and other Crypto currencies. Maybe, you’ve decided to give it a try, no longer ignore or dismiss these strange beasts because you get the suspicion that there might be more to this than just Hot Air or Nerds Playing Games…
Well, you’re not alone!
Although invented back in 2009, Crypto currencies have gained some momentum only within the last year or so.
To provide answers to the increasing number of people trying to get to terms with the concept of a Crypto Currency, the following section has been compiled by our staff:
Q: Is It Money — At All…?
All Crypto currencies are primarily a transactional tool, and a very good and economic one at that. You would not want to use them as a long-term store of value (although some people may erroneously try to do just that.
Bitcoin is not what one would call a true store of value. It is important to stress that it is not meant to be one. It can (and cannot, at the same time) be argued that Bitcoin is “money” for it does have many of the basic monetary functions while lacking others at the same time.
That said, Bitcoin and other Crypto currencies do have those monetary functions that make them useful for transactions, particularly in context with today’s online activities. Lacking other ones, it should be noted that a better long-term store of value is provided by gold and silver and that the simple rule of “Bitcoin for transaction, gold for storing value” holds true in that respect, too.
Q: Bitcoin, a Ponzi scheme?
There have been a number of claims that Bitcoin were just another Ponzi scheme. These are voiced by old-school economists who probably feel — a bit too hastily though — that the lack of some monetary properties of Bitcoin make Crypto currencies a fake altogether.
This fails to recognise that all Crypto currencies are primarily a transactional tool, and a very good and economic one at that. (Simply compare them to conventional payment systems.) You would not want to use them as a long-term store of value (although some people may erroneously try to do just that: this does not make Bitcoin, Litecoin or other such digital currencies Ponzi schemes).
Bitcoin is not what one would call a store of value either. It is important to again stress that it is not meant to be one but that it is a transaction-facilitating mechanism. It can (and cannot, at the same time) be argued that Bitcoin is “money” for it does have many of the basic monetary functions while lacking others at the same time.
Be that as it may, this definitely does not make Bitcoin a Ponzi scheme — and certainly not “the biggest one in history” anyway! So here’s another thought for anyone making these outlandish claims: even IF it were some Ponzi scheme, Bitcoin would hardly be the “largest in history” as this place is firmly secured for the U. S. dollar since 1913.
Q: Is it illegal to use?
No, using Bitcoin is not illegal for individuals — not even in the U. S. (where all sorts of Bitcoin businesses are leaving the country because of too much bureaucracy and heavy hurdles and financial requirements, looking for places with a more friendly business and regulatory climate).
Countries other than the U. S. are more welcoming to the idea of Bitcoin. Switzerland and Canada have a hands-off approach and have not overly — except in a few instances of bank account closures for Bitcoin businesses with some Canadian banks — interfered with Bitcoin. Other countries are explicitly welcoming Bitcoin or implicitly acknowledging Bitcoin as an exisiting — and usually also as a legitimate — way of payment. European countries such as Germany, the U. K., France, Denmark, Sweden, Norway, and Finland are regarded as Bitcoin-friendly, a fact that might lead to U. S. businesses setting up shop in places like these.
Bitcoin is, as such, legal to use in all countries including the U. S. as long as it is used for not-too-heavily out of the ordinary transactions. Engaging in slave trade or human trafficking and then getting paid with bitcoins is illegal, but that’s because of the general subject matter and not because of Bitcoin. Likewise, heroin purchases paid for in bitcoins would be illegal and would likely lead to action by the authorities.
A well-known and fully unregulated marketplace, Silk Road, where both legitimate and controversial items such as illegal drugs were traded was shut down in the U. S. a few weeks prior to this writing and caused another set of shockwaves throughout the Bitcoin community.
Again, these instances triggered government action and became notorious because of the kind of goods involved and not because of the fact that bitcoins were used as a payment. It is important to keep these facts apart and not confuse them with the general question of Bitcoin legality.
Q: What about taxes?
A: A definite beauty of Bitcoin is that you’re not alone with your confusion! The government is — at least — as confused as the Man in the Street. Only recently have a handful of authorities in the U. S. started to look into the concept of Bitcoin and other crypto currencies — and ridiculed themselves in the process: they are puzzled at best, and turn out to be fully incompetent in a subject matter is definitely their business (even if it turns out that they do not have any authority over it whatsoever; as they would have to understand it and declare that this was so, if that turns out to be the case).
That alone is fun to watch, a (presumably) allmighty government finding itself not-so-mighty in the end.
For the time being, taxation and Bitcoin is a grey area. As long as there are no clear definitions and rules there’s nothing to be broken either, at least as private parties or individual Bitcoin users are concerned. Keep watching though and follow new developments in that area to make sure and not miss anything that might affect you.
Q: Is it safe?
Q: How do I satart using Bitcoin (or any other Crypto Currency)?
Q: How do I secure my Bitcoins?
Q: Is it useful or recommended using it for purchases or similar transactions?
A: Of course it is!
Crypto currencies are made for transactions (much more so than for storing value. Bitcoin’s suitability for the latter still needs to be shown and appears somewhat doubtful).
The number of merchants accepting Bitcoin as a payment is growing every day, the number of places of acceptance is growing rapidly.
Using Bitcoin for transactions is it’s primary reason for being.
If it is argued that Bitcoin does possess properties of being “money” than this is primarily the case because it is fungible, divisible, and (increasingly) widely accepted.
Also, the fact that transmission cost is a lot lower than with government-issued fiat currency (where there is always middle-men to be paid, and, in the form of commercial banking corporations extremely greedy and currently drowning ones at that).
While choice may turn out to be somewhat limited, at the time of writing, when it comes to “classical” or conventional goods or services to be purchased, if you find Bitcoin accepted at a particular place you are going to spend money at (e g online shopping, let alone international purchase of some service or items), using Bitcoin may come in very handy and — apart from rare occasions or when you are set up to use foreign bank accounts in that particular location — certain to cost a fraction in transaction fees. Remember, there are no “foreign currency fees” (credita cards), no “overseas wire fees”, no mark-ups for “conversion” or “traveler’s cheque fees” to be paid when using Bitcoin, Litecoin, or any other crypto currency.
Q: Is Bitcoin as good as gold?
A: Like it or not, it”s definitely not and cannot be! You may be a fan of Bitcoin as much as you want but you would be a fool to try and replace gold or silver with Bitcoin. Precious metals are unique and are the only ones of their kind on Earth. Bitcoin is not and will never be as good as gold in it’s most significant aspect as, quite contrary to gold, Bitcoin has no intrinsic value. Also, Bitcoin cannot be used or verified without external tools (computers, network connections, electricity etc). That’s why Bitcoin is not a suitable store of value and never will be. Maybe, Bitcoin will turn out to have ‘some’ sort of stability better than fiat currencies but, unlike gold, there is no intrinsic or material value in Bitcoin.
One would not hoard expired credit cards either. Remember that Bitcoin is not designed to be a long-term store of value but a transactional device. Therefore, its value lies in free-market price mechanisms, freedom from governrment manipulation, and low transactional cost rather than being a store of value over thousands of years. The latter has only been achieved by precious metals (chiefly gold an silver) throughout all of human history, and it is not just unlikely but outright impossible for energy-dependent Bitcoin to achieve that.
Economically, this simply breaks down to two things: using Bitcoin for transactions and acquiring gold and silver for wealth preservation. Simple as that…