Bitcoin and Taxes
If you had read Satoshi’s white paper back in October 2008, you would have said “there is no way this can work.” There were literally hundreds of reasons Bitcoin could not and would not emerge as a new form of money.
Coming up on six years later, Bitcoin has overcome many of those issues and every day looks more and more like some form of financial value. What remains unclear, though, is if Bitcoin will predominantly be a store of value (like gold) or a medium of exchange (like the dollar), or both (the best case for Bitcoin bulls).
And one important factor in determining what happens with Bitcoin is taxation policy.
In the US, the IRS has issued guidance that places Bitcoin very much in the store of value column. The IRS has said that in their eyes Bitcoin is “property” and will be treated like stocks and bonds for tax purposes. In some ways this is good as the IRS is treating Bitcoin seriously and telling everyone how to report Bitcoin transactions to them. That’s progress. But sadly, treating Bitcoin as property makes it less likely that Bitcoin will become a medium of exchange in the US. That’s because consumers and business don’t normally transact in property. It would be a massive pain to keep track of “cost basis” and “sale price” for every dollar you received and parted with in the course of a day, week, or month. The good news is that because Bitcoin is “programmable money”, it is possible to do this programmatically for consumers and the companies providing payment infrastructure for Bitcoin are slowly but surely doing just that. However, in the long run, it would be much better for the IRS to treat Bitcoin as a currency, and my hope is they will do that as soon as possible.
An even more problematic issue for Bitcoin is VAT tax policy in countries where that is the norm. Right now, Canada is considering applying VAT tax to the purchase of Bitcoin. VAT can be as high as 15% in Canada, so that would mean every purchase of Bitcoin would cost up to 15% more than the current market price. And then when you turn around and purchase something with Bitcoin (as I did yesterday with seats for Tuesday night’s Met game), you would be taxed another up to 15% on that transaction. That’s double taxation which, in my mind, is always terrible tax policy. If Canada goes with this approach, it is my view that Bitcoin as a medium of exchange in Canada is a non-starter.
It is also true that VAT tax on the purchase of Bitcoin would be problematic for the store of value use case. Most investors aren’t going to pay a tax of up to 15% on the acquisition of investment property (like stocks and bonds). So why would they do that with Bitcoin?
The UK went down this path with Bitcoin and VAT last year and then, after careful consideration, the HMRC decided that VAT would not apply to Bitcoin acquisition, but VAT would be applied when Bitcoin was used to purchase goods and services, just like the British Pound.
If we had to pick a country that has taken the most thoughtful and helpful policy toward Bitcoin, it would be the UK. In fact, last week the Chancellor of the Exchequer announced an effort to make the UK the leading center of Bitcoin innovation in the world. That’s forward thinking. That’s what the US and Canada should be doing. But they aren’t. Instead they are stifling innovation in and around Bitcoin with their taxation and other policy initiatives.
I am sure many policy makers would prefer to see the Bitcoin genie put back in the bottle. But that’s not going to happen. Not only is Bitcoin alive and well, it is a global phenomenon, so even if you stifle it in your country, it can and will grow and thrive in other parts of the world. And so you are eventually going to have to deal with Bitcoin, what it means, and what it enables.
It is my view that treating Bitcoin like a currency is the most helpful approach. That will allow Bitcoin to find its best use cases without overly burdensome taxation and other regulatory requirements. I’m very pleased that the UK has found it’s way there and my hope is other major economies like the US and Canada will follow suit as soon as possible.
HM Treasury is very interested in making London the global centre for Bitcoin and virtual currencies because it sees Brussels as a direct threat to the historic position of London as Europe’s capital of capital (financial services, financial markets, et.c.). The City of London controls HM Treasury. It does not want to lose its position to Frankfurt. Cameron opposed the appointment of Juncker, and is offering a referendum on the UK’s continued membership of the EU after the next election.HM Treasury also sees virtual currencies as the way to kill off the ‘black economy’ by being able to monitor ALL economic transactions, achieved by eventually ending cash in circulation and replacing it with an exclusively electronic system.VAT is at 20% in the UK.
Hey who are you? I want to follow you on Twitter. Reckon I can learn from a smart guy like you!!! 🙂
i am nothing less than a node on the network.
Transactions are more global and less national every day. Governments will need to rethink taxes to adapt to that reality. The internet is already a huge pain in the ass for taxing authorities because it breaks a lot of boundaries. Bitcoin will only increase that pain because they will have fewer ways to track it than they have with credit cards or Paypal.I agree that the UK is the most forward thinking government when it comes to Bitcoin, but even their approach has problems. VAT is enforceable because transactions are done with a currency controlled by the enforcer. When you introduce a decentralized medium of exchange, like Bitcoin, that enforcement is more difficult because the enforcer doesn’t have any control over it.
it seems to me that governments will never allow bitcoin to evolve into both a store of value and a currency because it would threaten their primary source of income. Right now for governments around the world a huge portion of their revenue comes from increasing the money supply. Bitcoin would take away this power. I don’t think bitcoin and our current welfare state can coexist. At some point the two will come to a stand off. The government typically wins in these situations.Alan Greenspan wrote an excellent essay about this issue but in regard to gold.http://www.constitution.org…
That sounds like a great VC investment theme – is a genie being let out of a bottle?Currency is better for Bitcoin; store of value is how it has been introduced to the world & getting that genie back in will be tough…..
Sounds like some governments are getting in front of this, others could get left behind.
Jim, said “coolaid” you are now drinking have aspartame or actual sugar in it?I don’t think this is a “cat out of the bag” issue or even close to it. Left behind how?
I had just gotten off a red eye to Europe. So I’m not even gonna revisit my comment.Let’s aim for tomorrow.
The tax deterrent on Bitcoin as a medium of exchange (like the dollar) could in part be solved with a de minimis exception like gambling winnings at a casino or horse track (per transaction and per year). In practice, this would also be consistent with Bitcoin as a store of value (like gold), because investments in stocks/commodities – at least those the tax authorities care about – are above the de minimis exception anyway since the transaction costs of investment are otherwise too high on a percentage basis.
If bitcoin is used for transactions and these carry VAT, they will only do so for selected sales lines.For example in the UK food, drink, animals, animal food and seeds are VAT exempt as are EXPORTS.On premises food and drink are chargeable. but where input VAT is low (services rather than production), smaller companies can stay below thresholds without penalty.It follows that a beachhead for day to day bitcoin transactions is any unbundled service business especially and especially smaller ones in some primary industry (food, agriculture)So I imagine myself driving through the european countryside buying pumpkins and fresh asparagas and great artisinal products ( @wmougayar, @ awaldstein) from farm stands with a one-way honesty box – You can put money in but you cant take it out – And nobody makes money stealing pumpkins.Theft from honesty boxes is one of the greatest problems for local, middleman disrupting improvements to the food-chain that reduce low carbon impact and food waste.Gosh the older I get the more liberal & touchy feely I feel I am becoming (still believe in punishment fitting crime though)
It is all happening on the right path for Bitcoin.First they ridiculed …now they are fighting with tax and VAT … finally it is going to be a win for BItcoin..
I will refrain from commenting on the double taxation comment for Canada until I complete my investigation, because this was news to me, and I’m generally on top of it. The only thing I saw about it is a speculative mention in a recent report by the Canadian Bitcoin Foundation which was more noise than facts. [http://ca.bitcoinfoundation…]The UK can say whatever they want, but actions and intent are two different things. They “want to be a leader”. Well, Canada is already a leader by virtue of actions, and not just intent.- The Canadian government has taken a very “hands-off” approach and saying nothing that would impede the growth of Bitcoin.- In Canada, Bitcoin is already recognized as a barter currency, which means you can use it to buy and sell anything. Standard GST/HST applies in the same way as you were using dollars. CRA (Canada’s Revenue Agency) has already clarified their position here:http://www.cra-arc.gc.ca/nw…- Further, Canada has been very pro-active in providing clarity and guidance to crypto-currency operations, with the most recent one being related to Bill C-31 covering anti-money laundering. With this clarification, Canada was the first government to regulate Bitcoin, and it was done in a very sensible and light-weight manner that offers security and protection while enabling businesses to prosper. http://cointelegraph.com/ne…- Ethereum was developed and conceived in Canada by a Canadian (Vitalik Buterin, who is arguably one of the most prominent worldwide authority on Bitcoin, after Satoshi Nakamoto)- Blockstream from Montreal has been a leader in innovating around the Bitcoin blockchain with their sidechain approach that is about to rock the Bitcoin blockchain world when they launch it.- One of the first commercial ATMs were designed in Ottawa, and is currently completing a YCombinator program.- Vancouver is where the first Bitcoin ATM went into service worldwide
An informative response William, thanks.Surprised how politicized this is already.
I am not. Control of money is control and allocation of power. Power is the only thing politicos have to trade on.
What’s funny is the nationalism here.William is not a politico but he is a bit defensive about the UK taking some credit here.
I think he is right to show the BTC developments in Canada. No surprise that govts are getting nationalistic-because currency by definition is nationalistic. Bitcoin is not nationalistic, which is why it’s threatening to governments. How does the US Govt fulfill Article 1 Section 8: http://www.usconstitution.n… Maybe if governments get nationalistic we will see more competition and development will go faster.
Agree and I like this part of William that is showing up
Control of money is control and allocation of power.Politics (and decision making) seemed to work better that way in the past also perhaps. All that pork barrel stuff. Smoke filled rooms. Was actually a good system that got things done.
Great response. Thank you.
London handles approx 37% of global currency transactions. I’d be more than a bit surprised if it was just talk.
London indeed has a company Bitstamp but all the wired transfers of deposits from it goes to Slovenian banks. Also the servers for Bitstamp are located in Slovenia. So UK has to do more if they want to be the leader in BTC trade. BTW I like your viszla 😉 I also have one.
Definitely…London and New York are big financial centers. They both have the potential to also be leaders in the crypto-currency space.
After initially thinking “no way” on Bitcoin, I have come around to “yes, there is certainly value in it more than just saving on credit card fees”.I think countries that try to stamp it out are in danger of shooting themselves in the foot. I firmly believe that he who controls Bitcoin will reap the largest amount of gain for the next 30-40 years of the internet. The initial foothold to me is establishing a stable value for the “currency”-which leads to futures, options, swaps-not simple cash trading.There are several likely places on the globe for this to happen, Hong Kong, Tokyo, London, Berlin, New York, or possibly Chicago (Chicago is the global center for risk management).London’s move to define Bitcoin as currency is the right attitude, and will give them a leg up towards internet growth.
We used to get hit with a lot of overdraft fees so my wife and I keep our money in cash. I feel this is unsafe.Could we take our earnings and store them in bitcoin and help us better manage what we have?
Could we take our earnings and store them in bitcoin and help us better manage what we have?I think a first step would be being able to manage an account and not get hit with overdraft fees. When you say “keep our money in cash” do you literally mean that? Like actual currency? Stored where?I can’t even begin to imagine that anyone would make a case for you to keep your money in bitcoin, as somehow a good way to avoid overdraft fees, which happen because you can’t manage money, not because there are overdraft fees.
Yes cash. In our pockets. We often don’t make enough to cover basic bills so occasionally we run in the red which lead to overdraft fees which lead to overdraft fees which swallow our next checks. We are doing better this month though 🙂
It’s incredibly premature to suggest that bitcoin will be a (not to talk of THE) key driver of value creation on the internet in the medium or long term. It simply has not demonstrated the properties required for mass adoption, government regulation aside
Bitcoin Momentum Grows in Emerging Markets http://onforb.es/1shPm7U via @forbes
Well, what can the government possibly do to stop bitcoin? Shut off the Internet and phone networks? Outlaw mathematics?To be able to tax bitcoin, they would have to do so much more than just wave their guns around hoping people will simply obey and pay up. They have to control just not bodies, but minds. And with public schools, they are well on their way with that.
The concept I like a lot. But, there is something that holds me back on this this one.that I can’t define.
do you like to touch and feel your money?
I have an original seragraph of Uncle Scrooge swimming in his money bin that pictures that thought precisely.
That’s exactly why Bitcoin is so hard. Money is emotional.
I don’t think it’s that hard to convert a “non money” into something emotional. You just have your brain convert it on the fly and add it to other things of value.The problem is if something isn’t stable (enough) that’s hard to do. Gold (or the DJI) is somewhat stable (at least compared to bitcoin) so you can think “ok I’m worth this much”. Real estate is also “more” stable by that definition. You can take a week off and feel fairly confident that your real estate isn’t going to drop a great deal (not that you can do anything about it quickly if it does but if it’s earning income you don’t need to).Bitcoin, otoh, hasn’t been around long enough to get to that point where you know the boundaries of what can happen with it.
I agree that the UK has been pretty positive policy-wise so far, but let’s not forget that there was a lot of enthusiasm initially when Ben Lawsky started his investigation of Bitcoin and pretended to care about fostering innovation. Now it’s all but guaranteed that the BitLicense will end up an oppressive, bureaucratic disaster. So before we see what actually comes out of that UK foray into Bitcoin, I wouldn’t be too optimistic.Besides the regulation, getting a bank account has been all but impossible for UK-based Bitcoin startups. Even the UK’s foundation (UK Digital Currency Association) couldn’t get a bank account. So that’s very different to the situation in France, Germany, Canada, Switzerland or even the US.And William is totally right that Canada if you adjust for the population size has probably been the single most innovative and active country in the Bitcoin-space. Of course, if they did start charging VAT that may well change…
The trick is to create a virtual currency that reduces taxes by virtue of its design (called ‘cashable savings’) – that way it dis-incentivises the need to tax in the first place.’Money’ is lent into existence. It comes with interest, hence why the world’s in so much debt. It does the world no good at all. 0/10Bitcoin is mined into existence. It reduces transaction costs but doesn’t really help correct our unsustainable system.Currency that is earned into existence for pro-social behaviour will create the correct incentives that save governments money and improve literacy levels around what the sharing economy looks and feels like.
Has anyone used any of the recent websites to emerge that “calculate” your taxes based on Coinbase/BitStamp feeds, manual CSV upload, etc.? Thoughts on the best one?
So last night I tweeted Waiting for the #Bitcoin startup that turns cash from gentlemen’s club workers to Bitcoin for use in the regular economy— Bill McNeely (BillMcNeely ) August 11, 2014<script async=”” src=”//platform.twitter.com/widget…” charset=”utf-8″></script>After I picked up a dancer from a Dallas area gentelmen’s club ( in the course of my duties as an @Uber driver )Their head of security was carrying the lady’s purse and when I got to the other gentleman’s club the same procedure was followed That told me she was carrying a lot of cash and they were following the same TTP/SOP as casinos do after a customers wins big.A lot of bank do not accept sex workers business http://jezebel.com/chase-ba…Could bitcoin be a safer conduction for these folks from the legal but grey economy to conduct legitimate business transactions like everyone else? http://www.coindesk.com/new…
Bitcoin is a bubble similar to tulips.
No, the only bubble around here is the one in which you are living.
You ignored my point. I will be in Monaco while you get fucked jerking off with your digital coins. There’s an ad-hominem for you bitch.
c’mon. debating and discussing is greatbut please be respectful here
Reach into your pocket for 2 or 3 real US coins, add them up, divide the total by 4 & add 3. From that number, you only need to look up 6 or 8 IQ points to see the level of your reply.Sunight shines on this corner of the internet. Head back to the rock covered portions you typically frequent, troll.
The Isle of man near great Britain is looking to become the Switzerland of bitcoin. Exciting stuff
Ethereum will succeed, and then most of the tax issues will fade away.
… into the Ether
Hi, Tom from Elliptic here – we are are a UK-based digital currency custodian. We’ve been working over the past couple of years to engage with government, tax authorities and regulators to help legitimise and drive adoption of digital currencies in the UK.I just wanted to emphasise that the UK’s approach hasn’t come out of nowhere – it has been influenced and shaped by the Bitcoin community – including businesses and users. Last November we met with the UK tax authorities (together with the UK Digital Currency Association), to suggest that their VAT treatment of Bitcoin was inappropriate. To their credit they listened and changed the rules. Along with other businesses we’ve also been lobbying the Treasury to implement appropriate regulation of digital currency businesses – leading to the review announced by the Chancellor last week.The UK’s positive and thoughtful approach has come about because authorities here are on the whole willing to listen. Contrast this with the US, where regulations have been drafted with little consultation, and have been largely inappropriate.The UK will become a hub for digital currencies because an active and vocal community of users and businesses are working constructively with government and regulators.
that’s awesome Tom and that’s what we are trying to do here in the US as well
What remains unclear, though, is if Bitcoin will predominantly be a store of value (like gold) or a medium of exchange (like the dollar), or both (the best case for Bitcoin bulls).I’m not seeing how it can end up being both on any scale. I’m not an economist but in simplistic terms anything that appears to be able to go up in value over time has an automatic incentive to be hoarded and not spent. Right? I’d rather give you $10000 than a domain that is worth today $10000.For example if you told me I could use gold instead of cash I might not want to if I believed that gold prices were going to rise or be more valuable over time. I’m not going to sell a stock and buy a luxury good if I feel that my Boeing stock will be worth more in 1 year because of some new technology they are developing or some orders in the pipeline that I believe are happening.Otoh the cash sitting in the bank I have no problem spending because it isn’t going to increase in value. $100 spent today won’t be worth more and will be worth possibly a bit less in 360 days.
$100 today is DEFINITELY going to be worth less in 365 days, no doubt about it (and I mean that in an absolutely literal sense, not in the sense of a 95%+ probability).
In some ways this is good as the IRS is treating Bitcoin seriously and telling everyone how to report Bitcoin transactions to them.Also means that it treated such that any gains get taxed as capital gains as opposed to ordinary income.Per IRS:Q-1: How is virtual currency treated for federal tax purposes?A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.Further (the above is from a pdf Notice 2014-21), linked here http://www.irs.gov/uac/News… http://www.irs.gov/taxtopic…
Bitcoin is a brilliant anti-counterfeit technology, but as a money technology, it combines the weaknesses of both commodity-based and fiat currency money systems, and is inferior to both of them.*******An excerpt from the comment thread below to sums up my position:”The key to a commodity-based currency, which uses gold as it’s underlying unit of value, is that you need to be able to trade in your notes for the underlying value unit… like trading in a hundred dollar bill for a nugget of gold. In the case of Bitcoin, if you were to go and try and trade in your Bitcoins for the underlying value unit, you’d get less than nothing… you’d get the obligation to spend electricity and computing power if you wanted to get back the value of your note. There’s nothing there, it’s a phantom, a sunk cost where the gold should be.”*******How big is that sunk cost you ask? That costs us, as a human collective, (as of Nov 2013) a computing power 256 times faster than the top 500 supercomputers combined. Now THAT is expensive paper. (source: http://onforb.es/1dcxVIN). I don’t know how anyone could make the argument that that kind of CPU power is “etherial” or “abstract” like fiat dollars. Amazon sells computing power (http://bit.ly/1t6vmTB). Amazon’s marketing copy calls it the potential for “accelerating the human mind”. We are talking about REAL value being spent on worthless notes. By using Bitcoin, we LOSE value in the economy. Bitcoin is nothing more than a very costly form of worthless currency, if measured in real value.Bitcoin claims to be a money technology, but it’s really just an expensive form of currency technology, which is a secure way to transfer money… for example, if beer were money, the currency would be the glass that it comes in, it’s a convenient way to hand over beer instead of spraying it in the customer’s face. We have confused Bitcoin with actual money, because at this point in history, we’ve lost perspective on what is money, and what is currency, which is understandable based on the hairbrained mind f*#k that is the federal reserve banking system… but before you bring up fiat currency as the counter example, bear with me, as this goes deeper. Bitcoin is actually worse that the current fed system.Saying that Bitcoin is valuable based on the effort it takes to “mine” it, is as if we agreed that paper money is valuable because we found very expensive trees that are all but impossible for the average person to find, cut down and process into paper. What you’re left with is no trees, just paper with numbers on them, and you determine the size of the numbers based on the effort it took to destroy the trees, which requires an ever increasing effort, to get the same amount of paper. That’s Bitcoin: the anti-value money.Rather than creating something tangible like gold through the process of mining, or having the intangible endoresement of one of the wealthiest institutions on the planet, Bitcoin creation consumes electricity and computing power to create notes of exchange, which the authors of the technology equate to the energy required for mining gold. However, Bitcoin fails to create anything that looks like gold to back up the notes of exchange, and only presents the notes themselves to justify the energy that it spends on creating them… it calls this mining, but it’s really just an elaborate form of printing.In contrast, when you mine gold for a commodity based money system that uses paper currency in the marketplace, you have the ability to print more paper currency backed by the new gold you just mined, AND you have the gold itself, which doesn’t go away like the evaporation of electricity and CPU power during the creation of Bitcoins. With Bitcoin, you’ve spent the energy to create the unit of exchange, but that’s all you’ve got… a unit of exchange. The energy has been spent with nothing to show for it but the digital equivalent of a paper note for trading (granted, one that’s very hard to counterfeit)… so I don’t see any way Bitcoin could become anything other than a fiat currency at best, and a very expensive one one in terms of economic and ecological costs of electricity and CPU power.Satoshi describes the error with the following sentence, and leaves it here:”The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”The trouble is, there is a NEGATIVE value backing it up the currency, (not a zero value like fiat), as we are using real energy to create notes (not virtual energy), and it is this that has been equated to the positive value of gold or some other tangible equivalent… It’s taking a negative value and calling it a positive one. Bitcoin has mistaken the work of mining for the actual gold itself, and it has added a scarcity layer to a fiat currency, which is by design intentionally very costly to produce… which makes it the worst money technology we’ve ever come up with.Unless I have made some fundamental error, Bitcoin has nothing to show for the energy it spends, except for the notes themselves, which makes it the most expensive fiat currency we’ve ever printed, as if we are printing fiat currency using gold ink that is impossible to retrieve from the worthless paper it’s printed on.Bitcoin is interesting because it allows us to temporarily circumvent or challenge bad fiscal policies, and opens up new unregulated avenues of trade, which is exciting, but as an actual piece of money technology, it falls short of the systems we already have, and I don’t see it being ecologically or even logically sustainable after our current infatuation with the bells and whistles it has delivered to us fade away. Our best hope is to take the lessons learned for anti-fraud technologies, but to run the other way as adopting it as actual money.I might be totally wrong, of course, and someone please tell me if I am the only crazy person who sees this problem with Bitcoin, or if we really have mistaken technology for money, rather than understanding money as technology.
What is value? Value is subjective. I pose to you that Bitcoin the protocol creates its own value via Bitcoin the network – the mining infrastructure. It does so by offering features and utility that are secured by cryptography, and further secured by an infrastructure that is fueled by issuance of its own tokens that allow people to harness the value of the infrastructure and use the features of the protocol.
Establishing an objective standard of value is the whole point of creating any money technology.That said, you’re right. There is definitely value in replacing other forms of trading notes with a new digital version that provides better security and infrastructure, and perhaps that’s what drives the intrinsic value of the protocol… But that’s different than the face value that the money assigns to itself, based on its own objective standard of value. Objectivity is what makes money a useful technology, as it facilitates fair trading. Bitcoin does this by using a predictable amount of computing power as it’s objective standard. But the problem I’m pointing out is the fact that they’re using a negative unit of actual value, to represent a positive unit of virtual value, like anti-gold. To compound this error, they made it more and more expensive to print as time goes on (negating the advantage of fiat currency as a money technology), and programmed it with a fixed scarcity (replicating the disadvantage of using a commodity like gold as money).You bring up a great point about the value of the infrastructure for anti-fraud and anti-counterfeiting, but that’s a totally different form of technology than the money itself. That’s currency technology, it’s not money. Money is meant to accurately represent value, that’s its primary job. Currency is meant to prevent counterfeiting, and provide for a secure means of value transfer (not value measurement)… which Bitcoin excels at, but it sucks as money.
It does have a builtin ‘scarcity’ associated with it. There are only so many of them and they get harder and harder to find. Just like gold eh? 😉
It’s true that the scarcity of Bitcoins mimics that of gold, but it’s missing half of the necessary components to be a practical commodity based currency… The key here, is that you need to be able to trade in your notes for the underlying valuable unit… like trading in a hundred dollar bill for a nugget of gold. In the case of Bitcoin, if you were to go and try and trade in your Bitcoins for the underlying value unit, you’d get less than nothing… you’d get the obligation to spend electricity and computing power if you wanted to get back the value of your note. There’s nothing there, it’s a phantom, a sunk cost where the gold should be…So… 1) it has the main flaw of a scarce commodity currency, that massive deflation occurs as investments compound, just as if we used physical gold for trading.2) it lacks the qualities of a commodity backed currency: it’s missing something of value to trade in your notes for… plus you can’t easily print more of it to make up for the natural compounding of your investments, which is a big advantage of an actual fiat currency where you just print more notes at no cost… With Bitcoin you have to spend a bunch of real energy to print more notes when the real value of the economy increases.3) it’s not worth anything valuable outside it’s own self referencing sphere, so at best, it’s acts as a fiat currency… but it costs a LOT to print, and it carries with it all of the flaws of a direct commodity currency, as stated above.Either I am completely out of my mind, or this is the worst money technology we’ve ever invented… Don’t get me wrong, as an anti-counterfeit technology, it’s brilliant. As a money technology, it blows.
No, its an interesting point. However, I would point out that since we left the gold standard decades ago, our currency is in a similar situation. The most recent infusion of trillions in Fed stimulus (i.e. printing money) is a good example. Despite what the govt. says inflation has been rampant of the last couple of years and will only continue and I believe accelerate before it gets better. This is directly the result of exactly what you are referring to, the lack of the currency being tied to a physical asset. In that sense, I’m not sure I see much difference between bitcoin and currency.
Well, the difference between Bitcoin & a currency like the dollar, is that if we decide that we need to print trillions of Bitcoins to get ourselves out of a jam, you’d have to spend an extraordinary amount of electricity and computing power (real economic value) to create more exchange notes that have no real value, and in doing so, you cost everyone MORE in the form of real energy used, PLUS, you get the same negative impacts of introducing more worthless notes into circulation without any real value backing them up… It’s worse than dollars by a long shot. It’s the worst of both worlds.I guess you could make the argument that Bitcoin is designed to prevent runaway inflation, but an increase in exchange notes isn’t just caused by the government printing more money with nothing real to back it up, it occurs naturally when you invest money in real value-creating companies & assets… For example, if Fred finds a great startup to fund, and uses Bitcoin to seed it… as the value of that investment multiplies through the work of the founders, the value of your Bitcoin investment would multiply… but wait, you would need to go out and mine more Bitcoins in order to reflect the real value increase of your investment… New value has been created, but there are no new “free” Bitcoins to measure it. So why would you ever use a currency to invest that has no ability to artificially increase based on a correlative increase in real value created somewhere in the real world? Bitcoin makes no sense, it’s like saying that the cost of creating your ruler is equivalent to the inches that are printed on it. Your ruler is really expensive, and it measures nothing.Another key difference, is that dollars originally did have a real commodity value behind them to start… and dollars EVOLVED into a fiat currency only after we reached the point where people basically forgot how to tell the difference between paper dollars and something of real value, because it was rare that anyone actually called their notes due in exchange for government gold… In fact, by the time that we switched to fiat dollars, capital investing had multiplied the paper currency well beyond the gold supply, but this was done by adding real value to the economy through the investment of real capital (things like human labor, new technology, better processes, which is different than money).At that time, if everyone were to call the government on the gold assets that it owed the people in exchange for paper notes, there wouldn’t have been enough actual gold to cover the paper equivalent, because paper was growing by the multiplication of real capital, in addition to just finding more gold. The government was effectively bankrupt, unable to repay the notes callable on its gold assets. But this was not because the government somehow lost value, it was because it’s money technology was inadequate to account for the natural value creation that occurred in the economy, which exceeded the total value of the actual physical gold at a certain point. This is the natural evolution of a scarce commodity based currency whose purpose it is to measure the theoretically infinite multiplication of real capital, or real value… eventually you run out of enough base commodity to account for the increase in value of the economy.There is likely no money technology based on a finite commodity like gold that can accommodate the rate that real value multiplies in a capitalist economy. The scarcity of the original commodity eventually creates a natural limit to how far that particular money technology can take you, so if you are going to reinvent money, I don’t know why you would start with scarcity… the non-replicability of Bitcoin IS valuable, but the artificial scarcity it introduces doesn’t do anything to advance our money technology. It’s a step backwards. What we have now isn’t perfect by a long shot, but there are “real world”, “real value” reasons why it evolved in the way that it did, and its still WAY better than Bitcoin despite it’s terrible flaws.With Bitcoin, I don’t know where you end up when your original currency doesn’t start off by measuring a real commodity value, but in fact begins by adding a NET NEGATIVE to the economy… and I’m not sure I want to find out where this goes. We should run away from this form of money as fast as possible, and we should start using the computers designed for Bitcoin mining for something else… literally anything else would be a better use of the collective resource we have of the computing power we’re using for this nonsense.Bitcoin uses real capital (computing power and the electricity that runs it) to create fake units of value. Mining for gold is not the same as mining for nothing… ever. Buying bitcoin hardware is like starting a gold mining company, and randomly drilling into some mountain that has no gold in it. But hey! I did the work! I bought the digging equipment and I hired people to dig! Why won’t you pay me for the work that I did? I used real capital for that work! Because dude, you have no gold. The fact that confused people are willing to buy bitcoins with dollars doesn’t make it valuable… it makes it viable… for now… at great cost to the actual value of our economy.
“if we decide we need to print trillions of Bitcoins to get ourselves out of a jam”.I think you need to read some more on monetary history. The very fact that governments can attempt to “print their way out of a jam” IS THE JAM. That’s why paper currency regimes have an average lifespan (from creation to failure) of 43 years, and is why the failure rate of paper money systems throughout history is =100%.And to explain to you what mining does buy: it buys network security. Mining makes it very hard to control 51% of the network. Imagine how much banks pay to secure their networks…and how much energy that takes.And also FYI, Bitcoin isn’t really a “payment system”. It’s e-cash.
You’re right, and I made a mistake by implying that we should preserve the government’s ability to bail out investment banks who screw up so badly that it threatens to take down the entire economy… that’s not something I want to see replicated in a new money technology, and we should definitely seek to eliminate the inherent properties of the current money system that allow perpetually irresponsible behavior by investment banks and other corrupt institutions. I regret using that particular example to support my position.Your other points are great too, but secured network technology is VERY different from money technology, and it seems that most Bitcoin discussions confuse the two as being the same thing, when they serve fundamentally different functions. Fred’s post puts Bitcoin in the money technology category, and asks the question of which form of money Bitcoin will become: store of value (like gold), or medium of exchange (like fiat).I agree that Bitcoin is a great leap forward in secured network technology, and the value we consume to create it may justify it as a replacement for current forms of electronic transfers, but as a money technology, it is fatally flawed, and if we continue to understand it as money, we are doomed to run into big problems.Any money technology that we use going forward needs the ability to add more notes to circulation at virtually zero cost, and Bitcoin doesn’t exhibit this ability. Government bailouts are not the only reason why we need an expandable money supply. Responsible lending institutions and investors need the money supply to expand when they lend to entrepreneurs and companies who create new real value in the economy. Without the ability to add more legal tender into circulation to measure this new value, you create a limit to how much of your money can be invested… it breaks in the form of infinite deflation, as Bitcoin is destined to do.This is the fundamental problem that prevents a truly scarce commodity like gold from being a practical money technology in a forward looking economy designed to multiply real value well beyond the supply of the commodity… and its part of the reason why the U.S. government abandoned the gold standard, because at a certain point, there was more value in the economy, represented by paper in circulation, than there was gold to trade it in for… Had the entire population called the government on the gold it was owed, there would have been a total breakdown in the money technology… so they preempted such a disaster by abandoning the gold standard. An unfortunate side effect of the new fiat system is the potential for bailout abuse… but this is secondary to the primary reasons why we need a freely expandable, non-scarce form of money.In this way, fiat currencies carry a great advantage, (so long as they are not abused through backstopping corrupt institutions that would naturally fail by their own mistakes at the expense of everyone else). Bitcoin, while it does carry the promise of prohibiting government bailouts of bad institutions, it also prohibits a way to accurately measure the multiplication of value beyond the finite number of money units it can create. In this way, it exhibits the weakness of a commodity currency, and doesn’t have the advantage of being inexpensively expanded, like a fiat currency does.However, these flaws are tangential to its most fundamentally fatal flaw: that it starts by creating a negative real value (using electricity and CPU power), and assigns to it a positive virtual value. Taking the politics out of the conversation for a moment, I don’t think we want to start off by using something that has as it’s central value reserve, a big gaping hole where the CPU power and electricity was spent during its creation. That’s a really bad way to jumpstart a new money system.
Your reply conflates a few issues that require parsing. Lots of people for example believe that fractional reserve banking and capital formation requires fiat-style debasable paper money. It does not. A better idea would be to have the unit of account stay stable, and the fractional reserve/lending happen separately. We don’t just change the length of the yard and we shouldn’t wish our monetary yardsticks to change either. We need a stable unit of account at the heart of the money system, and lending/capital formation can happen separately.And the argument about gold is the standard stuff, oh, oh, there isn’t enough of it. That’s not correct: it’s merely a question of price, the quantity is irrelevant. Your argument that fiat systems are better “because they can be inexpensively expanded” is bass-ackward: I’d say that encapsulates the reason they are worse. The Fed has expanded the M2 money supply by 66% in the last five years, yet median net wealth has declined. What a surprise, the Priests of the Fed are hopefully noting that you cannot print prosperity (maybe you can let them know that the Earth is not the center of the universe either). Mankind has tried this monetary stuff for 5,000 years and the failure rate of the “oh look I can print as much as I like” systems tells us something very important if we would just listen. Check out the price of goods and services at the year 2000 and ask yourself whether you would rather be paying those prices or 2014 prices. Aha, the money has been a terrible store of value: simply because they produce it like confetti. The sooner we learn there are no shortcuts, the better.
I think we’re actually saying the same thing two ways, and we’re making progress in articulating what an ideal money system might look like.It’s ideal to have a fixed reserve of something truly scarce at the heart of the system, while the currency in circulation that represents that underlying reserve, is permitted to expand as the economy expands.In a system like that, any deflation (or increase of value in each unit of account) only occurs in the central reserve bank… meanwhile the value of each unit of currency floating on top of it stays constant, and the total number units of currency can multiply through investing. This means that you need a way for the floating currency to grow in step with real value created in the economy, at no real cost to the economy… and with no affect on the underlying reserves, which can increase in value per unit ad infinitum in the reserve bank… Bitcoin fails to achieve either of these functions, which is my central message here.Gold might have been a good candidate for this kind of ideal system, because as its value increases to match the growth in the economy, it can be (theoretically) infinitely divided without destroying its fundamental physical properties.Unfortunately this ideal system is impossible with gold as the U.S. central reserve for the purpose of measuring dollars, because the total gold on the planet isn’t limited to the vaults of the U.S. reserve… it is spread around the globe and interspersed into other economies that don’t use the dollar, and we live in a global economy where value is exchanged across money systems, each of which has a slightly different relationship to gold.So while gold has unique properties that might make it a good candidate for a central reserve commodity, there isn’t an accurate way to markup the value of the underlying gold reserve against dollars, when the total supply of gold isn’t controlled exclusively by the dollar-based system… so we need something else (perhaps something digital?) that mimics the same properties of gold at the heart of a new central reserve system.The trouble with Bitcoin, is that it has no such underlying reserves to backup its currency floating in circulation… It’s floating on top of nothing, and to make matters worse, Bitcoins themselves are scarce and increasingly expensive to produce. This is a terrible combination for a money technology… it’s a currency that’s destined to deflate, which almost immediately turns it into a non-currency… and it represents a hole in the ground where we spent our computing power & electricity, which is nothing like a gold reserve. It’s the worst of both worlds, as far as money is concerned.In an “ideal” money system, the currency neither inflates nor deflates, but where there is a perfect 1:1 correlation with currency in circulation and value in the economy (with a corresponding value of an infinitely divisible reserve commodity that represents it). That might be what we should shoot for. In that case, we need an accurate way to determine the value economic activity. Whatever that looks like for us going forward, Bitcoin is certainly not that.Historically, the responsibility of accurate valuation has been the responsibility of banks and insurance companies, who underwrite the value of the assets and companies that they finance or insure. The livelihood of those businesses theoretically depends on their ability to accurately measure value. The inherent risk (the fact that they sometimes make mistakes), creates a natural inflation of the dollar, where dollars have been added, but no value was added.We have clearly let our current system run amok, when mammoth valuation errors by investment bankers that would otherwise result in the destruction of those institutions, are “saved” by the Fed who inflates the currency to artificially prop up the livelihood of the institutions that fail to perform their function properly. It is clearly broken on many levels… But the Fed’s actions prevented a near total cessation of all kinds of credit, which appeared necessary to prevent a massive depression. Whether or not that was the right decision, is a different discussion altogether.Staying on topic, my fundamental point is that Bitcoin is broken right out of the gate as a money system, and we should abandon it as money before it starts to make a more meaningful impact on the economy, because it’s fundamentals are upside down as a money technology… It may end up doing more damage than the Fed if we run with it as our new form of money.
The value of a bitcoin comes from its utility on the biggest (by far) and most secure (by far) digital money network.That’s network of users, as well as network of computers. Bigger or better alternative networks don’t and won’t spring into existence suddenly, or out of thin air.Combine that with scarcity (but some flexibility, the 21E6 BTC limit could be changed by majority vote in future if there was a compelling reason to change it that convinced 51% of the network) … and you have definite value; I’d even say ‘intrinsic’, but your semantic appreciation may vary.For most people Gold only has very limited intrinsic value. Once you have as much bling as your modesty allows and you have corrosion-proofed all your electronics, what are you going to actually DO with your hundredth or thousandth ounce of gold? NOTHING, except pay to store it safely until you are ready to transact it as a token!Deflation vs inflation I don’t really know enough to comment, but it’s a very long-term problem that is an awful long way off for Bitcoin. If it ever gets to that stage and the deflation is a problem, I don’t see why people can’t decide to use a different currency as they so choose. Don’t forget BTC is completely voluntary to use, and open source, which is totally different to government-backed fiat currencies, which are mandatory for many uses (i.e. repayment of debt, payment of taxes etc), – so the same worries we might have for fiat do not necessarily apply to bitcoin, either now or in the future.
I don’t disagree with you that it has great value as a currency technology, meaning it provides a universally acceptable way to securely TRANSFER value from one person to another, in the same way that handing a paper dollar from one person to another is a great way to transfer a representation of value offline. In that example, paper is the technology. But we would never say that a dollar is a euro because they are both printed on the same size of paper, and that’s the mistake that we make when exchange dollars for Bitcoins.Bitcoin is a huge improvement to previous electronic transfer technology, because it solves a lot of the security leakage, fraud, etc… but what it is not, and what we should not confuse it with, is the money itself, namely the universally accepted way of ACCOUNTING for value… from that perspective, it accounts for negative values, not positive ones.That’s the difference between currency and money. Currency is a method of transfer. Money is a measure of value.Bitcoin confuses everyone by trying to layer on the correlative “value” of each bitcoin with some ever increasing unit of computing power, and it assigns that value unit to each coin. But those units represent a destruction of real economic value… that’s why Bitcoin is broken as money: it represents anti-value.As currency, it might be fantastic were it not for the artificial scarcity that they built into the protocol, and it’s extraordinary cost. It’s too expensive to print, and they picked a negative value commodity to underpin its value. So, In order for bitcoins to properly work EVEN as currency, there would need to be some correlative reserve of something else that everyone also agrees is valuable (in addition to the worthless bitcoins themselves)… but instead of that something, you have the debt of having spent computing power. That’s the part that’s easy to forget because it is invisible from your terminal… the electricity and the opportunity cost of solving any other sort of computing problem… Those real things are being spent to create nothing more than worthless currency.
“IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply.”Even if transactions can be programmatically tracked, IRS property rules/regs would appear to be a sig impediment to adoption, no? Benefits of acceptance need to be large and clear enough to justify the incremental manpower/reporting requirements, even if they are modest. Is treating BTC for tax purposes in U.S. as property (not currency) a speed bump, a detour or a road closure–acceptance will likely vary by size and type of biz/industry.
If you had read Satoshi’s white paper back in October 2008, you would have said “there is no way this can work.” There were literally hundreds of reasons Bitcoin could not and would not emerge as a new form of money. If a government hates Bitcoin, then, okay, how can they stop it? Shutdown the whole Internet? Rots u ruck, guys. With smartphones and even smart watches, maybe 2+ billion now, and well on the way to 5+ billion, users, essentially every person in the world able to type, click, or swipe, all of whom could in principle, most of them in practice, be using Bitcoin. Stop that? Believe that and ask where they are getting that really strong funny stuff they’ve been smoking?Hmm. Irresistible force, Bitcoin, meets immovable object “hundreds of reasons”.Godzilla is on which side of this drama?Investing in that is a gutsy move.Ah, “No guts, no blue chips.”. Right?Of course, lucky beats smart; when luck is in short supply, smart wins. :-)!”Bottles of luck for sale! Bottles of luck for sale! Just one little one ounce bottle can give you luck for life. For the insignificant price of just $49.95, one bottle could mean millions to you! Supply is short. Demand is high. Hurry, hurry, and get your own one ounce bottle of luck for life! Now we accept Bitcoin!”@LE, is that the right sales pitch?Hmm ….
@LE, is that the right sales pitch?I don’t know but I really liked this: “Rots u ruck, guys.”. Sounds like you don’t come even close to loving bitcoin long time.For the insignificant price of just $49.95, one bottle could mean millions to you! Supply is short.I am going to bless this idea. I have no doubt that if you lowered the price point on the “bottle of luck” you could sell bottlles of luck. That’s actually not a bad pet rock for christmas. I remember when the pet rock hit the NY Gift show. You’d need a snazzy label and a nice looking bottle. Needs to be stocking stuffer price. Maybe even a few a different price points (but all the same size).http://en.wikipedia.org/wik…I’m actually serious. And I once implemented a great publicity stunt (that got front page wsj mention and other places) based on some off handed comment like that.
“Rots u ruck, guys.”. Sounds like you don’t come even close to loving bitcoin long time.Fred was confident about Bitcoin before I was, but I see no way to stop it now. So, count me as ‘optimistic’.I saw those 100 reasons why not and concluded that soon Bitcoin would be for essentially illegal activity only, get a really bad reputation, and be only for business shouldn’t be doing anyway. I was wrong. Staying with math makes being right easier but sometimes being relevant harder! :-)!My remark “Rots u ruck” was aimed not really at Bitcoin but at someone trying to shutdown the whole Internet — to stop Bitcoin.Thanks for the Pet Rock 2.0 bottle of luck view! Maybe Fred would call that hustle. But also important is focus, and my latest bug, as of about 1 AM, now that I’ve slept on it, appears to be simple: I had a loop over an array of objects where the loop went over all the components in the array, but only some of the components early in the array had their objects allocated. So, when the loop got to the components not allocated I got a null reference exception. I only need to loop over the allocated components. In production there would not be a problem, but my test database is so small that now it didn’t even fill the array! But, it’s easy enough to fix.The code has passed unit test but now is in system test. My error reporting is good and tells me right where the bugs are. But in the last few days, have fixed a lot of bugs; they are like popcorn, many of them but simple and easy to chew.Yesterday I wondered why I had allocated space for and asked for 100 results but got only 50. So, look at the code long enough to guess might be looking in the wrong place and, then, write a little SQL code on the test database. Yup, there were only 50 rows in that table of the database! In production, that table will have billions of rows.Uh, in production, that table will be in main memory, virtual memory, or on SSD with some simple direct access or B-tree logic and ‘sharded’ across multiple servers.When I get the code running, maybe I’ll do the bottle of luck thing as a Christmas stocking stuffer idea! Barrier of entry? Come to market fast! Don’t tell anyone — it’s an AVC secret, okay? If I do it, a free bottle to each AVC ‘regular’!For the sales pitch, I borrowed the wording from a pitch in a scene in the Deanna Durbin ‘Spring Parade’ (1940). Cute movie. The whole thing in one file is athttp://www.youtube.com/watc…Her singing is more fun in ‘Three Smart Girls Grow up’ (1939) in nine parts starting athttps://www.youtube.com/wat…The other parts show near the UL corner after the previous part.Also some really nice singing, by a beautiful woman, now with two kids, instead of a teenager, is athttp://www.youtube.com/watc…Something good from Latvia!
A very high price for a three letter .com:(BTC.com sold for 1,000,000 USD)http://www.thedomains.com/2…http://techcrunch.com/2014/…
Great article, really enjoyed reading it! Is there any chance I could send you a free copy of my new book on Bitcoin legal regulation? I published it on Amazon last week, and I believe that it is the first full-length book on the subject (more than 700 references citing 300+ different sources). I would love to hear your thoughts, or even to see a review of the covered materials on your blog. Link: http://www.amazon.com/Bitco…
Not clear on how the US can have two “currencies”. If I buy $100 worth of British Pounds Sterling and later sell it for $150, don’t I have a $50 taxable FX gain? If our economy is built around the dollar and we authorize a second currency that we can use tax free, aren’t we setting up tax-free arbitrage opportunities?
FX trading gains are a big problem for BTC – well apptted
These comments are all great as they let us users give andget feedback individually, however, I wonder what the vast majority thinks ofthe BitCoin potential’s in eventually becoming the global currency of choice?Am guessing that very few in this thread read every one ofthe 63 comments made to date on this story; that’s too bad as there is a lot ofinformation in these comments that thousands of us could learn from.Unfortunately, on average, only 1/10 of 1% of a site’s orblogs’ traffic interacts with comments versus the 6% to 8% of visitors who arewilling to leave their opinion on a story by quickly selecting an answer on apoll; for those of you not that good in math, that’s 60 to 80 times morefeedback and interaction.If we had such aggregated poll results here we could instantlysee what people think on the issue.In fact, if the following Qbloc iFrame from Qwanz.com wasinserted between this story and its comments section, it would generatethousands of opinions and therefore new information, which, in turn, would havebrought new and different comments as well.“With NY State’s new regulations for trading BitCoins andLondon’ announcement that it wants to be the capital of BitCoin trading, do yousee BitCoins soon becoming the global currency of choice?If interested in participating to give your opinion, pleasego to: http://www.qwanz.com/headli…What’s also kind of cool is that the Qwanz Qblocs allows youto send on results to US elected officials, US government agencies, like theDepartment of the Treasury, Corporations and over 20,000 journalists worldwide.In other words Qwanz acts as a giant bullhorn aggregatingour opinions and sending them on to decision makers.Please give your opinion on BitCoin’s potential!!
I made this comment in similar form on Brad’s blog awhile back. You seem to be quite into Bitcoin so I feel like repeating it. I have a Ph.D. in Computer Science. I’ve read some of the Bitcoin papers. Even tho I could sit down and go through the proofs and understand them (given time), it doesn’t matter. The bottom line is that its based on the user’s trust that the math is right and does what they say it does. While things have been going fairly well (except for the occasional disappearance of bitcoins not related to the math, i.e. theft or misplacement or whatever you want to call it), I just don’t trust it. The same Ph.D. that allows me to understand it pretty deep technically also screams at me to stay the hell away from it. My intuition tells me that something bad will happen and you will lose lots. I really hope not btw. MHO.
So rephrasing your statement: I haven’t read the specs, but the system is potentially broken. Well, if Bitcoin math is broken on the level of hash preimage attack, or elliptic curves, we have much bigger problem: SSL/ssh/DNS/any hash based auth is potentially broken and internet as we know it is doomed.
Nothing like sweeping generalizations I guess. I just don’t trust bitcoin. And there about bazillion other types of attack against the currency implementation besides the two cases you mention. I’ll keep my money somewhere where there’s somebody standing behind it thank you very much. And, well duh, of course the Internet is doomed… 😉
Btw, thanks for the duckduckgo improvements. My biggest grouse – text completion has been added (noticed it a few weeks back). I think the search results are much better too. Just when i was thinking of dumping it :)oh they can also try to improve results for these kind of queries – “when is the sunset today?”
Because double-taxation is a no-no and always a complex argument in areas of virtual currencies et al when transactions span the globe for virtual goods or tangible etc it makes sense the UK wants to be the home of such transactions and so the most likely taxation hub. No altruism or vision just the chancellor trying to build up our GDP ;-)When I worked with a mobile payments firm this topic was a recurring problem as every country wanted a tax levy – explaining it to them was very problematic indeed as digital is an anathema to them in terms of its virtual and somewhat opaque non tangible analogue nature.
Fred – although I strongly disagree about Bitcoin being a viable product in the long (or short) term, I think you’re the best VC in the business. If I had the next facebook, I’d pick you as an investor; I don’t know any other VC that promotes investments as much and as well as you. You walk the walk and go out on a limb for your portfolio co’s, more so than any other VC I “know”. You deserve all your success, keep up the good work. Love your posts, super educational and engaging (even if I don’t always “get it”).
I don’t think taxes or politicians are the key impediments to Bitcoin at this point. More important impediments:1) Bitcoin is hard. I say this as someone that has mined, transacted with, and even traded bitcoin (long and short) for speculation. Setting up a wallet, securing your wallet, downloading the blockchain, transferring coins, and transacting in coins are all significantly harder than simply using cash (or debit, or credit). For most people, the benefits (lower transaction costs, greater anonymity) are not worth it, especially given the significant exchange rate volatility2) Bitcoin wealth is arbitrarily concentrated in the hands of early adopters. This is especially problematic given the deflationary nature of the currency. Currency ultimately derives its value from the willingness of other people to provide goods or services in exchange for said currency. While there will likely always be a niche of (tech savvy / political fringe) people happy to exchange things of proven value for bitcoin, it’s unclear why the majority of people would be so willing. It constitutes a transfer of wealth to the tech elite/ early movers for creating something whose value proposition is, for most people, dubious (see point 1).3) It’s unclear if bitcoin can even handle mass adoption: the ledger system may not be able to support transaction volumes within even an order of magnitude of transactions that occur with a major currency (e.g. the U.S. dollar) before the blockchain is too unwieldy. This may be less of an issue than points 1 and 2, since it is a technology problem and there is likely a technology solution (even if it involves compromises on how bitcoin works).In the long term I think points 1 and 2 condemn bitcoin to niche status. As of now, I’d venture that greater than 99% of goods available in bitcoin are priced in dollars/yen/some other currency and then converted to bitcoin at prevailing exchange rates – which are largely set by early adopter speculators. This is why bitcoin is hardly a true store of value or medium of exchange: established currencies are first priced against goods/services, not against other currencies.I think a digital currency may eventually gain widespread adoption, but it’s extremely unlikely it will be bitcoin.
There are very few people around today who can successfully predict what inventions will or will not work. This is especially true of software, where the complexity is very high. Add to this the cryptography element, and Bitcoin is still incomprehensible by most people on the level of how it works under the hood. This is a big problem, because in order to understand Bitcoin, rules of thumb and conventions have emerged that are absolutely wrong and potentially damaging to the rapid spread of BitcoinBitcoin is not a “new form of money” all the emerging applications built on the blockchain show that it is nothing like money at all, but is more like a dynamic programmable secure public ledger. If this had been the description of Bitcoin from the beginning, no one would have been interested in it. Sadly, in order to get things moving with computer illiterates, a simple explanation was needed to get the ball rolling. Now that ball is snowballing into absurd regulations and low brow thinking that threatens entrepreneurs.Bitcoin is often mischaracterised as either a store of value or a medium of exchange. These are not the only two uses of this technology. Its just as absurd as saying a browser is either a picture viewer or a text displayer. There is an infinity of uses that the blockchain can be put to, and there is no reason whatsoever to limit its use to two cases, and then base legislation on those two cases, that are put forward mostly by people who are not developers and who are simply users of this new tool.Taxation policy is not applicable in any way to Bitcoin, in the same way that it is not applicable to Mozilla Firefox. There is no reason to categorize Bitcoin as money, when it can be used for literally any purpose that has to do with digital signatures and public proofs. A small number of influential people, none of which have the capacity to invent Bitcoin are now placing themselves as the the men at the helm of an invention that they did not create, advocating that other men who they do not know should be restricted in what programmes they write on their computers. This is the very definition of unethical.I assure you that a legal challenge is coming to utterly destroy the misconceptions about Bitcoin, and there is legal precedent for this. The PGP munitions export case proved once and for all that software is not a device or munitions, and is fully protected by the first amendment of the constitution. Bitcoin is no different in any way. It can be printed out, just like source code can, and this is a first amendment protected act. Bitcoin is not money; it is speech, and in the USA, no law can be made controlling or restricting it.You could carry a book of Bitcoins with you, and scan and unlock them on a page by page basis and be absolutely immune from interdiction or prosecution, or taxation for that matter. Its either that, or throw out the constitution.What happens in other people’s countries is not the business of Americans, so their laws are moot when it comes to Bitcoin in the USA. Whatever the American government decides, it doesn’t matter. Bitcoin is a peer to peer system, where the smallest unit is two people with mobile phones, trading. There is no way that this can be stopped when there are a billion Bitcoin users. The State is going to have to adjust to the new reality of Bitcoin as money, just as it has adjusted to the free internet.In the meantime, it strikes me as completely insane that entrepreneurs seek to be shackled by regulation. No other wildly popular internet protocol needed regulation to succeed, and yes, Bitcoin is a protocol, it is not money. BitTorrent is the best example of the most wildly successful client/server/protocol project the creator of which never sought permission to develop. Not a single developer of a BitTorrent client asked permission to write and release their software, and lo and behold, these clients, like Azureus are installed on millions of computers, transferring billions of files.The same will be true of Bitcoin.The clients will spread everywhere, to every device, and the Bitcoin will flow between them. There is no way to stop it, and no legislation can do anything about it.The question then becomes, what entrepreneurs are going to profit, and which jurisdictions are they going to be based in?These are the true problems of Bitcoin; how to simplify the software and interfaces so that even a semi literate man can use and understand it. This can be done; look at all the mobile phones that have spread all over the earth, used by everyone, at every socio-economic level.The other problem is that of the on ramps to get Bitcoin to the people. We are solving that one ourselves.These are the problems that Bitcoin faces. They are hard problems to solve, and mischaracterising Bitcoin as money will not make it easier.
Very glad to read your comment, also many thanks to Fred for opening this discussion up again.- Your points about taxation not be applicable to Bitcoin is right, but the genie is out already and gov guys have a keen eye on the word Bitcoin. (Fred thinks)- Blockchain mechanism is very cool and will eventually takeover value transactions globally. Blockchain will decentralize value creation/exchange one day, not necessarily via Bitcoin. (I think)- In the country, where I live, there is a payment mechanism, called “writing a check with a future date on”. This is a viable payment mechanism for small businesses all over the country. It is illegal: however, no-one can catch since it is not possible to monitor two individuals in some small town. The check carries a value of 1000 dollars (let’s say) but pays 10,000 dollars of debt by changing 9 more hands until its expiration date. In the end, legally and from the Bank point of view it has only paid 1000 dollars of debt. – Think of a similar, yet digital mechanism: A blockchain supported digital barter currency with no value of its own, other than the item it has been created for. This is similar to the future check, except it travels on the web from account to account, until someone wants to cash it back to local currency. Then it expires. – This is also a distributed value exchange mechanism where somebody putting a service/good on the market effectively creating her own money. It will not carry most of the problems of the central (fiat) money.- If this mechanism work between vendors and customers, with some logging, vendors and customers may eliminate VAT completely. When people buy with this de-centralized currency, they effectively bypass value added tax, since the instance of purchase will be recorded in the blockchain and the transaction may be handled by a “programmable secure public ledger” (as you named it).- Bitcoin’s main defect (other than being a culprit) is carrying value like gold, and thus being open to be manipulated by Bitcoin mining VCs, similar to the sovereigns of 16th century Europe manipulating silver and gold coinage.
You are absolutely right. Bitcoin isn’t money, should not be misinterpreted as money, and it’s unfortunate that the original white paper makes an erroneous comparison between creating Bitcoins and mining for gold.While this gold analogy may have been a way for the technologists to “throw a bone” to the tech-illiterate, this is a bad analogy, and is the point where people get massively confused (I expand on this problem in my comments below).The more we understand and use Bitcoin as money, the more problems we are going to encounter.As far as taxation, if people are buying pet rocks low, and selling them high, they are achieving profits, and those are taxable, regardless what kind of charade may be going on to generate those profits. In this way, if you have Bitcoins or pet rocks on your balance sheet, and you can sell them to someone else and convert them to cash, those are taxable assets by virtue of the fact that they have some sort of perceived value in the marketplace, whether or not they have any real value on their own. That is the only way that Bitcoin activity should be taxable, and it sounds like that’s the way the IRS views them.
One of the challenges of Bitcoin is the current ownership structure. When i last checked (a few months ago) something like >50% of Bitcoins were owned by a handful of individuals. No currency can work with that structure – imagine >50% of USD owned by a handful of people! The result is that the profile of ownership looks like an equity structure… as long it is hoarded or speculated upon, it will have to wear the misunderstandings.
where is the value here ? Why does anyone need this ? Breakthroughs are usually identified many years hence. This is an investment ..it is being sold as one. At some point the burning match ‘burns someone” passing it along.
http://www.telegraph.co.uk/…An interesting (and quite long) article on the future and blockchain. You get a name check. Denmark gets a mention too. Copenhagen takes on George Osborne.
Great article and a lot of good points.Let me play dumb here (and I mean REALLY dumb).So the IRS is leaving it up to us to report to them the value of Bitcoin when we convert it to fiat and/or when we purchase something with it correct?And they, of course, mean they want me to convert to its value as expressed in “dollars” correct? I mean, I won’t be expected to report it’s value in Euros, or Yen, or Pounds right?So here is where I am stumped … I’m thinking they really don’t mean “dollars” but really want me to convert the Bitcoin to its value in Federal Reserve Notes. They are not one and the same are they? I mean, if I go to a company like Kitco.com or any of the other companies that buy dollars from the US Mint it will cost me approximately 24-25 FRNs for one dollar. The FRNs are obviously not “dollars” as why would anyone in their right mind spend 25 “dollars” to get one “dollar”?Also, I’m not that well of an educated person ( I don’t have a college degree even) but I do remember the difference between an adjective and a noun. A noun is a person, place or thing right? And an adjective describes a person place or thing but is not, in itself, a thing but merely a description of one right? You blog a lot so you must know for sure whether this is correct but more importantly I would expect the lawmakers and the IRS to know this at the expert level. I mean, isn’t mastery of words and their meaning the very essence of law? How can something be law if the wording is vague and unclear?So with my limited education (but from my understanding of what a noun) is I look at those green pieces of paper with words such as ‘Federal Reserve Note” and “dollar” (or “dollars [i.e. plural]) printed on them it seems easy to see that they are, indeed, Federal Reserve Notes and are definitely not dollars.For instance, lets look at a variety of those papers printed with different numbers on them (1, 5, 20, 50 and 100). If you had one in you hand that had the number “100” printed on it and asked you how many items you had in your hand what is the correct answer (shucks I gave away the answer when I said you had “one” in your hand, darn). So, if you had ONE piece of paper that said one hundred on it would you have 100 dollars in your hand or one federal reserve Note in your hand? Isn’t it obvious, then, that the piece of paper is not “dollars”?And, in addition to the above example, if you agree that you only have one item in your hand (so it’s name must be singular) then what kind of word is “dollars” on it – a thing or a word describing the thing? Again, just as obviously to me, the word “dollars” is an adjective and not a noun. It is a description (or was at one time) of how many dollars (plural) would be paid when the note (singular) was redeemed.So please forgive me in seeking clarification from the IRS ruling but do they mean that I figure out how much my Bitcoin are worth in dollars or in Federal Reserve Notes as the difference in my tax obligation would be considerable depending on which item I appraise the value of my Bitcoin on. Since the capital gains tax is 15% but the real dollar cost 25 times the value of the FRN then if I calculate my tax liability based on what the IRS has told me then I would pay approximately .6% of the value as represented when using the Federal Reserve Note denominations.For example: Suppose I buy something from Overstock for, say, 1 BTC and the current BTC price is 500 FRNs per BTC (notice I don’t use the $ sign because that is what the merchants use but has no legal meaning whatsoever – It is more a contractual item meant to bring the transaction’s parties into a “meeting of the minds”. I know THEY mean FRNs). And at the same time, one US Dollar (silver) is selling for 25 FRNs and 50 dollars (gold) is selling for 1250 FRNs. Since the value of a silver dollar and a gold dollar rarely match I would guess the IRS ruling lets me pick the lesser of the two to do my tax calculations but I am not sure.So, let’s assume I use the silver dollar then, I would take the BTC value in FRNs (500) and divide it by 25 (500/25 = 20) so I would have to report that the BTC I used had a market value of 20 dollars right? And 15% of 20 dollars is 3 dollars so I would owe the IRS 3 dollars in taxes per BTC correct?But then there’s something else I get confused about is “legal tender’ laws. It says right on those paper notes that they “Are Legal Tender For All Debts Public And Private”. After the above calculation I realize I now have a debt (a public debt) that I need to pay but doesn’t the legal tender law means I can give them the much lower value FRN (at 1/25th the value of a dollar) and they have to accept it at it’s face value in lieu of a real dollar? I think that’s what “legal tender: means? It means that if I tender it as payment (i.e. present it) they have to accept it in lieu of a dollar.It is all just so confusing isn’t it? I think more people should write the IRS for clarification of all this don’t you? After all, they should definitely know the difference between a noun and an adjective (even though eventually it would be a judge or a jury that would need to know if it ever ended up in a court battle). And this “legal tender” stuff. I’ve heard of ‘Tender” Vittles cat food and Elvis’s hit “Love Me Tender” but what the heck is this “Legal” tender? I can’t find a definition of “tender” in the law books so that might be something else we all should ask them. And I suppose, while we are at it I suppose we might want to ask them to provide a legal definition of the word “dollar”. According to Dr. Edwin Vieira here – http://www.fame.org/HTM/Vie… – he seems to say that it is pretty much certain that it is a one ounce silver coin. And he doesn’t have the “Dr” from a Cracker Jack college either as he has four PHDs (from Yale I believe).So I know this was just a lot of dumb questions and I do apologize for being so ignorant of my own native language (i.e. English). If their is some “higher” level grammar where nouns are no longer persons, places or things and adjectives are no longer descriptions of nouns I do, sincerely apologize with all my heart for my ignorance! That is probably the case right? I’m just not familiar with the higher skills of the English language like our lawmakers and tax officials are.Maybe you or one of your readers might be able to point me in the right direction to get my thinking clear on this. I am basically an honest person and do want to pay my fair share of taxes but I really don’t want to pay the shares owed by the tax cheats (that’s what we pay those government tax experts for right?). I don’t know why paying taxes that I sincerely want to pay is made so difficult by strange use of words by the IRS. Do you think “Dear Abby” might be able to help me? Or maybe Peter Schiff? How about Max Keiser? Can you get this to any of them for advice? I’m having problems sleeping over this.Thanks,
Hi Fred, I agree with you completely the Bitcoin Genie is indeed out of the bottle. On the more radical views side of the discussion there are people like Andreas Antonopoulos. Who want Bitcoin replace existing perceived ‘corrupt’ financial systems and centralised governments. While a complete overhaul is extreme and unlikely, there will be some big changes and I’m very interested in what might replace those existing systems.If government taxes and spending were dramatically reduced. Its possible there will for a time be dual systems operating the old world and new world systems with some people working and living in a kind of shadow economy.Assuming for a second that bitcoin is adopted and remains relatively tricky to trace and enforce taxes, how will people pay for their local services and things like road maintenance. Will we possibly move towards a society where we use micro-transactions to pay for each item we use or need to use. Will communities come together to pay and support their local infrastructure, these are the big questions we need to be looking for answers to.Its likely that there will come a point of reckoning where incumbent structures have a show down with the new world economy, depending on the path to that point it may be fairly combative.As history has shown something new will always replace the old, hopefully this time the evolution will be a positive step forward.
In a bitcoin guidance paper released yesterday, The Australian Taxation Office treats bitcoin transactions like barter transactions with similar taxation consequences.