The Internal Revenue Service has filed a John Doe summons in an attempt to acquire data from Coinbase, a digital assets exchange company. If successful, digital currency users who have been using Bitcoin and other alternative currencies to dodge paying taxes could be fined by the federal agency for evading taxes.
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However, a Bitcoin user has filed a motion to block the summons and a hearing will be heard on January 19, 2017.
The value of Bitcoin, the crypto currency that many are interested in but few understand, hit $1,153.02 on January 4, nearing its all-time high of $1,165.89, which it reached on November 30, 2013.
Since January 4, the currency has plunged roughly 40 percent according to CoinDesk. The recent volatility has sparked a renewed interest in Bitcoin and its future.
In a nutshell, Bitcoin is a decentralized currency with finite limits. Bitcoin users set up a wallet that gives them a unique address, similar to an email, allowing them to exchange Bitcoins with people around the world. Every transaction since the very beginning is recorded on an unforgeable ledger, known as the blockchain.
It is a revolutionary technology in the currency world, and some believe what we are seeing today is only a fraction of its potential.
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“There’s a Marketplace because people believe the technology of Bitcoin has just begun,” Nick Spanos, founder of the Bitcoin Center NYC, said. “It’s like we just invented the wheel and soon we’re going to have the train, the motor car, the airplane - were going to have all these things come about through Bitcoin and the block chain.”
Something that makes Bitcoin unique is that unlike the U.S. dollars, which can be printed whenever the government sees fit, a centralized government does not control it.
"With Bitcoin, it's kind of controlled by the people," Charlie Lee, director of engineering at Coinbase and creator of Litecoin, said. "So, it's what they call a decentralized currency - it's because people are running the software that controls Bitcoin."
Yet despite its recent upward momentum, not everyone is convinced about Bitcoin’s value. Investors especially have been hesitant to buy into the new currency.
"With Bitcoin, I appreciate that the trend has been higher," Sameer Samana, global quantitative strategist for Wells Fargo Investment Institute, said. "That value could've gone up as much as you know, who knows how many thousands percent in 2013, only to crash back down in 2014 and 2015. That's not what you want your paychecks to be doing or your investments."
Ever since its creation in 2008, the cryptocurrency has been characterized by volatility, causing potential users or investors to think twice. A top concern: how do you determine its worth?
"It's really hard to define it - almost a speculative commodity. For something like oil and for something like gold you can at least figure what the supply and demand picture looks like,” said Samana. “But with Bitcoin, just looking at it over the last few years, this thing is either the best store value since fiat paper currencies or it’s something that should be avoided at all costs based on just how it’s traded the last five years."
So, the future of this innovative currency then relies on defining its “intrinsic value.”
"Bitcoin's genius is not the ability to be untraceable, it's the ability to be un-censorable - that's the value it provides," said Lee. "The value is being able to send money that cannot be blocked."
When donations to the site WikiLeaks were blocked by services such as MasterCard, VISA, and PayPal in 2010, the site nearly folded until it opened funding portals to digital currencies like Bitcoin and litecoin.
Cyber security hacks, like the incident in August of 2016 where $60 million worth of Bitcoin was stolen from Bitfinex, one of the world’s largest Bitcoin exchanges, have also raised red flags for investors.
Despite its volatility and inherent cyber security risks, it appears people are slowly beginning to understand Bitcoin’s value. The Winklevoss twins have filed an application for a Bitcoin ETF, and if approved by the Securities and Exchange Commission, Bitcoin could see explosive growth.
The currency has also seen a dramatic increase in places that are experiencing economic turmoil. In November 2016, when India’s government decided to ban large currency bills, the weekly volume of Bitcoin trading in the country nearly doubled the following month, according to a report by Quartz media.
Bitcoin has grown into a service that is used by more than 100,000 merchants, according to a 2015 survey by BitPay. Some believe the technology could help shape the future of the global banking industry.
But for now, Samana says Bitcoin is still a risky proposition.
“For most of our clients, and just other investors in general, I think a lot of these thing will have a positive from the standpoint of consumption and how they store and use their net worth and income. But people really shouldn’t view it as an investment.”