Posts Tagged ‘cryptocurrencies’
by adminadam in home
A few weeks before tax day, the IRS gave guidance saying (that is, they declared that) Bitcoin is, was, and always has been a commodity in regards to tax burden. Capital gains tax applies each time a transaction is made with this
currency commodity (shall we call it a commurrency?), even if it is just a cup of coffee being purchased. If the price of Bitcoin was higher when you bought the Bitcoin than when you made the purchase, then you are liable to pay capital gains tax on that purchase. This is great for institutional investors, not so great for people in the U.S. who are using it as a currency. Personally, I wonder about the IRS’s capacity to enforce and act on this with the growing adoption of Bitcoin. Also, since the ruling is retroactive, all purchases/transactions made with Bitcoin since the beginning of time are fair game. So what if you don’t or can’t know the input and output values of all your coins (including other virtual currencies like Litecoin, Dogecoin, etc.) since 2009, when Bitcoin was released?
There is a clause apparently that says that if you can’t provide this information for some reason, or if you don’t have the records, then you *may* be forgiven of some of your burden for some of your gains if you appeal upon being audited for a given amount. Losses do deduct from total gains, just like you would expect, but I guess I just wonder how the IRS expects to keep track of Bitcoin transactions and audit people going forward. I know a number of people who bought their first Bitcoins through coinbase using a bank transfer. Like most people in this boat, you then transfer those coins to a safer-than-coinbase storage medium, whether that’s a paper wallet or the Bitcoin-Qt Standard Software Wallet which you run on your home computer (hopefully safely encrypted and backed-up — see my guide on doing this here). Each transaction made in order to get these coins under your control in this scenario is a transaction, but note: you haven’t purchased anything, or traded anything of value for your Bitcoins. Ultimately, essentially, all Bitcoin transactions whether purchases or personal fund-movements appear identical to the Bitcoin network. Were there some greater level of willing transparency on this issue from the IRS, we could know if they plan to, say, host their own bitcoin node, download the blockchain themselves just to make sure they understand it, or merely check transfers using an online blockchain (the public ledger), like blockchain.info, for example.
The final obstacle in collecting (and reporting) revenues from cryptocurrencies stems from high-frequency trading — say you bought your Bitcoin on a U.S. exchange, then transferred it to BTC-e in Bulgaria (where it’s counted as a virtual currency, incidentally…), then engaged in a bout of high-frequency Bitcoin/Litecoin/Dogecoin/Peercoin trading. The IRS doesn’t likely have legitimate access to these trades, nor may you have even a decently-complete record of what’s transpired; all you know now is you have more fill-in-the-blank-coins than when you started.
Another complication arises with the arrival (soon: May Day) of dark wallets and (next-gen) seamless coin mixing services. Dark Wallet by Defense Distributed is one such development which will be used to strip coins of their identifying information (i.e. where they came from first/middle/last). Anonymity in cryptocurrency will be possible (more possible than it is now). Add to this the facilitation of anonymous purchases through dark markets and distributed markets, such as BitWasp and DarkMarket (this also from Defense Distributed). Where the Silk Road was shut down, Silk Road 2.0, and others now exist. Add to this these 2 more new projects and project outwards: we are seeing exponential development and evolution in this economic space. Many more black, grey, and unrestricted markets will bloom — expect to hear more about this soon!
In other news, China is still wishy-washy about Bitcoin, but hasn’t outright banned it, and since some time has passed since the last definitely-going-to-be-banned rumors spread, the price has come back up a bit to around $500, from a low of approximately $350. Ultimately, the failure of Mt. Gox brought the value down by half in the early part of 2014, simply because so many people lost their money, and also because of all the FUD (fear, uncertainty, and doubt) spread about by the media; read: “Mt. Gox failed; Bitcoin’s dead!” Such proclamations will likely continue to be heard for a few years to come for a variety of reasons, but whatever happens in one country or region need not happen in another (I’m talking about legislation, FYI…). Finally, I will say I believe Bitcoin’s value will continue to rise as the technology is made more accessible through simple, non-smart phones, as more people learn how to send Bitcoins through SMS, and as more charities and families are able to receive donations and remittances throughout the world with near-0 friction, essentially for free at that.
Lastly, in the news: Sidechain innovation. I’m excited about this for Bitcoin and its future. Basically, instead of creating new alt-coins in the future, it may be possible to update the Bitcoin core to more easily extend Bitcoin into semi-temporary Sidechain-coins with different, varying properties based on people’s needs. Say you need a coin that transacts (or is confirmed) quicker — you simply create a sidechain, put some Bitcoin in escrow to initiate this, and create Side-Quick-Bit-Coins or whatever you wanna call them. Then when or if the need is gone, return the Bitcoins in escrow to the normal Bitcoin network. I’m fuzzy on the details, but stoked about the implications, particularly for Bitcoin’s ability to compete with Ethereum and other Bitcoin 2.0 protocols like Mastercoin and Colored Coins. The bottom line is new functionality and greater scalability with this.
by adminadam in articles
What is Bitcoin?
Bitcoin is a highly extropic virtual currency and payment platform. It is resistant to entropy, theft, political corruption, and market manipulation (i.e. arbitrary inflation).
Here is an under-two-minute Bitcoin intro video from weusecoins.com:
What are Bitcoin’s novel features (both as a currency and as a technology)?
- The coins themselves cannot be burnt or destroyed, nor can they be stolen (if encrypted and backed-up properly). Coins can also be stored offline in a paper wallet or an indestructible, encrypted aluminum wallet.
- Bitcoin is a peer-to-peer, decentralized currency and banking/ledger system with no single point of failure.
- It has worldwide appeal and utility; different people are interested in it for different reasons and all can participate freely.
- A whole cryptocurrency ecosystem has evolved from it. See: Litecoin, Namecoin, or Anoncoin for examples of this.
What are its downsides commonly thought to be?
There are a number of arguments leveled against Bitcoin. Most posit that it will either be rendered null or that there are no legitimate uses for it. Briefly, here are a few of the more common arguments:
- That governments and banks will soon feel so threatened by it that they will shut it down.
- It’s volatile; it’s difficult to speculate on; it’s not a good investment.
- Only criminals and tax-evaders use it. (And/or high frequency traders.)
- It’s not accepted anywhere; you can’t really use it for anything.
- It would fail if the internet went down.
Now to examine these arguments.
First, that someone or some entity might shut it down:
Bitcoin cannnot be shut down by any authority as could Napster, or Wikileaks, or even the Pirate Bay for that matter. It is completely decentralized and has spread around the world. It is not dependent on ICANN or any centralized protocol or institution controlled by any one entity. I don’t think any conceivable level of coordination could remove enough copies of the peer-to-peer software necessary to run it — existing on many millions of devices around the world at this point — in order to shut it down. Also, as we move forward people are increasingly meeting in person to exchange bitcoin and other coins for cash, meaning that 3rd party bitcoin services (like Coinbase or Mt. Gox) are non-essential to obtaining cryptocurrencies.
Recently China declared that Bitcoin would not be accepted as currency there and that 3rd party Bitcoin/Renminbi exchanges would have to shut down at the end of 2013. This caused the prices to halve as there was great excitement and a surge of interest in Bitcoin in China previously. And while it will be harder for Chinese people to get and sell potentially, it certainly doesn’t spell the end for Bitcoin around the world. For example, Germany accepts it, as do the US, the Netherlands, Canada, Japan, France, and others. (I expect even in China it will continue to play some, albeit marginalized, role.) Note also: Swiss lawmakers are considering treating it as they would any other foreign currency as we speak.
Second, on the volatility, the usefulness for investment purposes:
It is difficult to speculate on, but less so, I believe, if you think in longer time frames than does a high-frequency trader.
Looking at this chart of the all-time price history of Bitcoin (above), we can see a number of big peaks and valleys, but the general trend is up — in a big way. It is new and subject to an extent to hype and speculation (as is any new commodity or currency, of course). One glance at the overall trajectory, however, and it appears to be more of an exponential trend than a linear one. I cannot conceive of traditional commodities or other physical currencies growing in this fashion, and believe it is only possible with a digital, peer-to-peer, distributed, low-barriers-to-entry system such as Bitcoin. Take a look at this all-time price history with weekly (instead of daily) price points and tell me that the growth is not astonishingly exponential in appearance…!
I think over the long term the value will continue to increase. If we look at a few examples of how Bitcoin (and the underlying protocol) are already being used I think it will become obvious why its value — and the value of other cryptocurrencies — is likely to increase over time.
Who uses it, where, and for what:
Bitcoin is a freely accessible, open-source, distributed, digital currency. That means that anyone with a smart phone or computer and internet access can use it. This ease-of-use and convenience may allow for it to supersede conventional payment and banking technologies, like paypal, moneygram, and bank transfers. As there is no bureaucracy involved, coins can be transferred to anyone, from anyone, at any time and for any reason. All this within minutes. All this without fees.
Here’s a few example uses:
- Trade sanctions can be bypassed. Cubans in the US can send their families money without hassle.
- Money can be sent anonymously (and if not then at least pseudonymously) over the internet for the first time in history. For more on the issue of true anonymity and the technical discussions surrounding it see: Zerocoin.
- Woodlank Patchwork, a new micronation which is both an enclave and an exclave of Japan, has chosen Bitcoin as its official currency.
- WordPress users can pay with Bitcoin.
- Reddit accepts it for advertising, tipping other users, and other promotional uses.
- Shopify allows merchants to accept it.
- OKcupid accepts it for premium services.
- Nesbit’s Fine Watch Service (near me in Seattle) accepts it.
- Seattle-based Accountable Moving & Storage accepts it.
- Cheapair.com accepts it for purchasing plane tickets.
- Khan Academy accepts it for donations.
- Tesla accepts it for the purchase of their electric cars.
- Virgin Galactic recently sold their first ticket into space purchased with Bitcoin.
- See CoinMap.org and useBitcoins.info for 1000’s more locations worldwide where Bitcoins are accepted.
Here, additionally, are some fascinating non-monetary uses:
- Proof of Existence allows users to anonymously time-stamp and create a record of a document’s existence. The cryptographic signature of this time-stamp is then stored for all time in the Bitcoin blockchain, the redundant, distributed ledger of transactions. With this you can certify that a given document/idea/etc exists without the need for a central authority. Think patent/copyright office, but peer-to-peer and open-source. Also, think censorship-proof publishing platform. Proof of Existence is built on top of the Bitcoin protocol.
- Namecoin is an ‘altcoin’, an alternative cryptocurrency with features that distinguish it from Bitcoin. Namecoin is specifically designed to create an open-source, distributed DNS network. While most every website you would visit currently is ultimately controlled by ICANN (who assigns domain names like thrivenotes.com), Namecoin is creating an alternative, decentralized system, whereby censorship will be impossible, and anyone will be able to create and host a website without risk of it being removed from the internet by ICANN or other influential parties (See: Homeland Security domain name seizures). Namecoin is a fork of the Bitcoin source-code.
What if the internet went down? Are there any other security issues to be aware of?
Besides the fact that the whole internet going down would be disastrous for everyone and all internet-based services, consider the following way in which Bitcoin could possibly even survive or thrive were the net to go down:
In an amazingly ambitious announcement, Bitcoin Developer Jeff Garzik declared his intention to launch cubesat Bitcoin nodes into space to store extra redundant copies of the blockchain in case of certain types of attack or internet outages. This apparently would cost only around $2 Million to do and would provide an additional layer of extropy (higher-order, complexity, and resiliency) to Bitcoin. I find this just fascinating. Perhaps Bitcoin would be okay..!
Regardless, I would like to provide some additional details on the security of the Bitcoin ecosystem, but thought it best to leave it to the experts for this one. Here is some useful Q&A from the Bitcoin Security FAQ:
Is Bitcoin secure?
The Bitcoin technology – the protocol and the cryptography – has a strong security track record, and the Bitcoin network is probably the biggest distributed computing project in the world. Bitcoin’s most common vulnerability is in user error. Bitcoin wallet files that store the necessary private keys can be accidentally deleted, lost or stolen. This is pretty similar to physical cash stored in a digital form. Fortunately, users can employ sound security practices to protect their money or use service providers that offer good levels of security and insurance against theft or loss.
The best way to be safe is to be sure of who you’re dealing with (trusted exchanges, for instance, are a good place to start) when purchasing, and then to store your wallet encrypted (with an 8+ word password, for example) in multiple (that is, 3+) locations.
Hasn’t Bitcoin been hacked in the past?
The rules of the protocol and the cryptography used for Bitcoin are still working years after its inception, which is a good indication that the concept is well designed. However, security flaws have been found and fixed over time in various software implementations. Like any other form of software, the security of Bitcoin software depends on the speed with which problems are found and fixed. The more such issues are discovered, the more Bitcoin is gaining maturity.
There are often misconceptions about thefts and security breaches that happened on diverse exchanges and businesses. Although these events are unfortunate, none of them involve Bitcoin itself being hacked, nor imply inherent flaws in Bitcoin; just like a bank robbery doesn’t mean that the dollar is compromised. However, it is accurate to say that a complete set of good practices and intuitive security solutions is needed to give users better protection of their money, and to reduce the general risk of theft and loss. Over the course of the last few years, such security features have quickly developed, such as wallet encryption, offline wallets, hardware wallets, and multi-signature transactions.
I love this line: a bank robbery doesn’t mean the dollar has been compromised. So perfect. I feel this is very important to consider in discussions of crytocurrencies: ‘Is this a local vulnerability that’s been exploited, or a global/universal one tatamount to the annihilation of Bitcoin (et al.)?’
Could users collude against Bitcoin?
It is not possible to change the Bitcoin protocol that easily. Any Bitcoin client that doesn’t comply with the same rules cannot enforce their own rules on other users. As per the current specification, double spending is not possible on the same block chain, and neither is spending bitcoins without a valid signature. Therefore, It is not possible to generate uncontrolled amounts of bitcoins out of thin air, spend other users’ funds, corrupt the network, or anything similar.
However, a majority of miners could arbitrarily choose to block or reverse recent transactions. A majority of users can also put pressure for some changes to be adopted. Because Bitcoin only works correctly with a complete consensus between all users, changing the protocol can be very difficult and requires an overwhelming majority of users to adopt the changes in such a way that remaining users have nearly no choice but to follow. As a general rule, it is hard to imagine why any Bitcoin user would choose to adopt any change that could compromise their own money.
Consensus-based, democratic, open-source projects FOR THE WIN.
Is Bitcoin vulnerable to quantum computing?
Yes, most systems relying on cryptography in general are, including traditional banking systems. However, quantum computers don’t yet exist and probably won’t for a while. In the event that quantum computing could be an imminent threat to Bitcoin, the protocol could be upgraded to use post-quantum algorithms. Given the importance that this update would have, it can be safely expected that it would be highly reviewed by developers and adopted by all Bitcoin users.
Just imagine: Quantum-Encryption-Protected Bitcoin. What would we call it? QuBitcoin? Bitcoin-Cubed? 5th-DimensionalCoin? Whatever form it takes, whatever it’s called, I love their assertion that Bitcoin and Cryptocurrency Developers will continue to develop and maximize the extropian potential of these liberating technologies — even in the face of quantum-supercomputer highway-robbery-attempts.
TL;DR – What about Bitcoin?
- You can send money to anyone, anytime.
- It can’t be shut down by governments.
- It can’t be controlled by corporations or the Federal Reserve.
- It may be protected from other conceivable, future forms of interference through the use of space-based redundancy satellites.
- And you can buy everything from a cup of joe to an electric car with it.