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Financial Attributes of Bitcoin

Financial Attributes of Bitcoin

Is Bitcoin A Real Currency?

Strictly speaking, Bitcoin and other cryptocurrencies are not a currency in the sense of being a medium of exchange in circulation that is generally accepted and prevalent. But they are accepted as a means of wealth transfer by a growing number of entities. Growing numbers of third-party vendors conduct retail Bitcoin and crypto-currency transactions for a fee. The CME Group and Intercontinental Exchange offer derivative markets, and Fidelity Investments has a digital asset group for investors.

Bitcoin cannot be readily utilized to conduct smaller transactions. When U.S. taxpayers conduct Bitcoin transactions, the IRS treats these as property transactions that will cause capital gains and losses on each use. Services including BitPay and now even PayPal, however, will convert Bitcoins to dollars for a fee (this works better for higher dollar amounts). In addition, if Bitcoin systems were hacked, investors would likely face a dramatic and possibly even complete loss in value overnight with no governmental or private party insurance. China is experimenting with a digital currency with no transaction fees that does not require an internet connection, as transactions can occur through cellphones .

There have been reports over the years of investors that have lost the passwords to their Bitcoin holdings (a complex securities code), and there is no central authority for such investors to turn to. In 2017, it was estimated that around 3 million Bitcoins were lost (at the time, this represented about 23% of its total value). It was reported that even Elon Musk had lost part of his code.

Is Bitcoin Digital Gold? 

Financial Attributes of Bitcoin

Many compare Bitcoin to a gold investment. Unlike Bitcoin, gold has a unique tangible physical presence and has been a means of wealth storage for centuries; Bitcoin has been around for less than two decades. Gold has other uses (jewelry, electronics, medicines), whereas Bitcoin does not. Cryptocurrencies still represent a fraction of gold’s total value. Some contend Bitcoin is “gold 2.0 since governments can’t control and debase it. That’s why, like gold, some people view Bitcoin as a hedge against inflation”. As seen with China, in 2017 and 2021, however, governments can negatively impact the perceived value of a digital currency overnight.

Inherent Risk

The fluctuation of Bitcoin and other virtual currencies’ prices in 2020 and 2021 underscore their volatility and opportunity for abnormal profits and inherently substantial risks. Taxpayers are required to report their taxable virtual currency transactions to the IRS, even if they simply hold these assets, as of the 2020 tax year. When CPAs discuss these transactions with individual investors, it is important not to cross the line into giving investment recommendations. The emphasis needs to be on risks, known and unknown, the enhanced IRS reporting requirements, and conducting due diligence before making new investments.

As seen since Bitcoin’s inception in 2008, it is subject to extreme price valuations; other virtual currencies have seen this as well. Virtual currencies’ underlying risks since their inception remain prevalent and unresolved, with little recourse for investors who have no central authority to turn to when problems arise. Rapid deterioration and recoveries of virtual currencies values occur often, but there is no guarantee that a recovery will always occur.

Bitcoin is Not Money

Financial Attributes of Bitcoin

Bitcoin is not money, but rather a cryptocurrency that exists in the ether that is not backed by any particular government. Beyond having a non-money status, there are no underlying assets backing Bitcoin. In a January 9, 2021, article appearing in the Times of London titled “Fools Gold or Time to Buy as Bitcoin Surges,” suggests that some believe that in the future, Bitcoin could become a safe haven asset similar to gold. However, its volatility and lack of regulation undermine its potential to become a safe haven asset. The secrecy surrounding Bitcoin transac tions that are largely conducted anonymously further calls into question its long-term viability as an investment vehicle.

On January 6, 2021, analysts at JP Morgan predicted that if Bitcoin became a global safe store for wealth, its value could increase up to $146,000. Many believe that Bitcoin’s competition with gold has begun.