Bitcoin is a virtual currency that is based on block chain technology that uses cryptographic protocol. It is therefore not issued by the central bank and not controlled by any financial regulatory body, authority or government but by software algorithms that may be subject to hacking. The participants provide computing power, record and verify the transactions made and in return for these services they receive transaction fees. Newly mined bit coins can be stored in local wallets. All records of bit coin transactions are stored in a decentralized peer to peer network that disables double spending, provides authentication to valid transactions in a long term block chain which is built using hash-based proof of work mechanism. A bitcoin transaction is irrevocable and new blocks of transactions are created every ten minutes and linked together in a block chain.
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To be able to own or exchange bit coins, one needs an account number made from 160-bit cryptographic fingerprint. The account number is governed by a public key and a private key. To be able to give bit coins you need the public key and to move an account the user requires his/her private key. Bit coins, once transacted, are stored in a wallet and it is the responsibility of its owner to secure them from theft from external sources.
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The publication of the paper “Bit coin: A peer to peer cash system.” By Satoshi Nakamoto served as the basis of the inception of the main idea behind bit coin as a virtual currency. In 9th January 2009, the first bit coin client was released, in January 12th the first bit coin transaction was made between Satoshi Nakamoto and Hal Finney with the subject of this transaction being a genesis block worth 50 BTC. The first bit coin exchange was on February 6th by members of the “Bit coin talk” community and by May of 2010 the exchange rate of the bit coin had reached 0.004 USD/BTC with exchange rates being significantly volatile and based on demand and supply. In July of 2010, the first bit coin exchange was created out of a website for trading cards “Magic, The gathering Online.” With a bit coin value of 0.008 USD/BTC which increased to 0.08 USD/BTC. August of 2010 revealed the vulnerability of the bit coin exchange with malicious users being able to make payments worth hundreds of billions hence creating a hyperinflation which made the bit coin temporarily worthless. Despite the fact that this suspicious activity was spotted and the bug fixed by Mt GOX and the bit coin acquiring parity with the USD in February of 2011 as well as its catapulting from experimental use to consideration by the broader public and Mt GOX becoming the largest bit coin exchange method at the time, the bit coin was still to face its greatest trials yet. In 2011, Mt GOX and other bit coin sites were hacked with users in Mt GOX receiving fake sell orders worth approximately 25’000 BTC bringing the price of the bit coin to 0.01 BTC/USD. Rounds of criminal activities characterized the bit coin market in the following year. Also during this time, Bit coin Central obtained a European bank license leading to an increased public confidence in the bit coin currency.
Bitcoin Impact on The F1040
The bit coin has affected significantly how American s file their annual tax returns in the Form 1040 with taxpayers required to declare all bit coin transactions such as; buying crypto currency with another crypto currency, receiving mined crypto currency and being paid in crypto currency. Americans are however not required to declare transactions that involve transferring crypto currency between coin based accounts, buying bit coin with cash and holding it, transferring between wallets as well as donating crypto currency to known charity organizations. Failure to declare these transactions in their annual tax returns would be considered as tax fraud. The bit coin demonstrates tremendous capacity to affect the USD with the support of regulators. However, in the absence of regulators, the bit coin remains an unsafe and volatile market. With the advent of the bit coin paper currencies are expected to be a thing of the past as the bit coin continues to revolutionize the way payments are made.
The bit coin is also posed to interrupt the ability of the central bank to exert control over monetary transactions as well as the economy with government bodies, central banks and regulators constantly engaging in intense debates over the risks of the bit coin to the consumer and financial stability and attempting to find potential regulatory mechanisms to govern transactions made by the bit con but failing considerably due to the absence of legal and fiscal classification to the bit coin. The attempt by the US government to regulate bit coin transactions by making them taxable may prove an effective way to provide this regulation. However, due to the globalization of crypto currency, more needs to be done by other nations in order to reinforce these regulations and otherwise these measures will be ineffective. The capacity of the bit coin to add a new dimension to the challenge facing the USD from other international currencies such as the EURO, can only be encumbered by the absence of these regulatory mechanisms as public confidence is continually eroded by advise from financial institutions to never store money that they cannot afford to lose with bit coin.
Moreover, the costless transactions enjoyed by bit coin users are now a thing of the past with cost recording an all-time high of 25$ in 2018. At its present state, the bit coin market remains too volatile to value, measure, save or trade. Furthermore, the bit coin market has brought about significant concerns on energy consumption with one transaction using 25 kilowatts of power leading to the centralization of participants in areas where there is cheap power and better cooling options. This centralization has brought about the security concerns associated with bit coin transactions.
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