Remember the guy who paid 10,000 bitcoin to have two pizzas delivered? The transaction, worth $41 when it took place on May 22, 2010, would grow to be worth $57,700 within a year. This past May, on the eleventh anniversary of what soon became known as Bitcoin Pizza Day, 10,000 bitcoin was valued at approximately $380 million. They were worth twice as much the previous month.
This story illustrates the mania surrounding Bitcoin and other cryptocurrencies. And it brings up some important questions about these new digital tokens’ utility as currency and as an investment. Are cryptos like Bitcoin a currency you use for purchases? Or are they an asset you should invest in like a stock? The way I see it, they’re a bit of both. And the rapid adoption of crypto points to what the future of spending and investing could look like.
What is crypto and how does it work as a currency?
Cryptocurrency is digital money that is decentralized, meaning that it has no central issuing authority like a bank or government. Transactions are made anonymously and recorded and secured using blockchain technology, which is similar to a bank ledger.
Purchased through crypto exchanges and stored in the user’s digital wallet, crypto facilitates faster, more confidential transactions without the typical fees associated with card payments. The downside? Mania-driven price volatility.
While crypto can be exchanged instantly between digital wallets, constantly shifting values make transactions a bit like gambling. Why spend your bitcoin today if it could double in value within just a few months? Conversely, why not get rid of it in case its value suddenly drops substantially?
To see how crypto works as a currency, we can look to El Salvador. The country became the first to adopt Bitcoin as legal tender in September of this year, purchasing 700 bitcoin and promising $30 worth for all Salvadorans who sign up for the cryptocurrency wallet app, Chivo. The rollout has not been free of headaches with reports of technical issues and attempts of stolen identity. And pricing volatility persists; Bitcoin’s value dropped sharply after adoption but recently surged to its highest levels since May. Where it goes from here is anyone’s guess.
Meanwhile in the U.S. where crypto is not yet a legal tender, a third of small businesses accept cryptocurrency payments including retailers like Overstock.com, AT&T and Starbucks. But, since the IRS considers crypto an asset not a currency, consumers are on the hook for any capital gains tax on their crypto transactions, making any purchase made using crypto a taxable event.
Aside from the current …….