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Last Updated on: 20th January 2024, 02:11 am
Table of Contents
What Exactly is Bitcoin?Bitcoin (or BTC) refers to the now world-famous digital currency which was created in 2009. Digital currencies are commonly referred to as “cryptocurrencies.” Bitcoin was the first-ever cryptocurrency. It was developed by Satoshi Nakamoto, an anonymous computer programmer who laid out its theoretical basis in a 2008 white paper. The new cryptocurrency rapidly gained in popularity over the years because it originally pledged to provide a way to send funds from peer to peer without a middleman such as a bank. Unlike legal tender currencies, Bitcoin is not run or governed by a centralized authority. One of the great advantages of Bitcoin is that it is maintained with private and public security keys. These keys consist of long strings of letters and numbers which are linked together by mathematical encryption by its underlying software algorithm, known as a blockchain. It is this public key which works much like a bank account number in a transaction. The private one functions more like your debit card's PIN number and is a critically important secret you only share when you are giving final authorization on a transaction. Bitcoin has long been considered a highly speculative investment. This is why individuals are often warned not to convert all of their life savings into BTC. Always consult with your financial advisor before making an investment decision, including the decision to purchase Bitcoin or any other cryptocurrency.
A Review of Bitcoin as an IRA InvestmentDespite the impressive growth that cryptocurrencies have shown over the years, this investment class is still seen as highly speculative. Whether Bitcoin will live up to its original ambitions as an alternative global currency and widely-adopted decentralized payment system will depend on how the general investing public perceives it in the years ahead, and whether authorities will enact regulations to rein in its potential. For investors with an appetite for risk, Bitcoin could make a worthwhile addition to a well-diversified investment portfolio. Below, we've listed some of the principal reasons why an investor might want to invest in Bitcoin.
#1. Bitcoin is a Novel and Disruptive Global TechnologyDo not simply take our word for it. Consider what the experts say on the matter. Peter Thiel, the co-founder of PayPal once said:
“I do think Bitcoin is the first encrypted money that has the potential to do something like change the world.”Paying for transactions online is not new. Credit cards have permitted you to do this since the 1990s when the Internet first became widespread. Likewise, PayPal has existed and thrived for some time now. The unique function of BTC, however, is that it allows users to securely pay for transactions across borders and different currency jurisdictions throughout the world, without routing through centralized institutions such as banks, credit unions, or international settlement networks. For example, if an American investor wants to send Bitcoin to a user in Shanghai, China, from a cryptocurrency wallet stationed on a hard drive in Dallas, Texas, he can do so without incurring any international payment fees, remittance charges, governmental oversight, sanctions interference, or third-party control. And, best of all, the transaction can be completed in a matter of seconds.
#2. Bitcoin Is Truly International And Exists Beyond National RegulatorsIf there were to be a national regulator for Bitcoin in the United States, you would suppose the Federal Reserve (which oversees the FDIC bank account insurance program and banking regulatory regime) would be the party best suited and placed to do so. Yet Janet Yellen, Chair of the Federal Reserve, admitted about Bitcoin:
“The Federal Reserve simply does not have the authority to supervise or regulate Bitcoin in any way.”This is because the Federal Reserve and U.S. Treasury do not issue Bitcoin nor guarantee it. It is not a U.S. dollar instrument, but it is instead an entirely different technology that exists on a peer-to-peer computer network that cannot be interfered with by state authorities. This is why the central banks of the United States, the European Union (ECB), and Switzerland (SNB), among others, do not have either jurisdiction or regulatory authority over BTC.
#3. Bitcoin Has Tremendous Power As An Online Currency That Can Not Be DuplicatedPart of what makes Bitcoin so powerful is that it is often considered the “gold standard” for online currencies. Eric Schmidt, CEO of Google once remarked:
“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”Who should know better than Google, one of the largest companies on the planet? Bitcoin's blockchain algorithm prevents any one Bitcoin from ever being reproduced. In this way, every Bitcoin is unique. A hard cap of 21 million Bitcoins is coded into its blockchain, meaning that there will never be more than 21 million Bitcoins in circulation at any point in the future. This prevents inflation and hyperinflation from impacting Bitcoin the way they do for fiat currencies.
#4. Bitcoin Can Not Be Centrally Controlled or Manipulated
There are countries of the world, like China, which have tried to halt the advance of cryptocurrencies and especially Bitcoin. John McAfee, founder of McAfee antivirus software, says about Bitcoin:Observers of the cryptocurrency market waited with bated breath to hear how sovereign taxing authorities like the Internal Revenue Service (IRS) would decide about Bitcoin. They reinforced the concepts behind it when they finally issued a statement on the BTC phenomenon. The IRS says about Bitcoin:
“You can't stop things like Bitcoin. It will be everywhere and the world will have to readjust. World governments will have to readjust.”The fact that more and more businesses and individuals have accepted it for transactional payments without government backing gives it a democratic flair as a peer-to-peer currency of the people. Since it is not issued by a central bank and largely operates under conditions of anonymity, it is highly difficult to centrally control by state authorities and therefore cannot be arbitrarily seized or confiscated.
#5. Bitcoin Is Now Approved By the IRS as a Valid Form of Property
“The IRS is aware that ‘virtual currency' may be used to pay for goods and services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, euros, and other real or virtual currencies. For federal tax purposes, virtual currency is treated as property.”Therefore, the IRS and other tax authorities, at present, do not treat Bitcoin and other cryptocurrencies as traditional currencies. Rather, they are investable properties that are subject to capital gains taxes like any other legitimate asset. That's why some investors choose to invest in Bitcoin within an IRA or 401(k), in order to take advantage of the unique tax benefits offered to assets held within these retirement accounts. (Considering investing in Bitcoin within an IRA or 401k? There are currently two custodians in the United States that offer Bitcoin IRA investments, which we have reviewed at the end of this article.)
The Pros and Cons of Bitcoin
Bitcoin Pros 👍
- It is completely decentralized and free from central bank manipulation and government policies
- The supply is limited – Only 21 million Bitcoin can ever be mined or produced. This limitation is hardwired into the Bitcoin protocol and can not be changed
- Bitcoin's value does not correlate with the dollar – In fact, it tends to move in the opposite direction of stocks and bonds, just like gold does. This is one of the reasons it is becoming incrementally more popular over time as a risk hedge similar to physical gold.
- Bitcoin could be significantly undervalued
- More and more people and businesses are using Bitcoin – see the Bitcoin transaction table below: