Bitcoin, essentially virtual money traded by digital exchange, has received tremendous media coverage this past month. This “currency” emerged on the market in 2008 designed by a programmer or group of programmers under the name of Nakamoto, whose real identity remains unknown. Bitcoins exist as software, not physical currency, and are not regulated by any country or banking authority.
Mined by powerful computers that calculate complex mathematical functions, Bitcoin quantity is capped at 21 million (with about 12 million currently existing worldwide) to keep total growth limited.
Bitcoin has surged on speculation that perhaps one day digital money will eventually become a legitimate global currency and even replacing currencies from certain countries. The growing mobile payment industry could be a big benefactor to the acceptance of Bitcoin as new and creative applications are being devised to accept digital currency. Bitcoin transactions are very popular among mobile users, where rather than using a credit card or cash to make a purchase, all you’d need is your phone.
In 2014, the value of Bitcoins fell by over fifty percent following remarks by China and Norway to not recognize the digital currency as legal tender. The government of Norway ruled that Bitcoin does not qualify as real currency but rather qualifies as an asset, producing taxable capital gains. Norway said that Bitcoins don’t fall under the normal definition of money or currency.
Even though U.S. Senate hearings disclosed that Bitcoin could be a means of exchange, it gave no assurance that it would actually become an accepted medium of exchange. Government regulations would need to be created and then enforced in order for Bitcoin to become accepted by other government entities. The currency can be traded without being tracked, thus raising the potential for illicit activity, such as involving weapons, drugs, and prostitution. Bitcoins are not illegal, but it is also not legally recognized by governments as a currency.
The total estimated value of Bitcoins worldwide as of May 30, 2017, is over 36 billion dollars – more than doubling in value since January 1, 2017.
More and more nations have been taking an official stance as the popularity of Bitcoins has evolved. The European Banking Authority has warned about the risks of trading digital money and being subject to losses where consumers are not protected by any government entity or authority.
As digital currency evolves, some believe that it will eventually be accepted as a legitimate currency. But for the time being, others believe that its time hasn’t arrived yet. Various studies have recently emerged with different opinions, such as a Stern School of Business study conducted by David Yermack, which concluded that Bitcoin behaves more like a speculative investment than a currency and has no currency attributes at all.
Max W. Smith, CFP®, CIMA® | Kent G. Forsey, CFP®