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Accounting, Accounting News

Bitcoins – New generation virtual currency used in online transactions

Friends of mine, also professional accountants, and I were talking about blogging and how can a blogger earn money in blogging and from using an internet when our conversation shifted to virtual currencies, which are currently used in the internet to transact online businesses.  It was my first time to hear about Bitcoins! I intially thought that Bitcoins are similar with Paypal, Payza, Liberty Reserves and other similar virtual currencies, but after a few research I realized it is not.

Paypal and other payment processors is different with Bitcoins in variety of ways, major of which is that, PayPal and other processors are just platform and it can’t be use without integrating you credit cards or bank accounts while Bitcoins are the units and at the same time the platform.

The bitcoin logo

This post discusses about:

  • What is Bitcoin?
  • Where Bitcoins come from?
  • Where Bitcoins are kept?
  • How to get Bitcoins?
  • Where can we use Bitcoins?
  • Famous articles regarding Bitcoins
  • Accounting treatment for Bitcoins

What is Bitcoin?

Browsing the web, I found some interesting facts about bit coins. And what is a Bitcoin?  Watch this video for you to learn the basics of Bitcoin.

So what is Bitcoin again? It is:

  • The first decentralized digital currency. Bitcoin is open-source. Nobody owns it; the most popular client is maintained by a community of open-source developers.
  • Bitcoin verifies transactions with the same state-of-the-art encryption that is used in military and government applications.
  • Using the Bitcoin network is free, except for a voluntary fee you can use to speed up transaction processing.

As mentioned in the video, it can be transfered directly from person to person via the net without going through the bank or a clearing house, which means:

  • fees are much lower
  • you can use them in every country
  • your account cannot be frozen
  • and there are no prerequisites or arbitrary limits

Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.

Where Bitcoins come from?

With paper money, a government decides when to print and distribute money. Bitcoin doesn’t have a central government.

With Bitcoin, miners use special software to solve math problems and are issued a certain number of Bitcoins in exchange. This provides a smart way to issue the currency and also creates an incentive for more people to mine.

Bitcoins are generated all over the internet by anybody running a free application called a Bitcoin miner.  Mining requires a certain amount of work for each block of coins.  This amount is automatically adjusted by the network such that Bitcoins are always created at a predictable and limited rate. Bitcoin miners help keep the Bitcoin network secure by approving transaction. Mining is an important and integral part of Bitcoin that ensures fairness while keeping the Bitcoin network stable, safe and secure.

Like real coins, Bitcoins are mined, but most of the Bitcoin users dont mine.  Bitcoin mining is a business and very competitive one. Mining only makes sense if you plan to do it for fun and thus don’t care if you make a profit, or if you can do it very efficiently and for a profit. If you want to get Bitcoins based on a fixed amount of mining power, but you don’t want to run the actual hardware yourself, you can purchase a mining contract.

Watch the video below to learn more how Bitcoin mining works:

In short words, if you want to be a Bitcoin miner, you need to buy a hardware and install a mining software.  Mining hardware uses Application-Specific Integrated Circuit chips (ASIC) which are designed specifically for Bitcoin mining.  That is so technical for an accountant like me to understand but what i know is that you need to have an appropriate hardware to start mining.

Mining can be done solo or with a group.  Group mining makes it fast to solve problems that solo mining which means payout is more frequent, but less amount, and each miner is given proportionate share to the amount of work provided.  Unlike group mining, solo mining takes long but the payout is more.

As discussed in http://www.bitcoinmining.com, Bitcoin mining is a process which includes:

  1. Buy hardware
  2. Set up a wallet
  3. Dowload free software
  4. Join a mining pool

You can have more information about Bitcoin mining when you visit http://www.bitcoinmining.com.

Where Bitcoins are kept?

Bitcoins are kept in a digital wallet which looks familiar if you use online banking. The Original Bitcoin Client is free, open-source software. You can download Bitcoin wallet at https://www.weusecoins.com/en/getting-started. After downloading, simply install the client on your Windows, Mac or Linux computer. It will automatically create a wallet for you and start downloading the transaction history.

Another way to get a wallet is to get one online at Coinbase or MyWallet. With this option you don’t have to install anything, but you have to take great care not to lose your password and you’re trusting that site to keep your wallet safe.

Once your wallet is set up, you’ll get your first Bitcoin address, which means you’re ready to receive Bitcoins!

How to get Bitcoins?

You might be wondering that, if Bitcoin miners creates bitcoin, where can an ordinary person like you can get Bitcoins?  Like real money, these are being circulated all over the web and in all countries were the use is allowed, and maybe even in some countries were the use is not apparently disallowed but no statutes currently is governing its use.  These are also traded!

Some most common source of Bitcoins:

  • Not the most convenient way, but bonus programs offer small amounts of Bitcoins when making other purchases, forcompleting surveys etc.
  • See if there are local Bitcoiners in your area at LocalBitcoins.com and TradeBitcoin.com!
  • Physical Bitcoins are available through Casascius and BitBills. Those places only accept Bitcoin, but you can get them with a credit card through MemoryDealers. You do pay a markup for the production and delivery, but it’s a fairly easy way to get moderate amounts of coins. Plus the physical coins make a great and memorable gift!
  • For larger purchases there are several currency exchanges, such as Mt. GoxBitstampCampBXIntersango andVirtex (CA).
  • Fund your exchange accounts or buy Bitcoin directly at one of over 700,000 locations worldwide via BitInstant.
  • If you prefer skipping the exchange and dealing directly with other people you can head over to Bitcoin OTC.

Where can we use Bitcoins?

Now that we know what Bitcoins are, where do they came from and where can we get some, let’s check where can we use Bitcoins.

You can use Bitcoins in buying stuffs in the internet!  Yes, like a real money.  Imagine, gold and other minerals are tangible and have physical value but these, Bitcoins, said to be produces through mining using a computer have the same value.  I can hardly believe it, but yes, amazingly it has value and are really used by large companies accross the globe.  Some countries even consider it as a legal tender.
  • You can find lots of Bitcoin-related services on the Trade page in the Bitcoin Wiki.

Here, you can see a list of online and real world businesses that currently accept Bitcoin.  It is an amazing fact that thousands of businesses accepts this digital currency that really has no tangible form you can access the list, HERE.

  • Check out Bitcoin’s largest online auction house at BitMit!
  • An increasing number of physical stores, restaurants and other venues accept Bitcoin as well. Check Bitcoin Traveland Bitcoin Navigator to see if there are any in your area.
  • Turn your Bitcoins into gift cards from Amazon, Barnes & Noble, iTunes and many more at SpendBitcoins.com. Or get gift codes for services like XBoxLive, PSN or iTunes instantly online at Bitcoincodes.com.
  • Buy music, ebooks, wallpapers and other downloadable content at CoinDL!
  • You might also want to check the Bitcoin Marketplace forum on Bitcoin.org.
  • Over-the-counter trading is being done via IRC chat in Bitcoin OTC (#bitcoin-otc on Freenode).

The most popular Company that is now accepting Bitcoins is the WordPress! This is the number 1 blogging platform in the world. I am a blogger, started purchasing a domain and is writing my blog using WordPress platform.  I am paying my the WordPress for mapping my blog to my domain using PayPal and never thought something like Bitcoins can be used.

Famous articles regarding Bitcoins

Famous magazine, including Forbes, published certain articles that are useful for us to understand more what is Bitcoin and how it is used, including the current issues it currently face.

Jon Matonis has many other articles in Forbes regarding Bitcoins and it is indeed an interesting read.  I suggest you read them as well so that you will get informed of what is currently the trend in the global economy.

It is also helpful to note that use of Bitcoins faces certain regulatory measures like one article written by Aaron Stanley in his article, Bitcoin aims to counter regulatory pressure, in Financial Times.

It is indeed amazing to know that there is this existing digital currency that is freely circulating in the network with less regulation but with increased security.  The risk, however, that this may be used in money laundering and illegal activity is high due to the anonymity of its users.

How much is a Bitcoin worth?  I read article that says 1 BC = $100  more or less.

Accounting treatment for Bitcoins

Being a virtual currency that is used use purchase goods and services in the internet, I first thought that can be considered as cash or perhaps a cash equivalent.  Bitcoins can be highly liquid.  But then again, a friend of mind raised the issue that it is not a legal tender to be considered as cash and cash equivalents.  He said in a separate discussion with other members of our firm, it has been discussed that Bitcoins are considered inventories that are held for trading, or for exchange to other goods and services.

The questions is why inventories, not a financial instrument?  As we know, financial instruments are contractual rights and obligations to receive or deliver cash or other financial instruments.  Remember that in the above discussion, it was discussed that Bitcoins are open-source, no body owns it.  Therefore if you possess it, you own it, not like a coin or a bill that is being issued and regulated by the government.  There is neither a contractual right or obligations here with other parties for it to be considered financial instruments.

Well, the inventory categorization might just be applicable for Bitcoin miners and traders but for simple business who do not transact largely on Bitcoins, maybe we can just considered these “Other current assets”. This is not conclusive but just an unestablished opinion.  Use of Bitcoins is increasing and the accounting standards board might need to release an interpretation on how it is really accounted, for uniformity.

Also transacting with Bitcoins may have tax implications especially in mining and trading these.  Read https://en.bitcoin.it/wiki/Tax_compliance for more information.

Related References:
  1. http://bitcoin.org/en/
  2. https://www.weusecoins.com/en/
  3. https://en.bitcoin.it/wiki/Main_Page
  4. http://www.youtube.com/user/weusecoins?feature=watch
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About leecpa

Orlando Calundan is a Certified Public Accountant. He has exposures in audit of financial statements of entities in various industries such as real estate, food (quick service restaurants), manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements. http://calundan.co

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