Bitcoin

Too Good To Be True?

BITCOIN BUBBLE:
TOO GOOD TO BE
TRUE
Authored by: Kevin Leyva Lopez

Contents
CONTENTS...................................................................................................................................... III
INTRODUCTION..IV
METHODOLOGY...IV
RESULTS.V
CONCLUSIONVI
CITATION......VII

Bitcoin
Too Good To Be True?
Introduction
Technology has given rise to many new trends, ideas and business which quickly expand
and propagate worldwide. Bitcoin is one of those ideas. Bitcoin is a crypto-currency that was
invented in 2009 and has gained, both, good and bad criticism. The currency is all digital, there
are no printed bills, coins or anything that is monetarily physical (Pete Rizzo). It is all kept in
digital format and instead of being backed up by gold or silver, like traditional currency, it is
backed up by mathematical formulas which people solve around the world using their
computers processing power. Every time a block is solved a new bitcoin is created, the person is
rewarded 25 bitcoins (Bonney). Also solving these mathematical formulas help verify that every
transaction is legitimate and no counterfeit bitcoins are introduced into the market. There is a
market cap set in the bitcoin protocol that limits how many bitcoins that can ever be made, this
number is set at 21 million. The crypto bitcoin currency is also not centralized meaning that not
just one institution can make it, everyone that has a bitcoin controls the currency. The question is

whether or not bitcoin is an overall safe currency that can be used in everyday transactions? The
fact that bitcoin is a fairly new system, it does not seem fit for safe everyday use.
Methodology
Research to see whether or not bitcoin is a safe form of currency took many forms.
Forums, databases and websites were used. Many of which were reputable and well known for
their articles on finance and banking. The first step to evaluating the safeness of bitcoin was to
see how well protected bitcoins really are? Second of all, how well has bitcoin stood up to other
currencies and what its fluctuation is like? Finally, how is bitcoin legally classified and what
implications you must go if bitcoins are used as a form of payment?
Results
Bitcoin is actually the pioneer of virtual currency and there are many other forms of
virtual currency. The software that bitcoin uses is actually open source and anyone can have
access to it, which is how the new bitcoins are created or mined by people all over the world
(The Bitcoin bubble; Digital money). This leads to answer to the first question, how well are
bitcoins protected? Surprisingly the bitcoin system itself is very safe, every computation, or
mining as it is called, verifies every transaction that occurs around the world and sees that no
counterfeit bitcoins are introduced into the system. The transactions are all anonymous, yet they
are available online to be seen by everyone (Rizzo). The downfall of bitcoin is the way the
individual stores it bitcoins. There are two ways to store your bitcoins, the first is by holding
them yourself in a USB drive and having the key to them or having a third party application
hold the for you. Both have very high risk because once a bitcoin leaves your virtual wallet you
cannot undo the transaction. If any hacker is able to crack past your security or even your wallet

providers, all those coins that were in your wallet are gone. Also since your bitcoins are not
controlled or regulated they are not protected by FDIC and there is no compensation for you loss
(Lee). In the past couple month there have been hacks on bitcoin wallets where losses resulted in
more than a million dollars.
The second form of assessing how safe bitcoin currency is for its everyday use, is finding
out how well the virtual currency stacks up to the rest of the worlds currency. Bitcoin is actually
not classified as a currency by the United State, but instead it is classified as a property. For tax
purposes, paying wages in property is a nightmare due to all the paperwork and red tape it
involves, but if you are using it for small transaction it is not much of a hassle (Lane). It is
actually better to pay your employees in stocks than in bitcoins because you dont have to pay
double taxes like you would with bitcoins. Also bitcoin is much faster and convenient because
there are no bank fees that have to be paid. On the other hand, when trying to secure your
financial situation you want something that is fairly stable that will not lose its value with time or
easily influenced with world events. Bitcoin is not the kind of currency you want to have if you
are trying to secure yourself. Bitcoins have a huge fluctuation patter that has a minimum of 5
dollars and a maximum of 1,300 dollars, which leaves you with a very enormous range (Toren).
With this type of fluctuation it might as well be considered a penny stock, in which case all
investors know it is a gamble.
The last characteristic of assessing whether or not bitcoin is a safe method of currency is
how it is legally classified and its legal implication. The United Sates does not consider bitcoins
a form of currency for any type of purposes. It is only considered as a property which an
individual owns. If any wages are paid in bitcoins there must be money set aside, equal to the
market value of bitcoins that must be paid to the IRS in wage withholdings (Lane). Also since

bitcoin is not considered a form of currency there are no organization that protects the virtual
currency from theft. If any bitcoins are stolen from you or your wallet provider there is no
compensation for your loss like any other bank would have set in place (Lee). As a matter a fact,
if you make any gains managing bitcoins you must pay taxes on those gains to the U.S. in legal
tender (Lane). With all the legal implications of bitcoins it is not a very convenient or safe form
of currency. There is nothing to protect the person that is holding bitcoins making it very volatile
and potential for a huge loss.
Conclusion
After all research was done and articles were read, the hypothesis stands that bitcoins are
not a safe form of currency to be used for everyday transactions. Bitcoin value is very volatile,
having a big range of value which changes every minute. Also the way you store bitcoins could
also be a downfall, a cyber-attack could wipe you out and leave you with nothing. Although if
you know well enough, you currency could also be very well protected depending on the caution
you take. The way the system checks for transactions is very safe and powerful involving all
computers that are involved in mining the coins. Finally, in the legal aspect, bitcoins are not
legally protected at all and also there are some regulations in place like paying taxes on any gains
made. If it were a safe way of currency there would be legal protection for that money and its
value in case a loss happens. If anything, bitcoin is a speculators heaven. The huge fluctuation
that it has could lead to a huge gain which is what a speculator is always looking for. Unless you
have money you can afford to lose dont manage bitcoin currency.

CITATIONS
"The Bitcoin bubble; Digital money." The Economist 30 Nov. 2013: 13(US). Academic OneFile.
Web. 17 Apr. 2015.
Bonney, Jeremy. "How Bitcoin Mining Works - CoinDesk." CoinDesk RSS. CoinDesk, 20 Mar.
2015. Web. 14 Apr. 2015.
Lane, Christine, and Gene Magidenko. "The US Federal Taxation of Bitcoins and Other
Convertible Virtual Currencies." Computer and Internet Lawyer 32.4 (2015): 11-4.
ProQuest. Web. 16 Apr. 2015.
Lee, Timothy. "Four Reasons You Shouldn't Buy Bitcoins." Forbes. Forbes Magazine, 3 Apr.
2013. Web. 17 Apr. 2015.
Rizzo, Pete. "What is Bitcoin? - CoinDesk." CoinDesk RSS. CoinDesk, 20 Mar. 2015. Web. 14
Apr. 2015.
Toren, Mathew. "Bitcoin: The Good, the Bad and the Ugly." Entrepreneur. Entrepreneur, 16 Dec.
2013. Web. 18 Apr. 2015.