Bitcoins Accelerating Globalization
Mining For Answers
Bitcoin is a decentralized cryptocurrency or digital asset that has taken the market by storm in recent years for its use as an international digital currency. It was started in 2009 and it is very easy for individuals anywhere in the world to use as payment between one another as this currency can easily be exchanged for goods, services or another currency. Bitcoin is giving everyone in the world access to the same market and allows the individual to send payments with these coins from any device with access to the internet to anyone, anywhere in the world at any time. This is accelerating globalization and making the world a more connected place as average people can buy and sell to anyone in the world with one common currency without the hassle of going through a bank. By not going through a bank the user avoids bank fees, your account can never be frozen, and there are no prerequisites or arbitrary limits on spending. Now, someone sitting at home in West Chester could buy something such as an electronic device from China directly from someone sitting at their home in Beijing instantaneously. Since bitcoin is so new, many people and even governments do not understand this currency, as a result several issues have also emerged with the emergence of bitcoins.
One of the biggest issues bitcoin faces is governments in certain countries either banning the currency or trying to restrict its flow because they do not want to lose control over the flow of money, but more importantly governments want to make sure that they are getting their share of the bitcoin boom through taxes. Many governments, such as the United States Government, tax based off income, and to do this accurately they need accurate data based off an individual’s transactions. Luckily, Bitcoin transactions are entirely transparent as every single transaction is stored in a ledger in chronological order called a block chain. Each block is all of the transactions made in a designated period and the chain is created as time goes on. Unfortunately for the government, these transactions are entirely anonymous, the two users are only represented by a code such as (A135HJFK9), and this number could be anyone in the world, which means that likely it is someone outside of the governments jurisdiction. Therefore, the governments must rely on people to report their incomes to them, which does not always happen.
The IRS has made it very clear that every single bitcoin transaction is taxable, and includes in their tax codes that the taxpayer must include the fair market value of virtual currency in USD as of the date the currency was received. Currently the IRS does not classify bitcoin as a currency, but rather as property, which means that when you use bitcoin you report either a capital gain or loss. Effectively the IRS wants people using bitcoin to keep track of every gain and every loss for every transaction and report this when they report their net income. For the biggest users making hundreds of transactions a day, this seems unlikely if not impossible, therefore ensuring accurate representation for taxing purposes still has a long way to come.
Another attractive aspect of bitcoin is that there is a finite amount of the coins, there is currently about 16.67 million coins in circulation and the cap for coins is 21 million which prevents inflation. Coins enter circulation by being “mined” like any other precious metal. Mining essentially is allowing your computer to perform mathematical equations in exchange for bitcoin. This equation is an algorithm used to verify every transaction that occurs in bitcoin, so other people’s computers are acting as the bank to verify the transactions without the waiting time. Mining has become highly competitive as the value of bitcoin has dramatically increased, as a result few individuals are able to successfully mine anymore. Now most mining is performed at farms in favorable areas with cheap labor and low electricity costs, one of these areas is the Sichuan province in China. This province now accounts for almost half of the processing (measured in hash power) for bitcoin. The Chinese government wants to maintain more control over their people and has banned Initial Coin Offerings (ICO’s) in China as one measure of control. Now they are considering going after mining due to the large amounts of electricity this consumes.
Bitcoin has given access to everyone in the world to the same market allowing anyone to participate in global commerce. There are still many issues that must be solved, but as long as governments keep bitcoin unrestricted, it will greatly speed up the process of globalization.
“China Bitcoin Crackdown to Extend to Low-Cost Mining Ban: Report.” CryptoCoinsNews, 14 Nov. 2017, www.cryptocoinsnews.com/china-bitcoin-ban-to-extend-to-low-cost-mining-local-report/.
Perez, William. “How Bitcoins Are Taxed.” The Balance, www.thebalance.com/how-bitcoins-are-taxed-3192871.
Franco, Pedro. Understanding Bitcoin: Cryptography, Engineering and Economics. John Wiley & Sons, 2015.
© 2017 John-seitz