BITCOIN: to buy or not to buy

Published Jan 18, 2018

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The new buzz word is Bitcoin. 

How many of us have been approached by friends and family with wonderful stories of how much money they have made and if you want to get rich like them, you must invest in Bitcoins?

So, what is this thing called Bitcoin, how is it regulated in South Africa, do we understand the inherent risks associated with Bitcoins and what guarantee (if any) the South African Reserve Bank provides to owners of Bitcoins, and above all, what are the tax implications with the South African Revenue Services?

Bitcoin is the first ever digital, decentralised coin. 

Digital means that bitcoin does not appear in a physical form, only on a computer and is stored in digital addresses across the web.

Decentralised means no financial body or central bank stands behind the coin and no one is controlling its distribution and production.

Bitcoin is an independent internet coin that is not bound or dependent on any man, company, bank, or government and is solely controlled by the will of the people - their will to mine it, to trade it, and to trust it!

The main advantage of Bitcoin is that it is decentralised, which means there’s no central bank or government which controls it or its distribution.

That is the main reason investors are considering the currency as some sort of a safe-haven asset in a problematic geopolitical world.

When governments are suffering financially, the people are also suffering from financial instability.

We saw it happen lately in Europe, Russia, Brazil and the United States. 

The other advantage Bitcoin has to offer, is that there is a mathematical limitation to the number of Bitcoins that can be created, no physical currency is ever printed, so it works and follows the rules of economy.

A limited supply creates a demand. When the demand goes up, the price goes up along with it. 

Willing participants can use Bitcoins to buy and sell goods and services without the involvement of commercial banks. 

And it’s not just your local coffee shop, which may accept it as payment. Companies such as Microsoft, takealot.com and even law firms have gotten behind the cryptocurrency.

Australian entrepreneur Craig Wright says he is the inventor of the digital currency bitcoin.

Wright told the BBC that he is Satoshi Nakamoto, the shadowy creator of the cryptocurrency, in a move that could end the years-long search for the inventor.

Nobody owns the Bitcoin network much like no one owns the technology behind e-mail. 

Bitcoin is controlled by all Bitcoin users around the world.

While developers are improving the software, they can’t force a change in the Bitcoin protocol because all users are free to choose what software and version they use.

In order to stay compatible with each other, all users need to use software complying with the same rules.

Bitcoin can only work correctly with a complete consensus among all users. 

Therefore, all users and developers have a strong incentive to protect this consensus.

There is no way to determine the exact number of people who use Bitcoin, but it is estimated to be between 100000 and 1million in 2013/4 on the internet.

It is difficult to know who owns the most Bitcoins. 

Addresses are not necessarily tied up to people’s identities, but it is speculated that the founder of Bitcoin owns around a million Bitcoins.

SHOULD I BUY BITCOINS OR NOT?

The National Treasury has cautioned the public to remain extremely vigilant of the risks and benefits, which accompany virtual currencies.

Not only is this novel and nascent technology being scrutinised by regulators, who may elect to intervene at any moment, but Bitcoin is also subject to wild price fluctuations, fraud and criminality.

WHAT HAPPENS WHEN BITCOINS ARE LOST?

When a user loses his wallet, it has the effect of removing money out of circulation. Lost Bitcoins remain in the block chain just like any other Bitcoins.

However, lost Bitcoins remain dormant forever because there is no way for anybody to find the private key(s) that would allow them to be spent again.

Because of the law of supply and demand, when fewer Bitcoins are available, the ones that are left will be in higher demand and increase in value to compensate.

This can be a computer software, hardware or pieces of printed paper but they all essentially do the same thing - they allow you to spend and receive Bitcoins.

Losing your wallet loses you all your Bitcoins.

Computer software and hardware can be hacked, which also poses another threat.

IS BITCOIN LEGAL?

To the best of our knowledge, Bitcoin has not been made illegal by legislation in most jurisdictions. However, some jurisdictions (such as Argentina and Russia) severely restrict or ban foreign currencies. Other jurisdictions (such as Thailand) may limit the licensing of certain entities such as Bitcoin exchanges.

IS BITCOIN USEFUL FOR ILLEGAL ACTIVITIES?

Bitcoin is money, and money has always been used both for legal and illegal purposes. Some concerns have been raised that Bitcoin could be more attractive to criminals because it can be used to make private and irreversible payments. However, these features already exist with cash and wire transfer, which are widely used and well-established.

WHAT ABOUT BITCOIN AND TAXES?

Bitcoin is not a fiat currency with legal tender status in any jurisdiction, but often tax liability accrues regardless of the medium used. There is a wide variety of legislation in many different jurisdictions, which could cause income, sales, payroll, capital gains, or some other form of tax liability to arise with Bitcoin. Sars presently doesn’t have a way of taxing Bitcoins.

HOW ARE BITCOINS CREATED?

New Bitcoins are generated by a competitive and decentralised process called “mining”. This process involves that individuals are rewarded by the network for their services. Bitcoin miners are processing transactions and securing the network using specialised hardware and are collecting new Bitcoins in exchange.

WHY DO BITCOINS HAVE VALUE?

Bitcoins have value because they are useful as a form of money. Bitcoin has the characteristics of money (durability, portability, fungibility, scarcity, divisibility, and recognisability) based on the properties of mathematics rather than relying on physical properties (like gold and silver) or trust in central authorities (like fiat currencies).

WHAT DETERMINES BITCOIN’S PRICE?

The price of a bitcoin is determined by supply and demand. When demand for Bitcoins increase, the price increases, and when demand falls, the price falls. There is only a limited number of Bitcoins in circulation.

WHAT DOES IT MEAN TO INVEST IN BITCOIN? DO I BUY OR NOT?

In order to answer this question, the first thing you need to answer is, what do you mean when you say you want to invest in Bitcoin?

Do you want to buy the currency in a hope that it will appreciate in its value (who doesn’t want this)? Do you want to invest in Bitcoin related companies? Are you looking to trade with Bitcoins? Are you prepared to invest in something that can disappear tomorrow? Are you prepared to invest in the unknown?

Hopefully you will know a little about Bitcoins at the next family gathering and not feel left out!

Dascoin is said to be the next phenomenon after Bitcoin, which provides all the answers that Bitcoin fails to provide!

Do you invest in Bitcoins? I don’t know!

* Sanjith Hannuman is a financial adviser.

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