Separating Myth from Fact

Trading digital currencies is tax free:  MYTH AND FACT

This one is going to depend on where you live.  In the United States, everyone should be aware that digital currencies are considered assets or property similar to stocks, and not a currency like a US Dollar.  As such, all trading is subject to capital gains taxes.  Every time you trade one digital currency for another, or you trade it for fiat, your must report capital gains/losses.  If you trade Bitcoin for Litecoin, you need to report capital gains/losses.  If you trade Litecoin for US Dollars, you need to report capital gains/losses.  If you hold your digital currency less than a year, you are subject to capital gains/losses taxed at the same rate as your marginal tax bracket.  If, however, you hold longer than one year, you are subject to capital gains/losses at 0%, 15%, or 20% according to which marginal tax bracket you fall in to.  If you purchase and hold, there is no reporting obligation until you sell or trade what you have purchased.


Digital currencies are only used for illicit activities:  MYTH

This one should seem obvious, but to a lot of people it isn't.  In the early days of Bitcoin, the anonymity granted through using a wallet address not tied to an individual certainly led to Bitcoin's increased usage on illicit sites like the now defunct cult legend Silk Road.  Yes, Bitcoin was used to pay for drugs.  I'm also fairly certain that most Mexican drug cartels accept -- nay, demand -- payment in US Dollars.  Let's face it, the vast majority of payments for illicit products and services throughout history have been done in the form of government-backed fiat. 

While Bitcoin payments have undoubtedly been made for drugs, funded hate groups, and used to support terrorist activities the same can also be said for the US Dollar.  Like the US Dollar, digital currency has also been used for good.  As one example, I'll point to the Doge4Water crowdfunding that occurred in 2014.  Inspired by their 2014 Winter Olympics success in assisting the Jamaican Bobsled team, the Dogecoin Foundation, led by Eric Nakagawa, began collecting donations to build a well in the Tana river basin in Kenya in cooperation with Charity: Water. They set out to raise a total of 40,000,000 ($30,000 at the time) Dogecoin before World Water Day (March 22). The campaign succeeded, collecting donations from more than 4,000 donors, including one anonymous benefactor who donated 14,000,000 Dogecoin (approx. $11,000 at that time).

Today, Bitcoin futures are now trading on the Chicago Board Options Exchange and the Chicago Merchantile Exchange.  I'm wiling to bet there will be more than a few philanthropists that will do good with their new-found digital currency profits.

Bitcoin is a bubble:  MYTH

Bitcoin is not going to come crashing down to earth, and it's certainly not going to ever drop to a zero value.  Bitcoin is long past that point of no return.  There will be market corrections where Bitcoin significantly drops in value, but this is common for any asset, digital or otherwise.  No asset has ever increased in value in a straight line.  Bitcoin wasn't a bubble at $500, it wasn't a bubble at $1000 or $3000, it wasn't a bubble at $11,000, and it isn't a bubble today.

Bitcoin is volatile:  FACT

Bitcoin is definitely prone to enormous market swings, and for those that are risk averse there are certainly more conservative investment options at your disposal.  Nonetheless, the idea that Bitcoin in some way needs to be "tamed" is misguided.  Historically, Bitcoin's volatility is less than Twitter's stock.  Yes, there are times when as an investor you'll feel like you're on an enormous roller coaster.  However, most investors will find the risk worth the potential rewards.

Bitcoin is a Ponzi scheme:  MYTH

A Ponzi or pyramid scheme by definition involves older investors being paid back through the capital gained from new investors until the entire system of wealth transfer becomes unsustainable and collapses.  The workings of Bitcoin are transparent and completely open source.  There is no cerntralized body to aid or prevent Bitcoin's adoption, and its growth can not be restricted by any individual or corporation.  The price of most digital currencies, Bitcoin included, is solely based on what the market is willing to pay for it, not by a need to compensate other investors. 

Bitcoin can be hacked:  MYTH

Bitcoin is a protocol that has been peer reviewed by thousands of developers.  The underlying code powering Bitcoin is the blockchain technology itself, and this can not be hacked.  Digital currency exchanges, cloud wallet platforms, and even software wallets can be hacked however.  Bitcoin and the blockchain code itself has been stress tested more thoroughly than possibly any other piece of code ever written.  Exchanges and cloud wallets, however, are little more than websites which are no more secure than the platforms on which they run.  If you are worried about your coins being stolen, please take our advice and invest in a hardware wallet where you and you alone control your private keys.

Digital Currencies are a fad:  MYTH

Much like any other technology (include recent examples such as the internet and cell phones), the full utility of a technology is not realized until it has been in the market for some time.  Digital currencies are still relatively new, but the power that they represent is the motivating force behind their rapid adoption and ascent.  The power that these digital currencies hold is the promise of a currency that is instantaneously transferable, completely border-less, and is unable to be controlled by any government authority.  The desire to extricate oneself from government-backed fiat currencies that are in an almost constant inflationary state (see Venezuela and their recent currency collapse at the hands of their dictatorial government) is indeed a powerful motivating force driving the prices of digital currencies skyward.

Digital currencies are anonymous:  MYTH and FACT

If you've been following along on this website and have reviewed the important definitions page, then you know that fungibility is a very important topic in digital currencies.  Some currencies like Monero are fungible, while other such as Bitcoin and Litecoin can allow for a user's identity to be unmasked if they make predictable trades always from the same wallet.  This was one of the tactics used by the FBI to bring down the original operators of the Silk Road website which exchanged bitcoin for illicit products and services.  If every transaction performed uses a different wallet (which is easy to do), then even non-fungible currencies such as Bitcoin and Litecoin can be considered fungible for all practical purposes.