What Is Bitcoin?

Bitcoin is a decentralized cryptocurrency that uses peer-to-peer technology for instant payments between people or businesses. It can be bought and used as a currency and also is a type of investment.

Bitcoin has been around since 2009. It hit its all-time high in price in November 2017, when 1 bitcoin was worth nearly $20,000.

What Is Bitcoin?

Bitcoin is a form of digital currency that is created and held electronically on a computer. Bitcoins are not paper money like dollars, euros, or yen controlled by central banks or monetary authorities. Bitcoin is the first example of a cryptocurrency, which is produced by people and businesses all over the world using advanced computer software that solves mathematical problems.

The Commodity Futures Trading Commission (CFTC) in the United States designates Bitcoin as a commodity as a response to a Bitcoin exchange offering derivative contracts or options on the value of the cryptocurrency. It is difficult to categorize Bitcoin because it is so new and different from other assets available to market participants.

Bitcoin has several attributes that set it aside from traditional currencies as a pan-global means of exchange. Central banks or monetary authorities do not control the number of Bitcoins, and it is decentralized, making it global. Anyone with a computer can set up a Bitcoin address to receive or transfer bitcoins in seconds. Bitcoin is anonymous, and the cryptocurrency allows users to maintain multiple addresses, and setting up an address requires no personal information.

How Bitcoin Works

Bitcoin is a method of payment or transfer of value that is independent of governmental authorities like central banks that traditionally control the money supply and the availability of currency in the global market. Transfers are made via computer immediately with low transaction fees.

Bitcoin does not flow through the traditional banking system; rather, it flows from one computer wallet to another. Bitcoin cannot be held or kept in a pocket or wallet like currency; it is purely a computer-based means of exchange.

Bitcoin is a fixed asset because there are only 21 million coins. Solving the advanced mathematical problems results in the mining of Bitcoins. However, Bitcoin is divisible so the growth potential for the exchange medium is unlimited. One of the most interesting inventions that came alongside Bitcoin is blockchain or distributed ledger technology. DLT has amazing potential when it comes to traditional operations and settlement ramifications for businesses in the financial as well as other industries. DLT tracks ownership and allows for immediate and efficient transfers of Bitcoin.

Notable Happenings

Satoshi Nakamoto first proposed Bitcoin in a 2009 white paper as a means of payment based on mathematics. The idea behind Bitcoin was to create a currency system that didn't involve banks and instead would operate using a decentralized ledger known as blockchain.

Bitcoin's value first surpassed $1,000 in January of 2017 before hitting its peak later that year. Since that time, its value has fluctuated from a little more than $3,000 to more than $33,000.

Do I Need to Pay Taxes?

The IRS recognizes cryptocurrencies as property and taxes it based on its value. For example, if you perform a service and are paid in Bitcoin, you would be required to report income equivalent to the value of the amount of Bitcoin you received at the time you received it.

As well, money earned from buying and selling Bitcoin should be reported as capital gains just as money earned from buying and selling other commodities should be reported.

Alternatives to Bitcoin

Bitcoin is not the only cryptocurrency available, but its market cap is more than twice the value of the next 10 largest cryptocurrencies combined. Bitcoin's market cap was $296.75 billion as of Nov. 13, 2020, followed by Ethereum at $50.99 billion and XRP at $26.8 billion. In all, there are 14 different cryptocurrencies with market caps of at least $1 billion. 

Key Takeaways

  • Bitcoin is a virtual currency held on computers and not controlled by any single bank, nation, or monetary agency.
  • The Commodity Futures Trading Commission treats Bitcoin as a commodity.
  • The IRS treats cryptocurrencies like Bitcoin as property and taxes it as such.
  • Since late 2017, the value of a single Bitcoin has fluctuated between about $3,000 and $33,000.