What is Bitcoin?

I’ve had two people recently ask me questions about bitcoin in casual conversation when I said I was a Wealth Manager. And I’ve seen numerous news articles on the subject as well as discussions about it on CNBC. However, I’ve found that very few people really understand what it is, how it came to be, or what its purpose is. I will attempt to break down this complex subject and explain it in a way that I hope the general public can understand. Much of what I’m about to write is my personal opinion as there are several theories and opinions when it comes to bitcoin.

Bitcoin is a digital currency. I believe the original intent was to create a currency free from any type of manipulation by government and free to trade simply on the laws of supply and demand. A currency that anyone could use in an unregulated market. The technology it uses is called ‘blockchain’. I won’t get into the details of that, but to get bitcoins, you have to use a special program that breaks down complex math problems and set your computer to basically do math non-stop on the blockchain. As the computer finds the solution to the algorithm, a certain number of bitcoins are released as a reward. As it gained popularity, more and more people started to ‘mine’ coins using their computers (and even joined their computers together). The creators were ingenious because every computer that was mining coins was now part of their network. A network of computing power used to conduct transactions on the blockchain. Also, as time went on, the algorithms got harder and harder requiring greater amounts of computing power to unlock the coins. The end result is quite simple! More people get on the network to mine coins and the increased computing power provides a network to buy, sell, and trade the coins.

Here is something most people don’t think about, but I find fascinating. If you have all these computers running non-stop mining coins and pushing their processors to the maximum, then how much electricity is that using? According to Newsweek, “The bitcoin network’s energy consumption has increased by 25 percent in the last month alone, according to Digiconomist. If such growth were to continue, this would see the network consume as much energy as the U.S. by 2019, and as much energy as the entire world by the end of 2020.” (‘Bitcoin Mining on Track to Consume All of the World’s Energy by 2020’  Newsweek 12/11/17). That is quite unsettling when you think about it… All these computers doing nothing all day but mining a digital currency and doing transactions using so much of the world’s power supply. That raises the question in my mind that if that is true, don’t you think governments are going to want to step in and regulate it? I would think so!

There is also a limited amount of bitcoin that will be in circulation. The goal is to have 21,000,000 coins in circulation. Currently about 80% of bitcoins have been mined and there is much speculation about what will happen when all the bitcoins have been mined and what will happen to the network. Also, bitcoins are starting to fall under heavy scrutiny from governments around the world because it is easy for bad people to use it for bad things. Bitcoins are simply a series of numbers and letters, so they can be bought, sold, and traded anonymously. You can send money anywhere in the world for very small transaction fees and convert it into whatever local currency you want using various online exchanges throughout the world. The recent launch of a bitcoin futures market has provided a path to liquidity for many people who have held onto bitcoin for years. However, it has also created a way for bad people to make a large profit on their bitcoin. I’m sure the moral implications of the success of bitcoin will be debated for years to come.

The governments around the world are also wanting to make sure they get tax revenue on bitcoin investors. Especially now due to the recent rise in value! The IRS recently filed suit against coinbase.com, which is a US based bitcoin exchange demanding information about their users to make sure taxes are being collected (http://fortune.com/2017/11/29/irs-coinbase/) and they won access to 14,000 accounts.  Many governments are wanting to ‘cash in’ on the tax revenue generated by bitcoin investors.

My opinion on the future of bitcoin is that eventually it will be regulated and online bitcoin marketplaces will be required to collect information on their investors and provide that information to the government. Once all the bitcoins are mined, I question how many people will stay on the network simply to cash in on transaction fees as it really depends on the cost of energy at that point. Governments don’t like bitcoin because it is something they can’t control and many are already tightening their laws to stop people from investing. And the energy use is getting astronomical and unsustainable. In other words, I question the long term staying power of bitcoin. Many investments firms are barring their advisors from purchasing bitcoin for their clients and I agree with that move. Right now, the risks are too great and the future is unknown.  Buyer beware!!!