Bitcoin. If you haven’t heard of it by now, I’m not sure how you found yourself reading this article. Unless of course a friend or family member is sending it to you because you are out of the loop.
Bitcoin is essentially a virtual currency that is decentralized and not backed by any monetary authority. Conventional wisdom would conclude that this is impossible or at the very least dicey. Nevertheless, it has manifested as a semi-legitimate currency through a complex set of software and a publicly distributed ledger known as the blockchain. (It’s important to note that Bitcoin is an example of blockchain technology, and not all blockchains are Bitcoin.)
Executives and prominent figures in the banking industry have fallen on both sides of the virtual currency, with J.P Morgan CEO Jamie Dimon calling it a fraud, and Morgan Stanley CEO James Gorman said in contrast that Bitcoin and cryptocurrencies are “certainly something more than just a fad.” That said, let’s be clear, this article is not advice on whether or not to invest in Bitcoin. Cryptocurrencies, in general, are very speculative and should be dealt with as such.
One of the employees in our office purchased Bitcoin at $5,700 in late October, and as of today it’s trading just under $13,000, and he states he has no idea where Bitcoin is going. Now, with that out of the way, let’s look at some of the hurdles Bitcoin has to clear to survive the market and the government.
The first hurdle that Bitcoin will need to clear is the market’s confidence in it.
Obviously many people have bought into it, but the original purpose for Bitcoin isn’t some investment play. Rather it’s supposed to be used as a currency that people genuinely use to make purchases. There are already platforms that support it, Square, Inc. comes to mind, but it needs to stabilize before it will find truly widespread customer-to-business transaction use. Once it does stabilize, people may sell as they were only in it for the asset’s appreciation, and not to use it as an alternative form of currency. This could cause a massive sell-off, and we could see the bubble burst.
Conversely, if the market decides it wants to continue to hold Bitcoin, then its price may still increase.
This all speaks to just how speculative Bitcoin is as an asset. Until you can use Bitcoin to make purchases for groceries or a car in 95 percent or more of relative storefronts, we can’t fully consider it accepted as a “currency” by the general market.
The second hurdle that Bitcoin needs to clear is the government. So far, we’ve seen a relatively passive position taken on Bitcoin by the U.S. government compared to other governments who are banning the use of cryptocurrencies and/or exchanges. That doesn’t mean you can cash in your gains and not claim taxes on them though. Bitcoin is considered property, like Gold or a Stock, and thus is taxed at capital gains against its basis. Additionally, the U.S. Senate Judiciary Committee is working on bill S.1241, which would criminalize the intentional concealment of any financial account that contains assets such as Bitcoins. This is to ensure that cryptocurrency or digital currency accounts are under the same rules as any other financial account. Hiding or laundering money with Bitcoin would be no different than hiding or laundering money with any other foreign currency. That said, the jury is still out on Bitcoin being a laundering tool, as the public ledger makes Bitcoin owners fairly easy to track, but that also depends on whether or not the original opening of the account was done above or below the table. Therefore, Bitcoin needs to use already established forms of money laundering, rather than some new avenue simply because it's a cryptocurrency. It doesn’t inherently allow you to launder money, but it does add a new tool the money laundering chest. As the interest in Bitcoin continues by the general population, we can expect to see that interest be mirrored by the government.
Ultimately, there still needs to be significant developments for Bitcoin (and cryptocurrencies in general) before anyone can make qualified statements on its future. So when you hear people saying, “Bitcoin is a fraud” or “Bitcoin is the future” you can consider statements like that as two sides of the same speculative coin.
Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.
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