„I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.“ – This is how Satoshi Nakamoto introduced his concept of a new digital currency during the height of the 2008 financial crisis. In a nine-page whitepaper („Bitcoin: A Peer-to-Peer Electronic Cash System“) he describes the theoretical framework of Bitcoin and published it on a big cryptography-forum on the internet (the original post can still be found here). This concept gained him a lot of fame in the crypto-community and with the help of some of the forum-members he could code the first version of Bitcoin, which went online in January 2009. Ever since this has been considered the birth of Bitcoin.
Many attempts have been made to find out who is behind the pseudonym of Satoshi Nakamoto, but it remains unclear who that might be. This resulted in lots of conspiracy theories: Newsweek claimed that the California-based Engineer Dorian Satoshi Nakamoto is who we are looking for. He himself denied the accusation. The founder of an early Bitcoin-project (‘Bit Gold’), Nick Szabo has also been linked to the pseudonym. However, the founder of Bitcoin remains a secret.
In 2010, Satoshi Nakamoto withdrew from the project and handed over the website bitcoin.org and the power over the source code of Bitcoin to a few famous members of the crypto-community. In April 2011 he officially resigned through an email saying „I’ve moved on to other things. It’s in good hands with Gavin and everyone.”
What is Bitcoin?
The story behind Bitcoin might sound rather mysterious, but the reality of this virtual currency is more than present. Bitcoin is a digital currency of a worldwide decentralized system. Through this, Bitcoins can be transferred from one person to another (‘peer-to-peer’) without any banks or financial institutions confirming the transactions. „A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.“
Bitcoins are stored in a wallet, which is encrypted through a private key. Only the owner of the private key has access to the wallet and the digital currencies stored in it.
Another important aspect of Bitcoin is, that there is no transaction limit or maximum amount of transactions. There’s also no geographical limits for transactions: the only requirement is an internet connection.
The Characteristics of Bitcoin
In total, there are 21 million Bitcoins and their quantity is definitive, in contrast to fiat-currencies (e.g. Euro, USD) which can be re-printed anytime and in any quantity. As of now (July 2019), 17,85 million Bitcoin have been issued, of which 4,85 million have already been lost forever. This can happen if the owner, for example, loses the private key. Aside from that, Satoshi Nakamoto has about 1 million Bitcoin on his wallet and there is no information on whether someone has access to them or not.
To prevent Bitcoin from being copied or issued twice (‘double spending’) some type of digital accountancy is needed, which verifies the authenticity in real-time through the use of an algorithm. To ensure this, every single transaction is put into the blockchain, which can be viewed by anyone. This might sound very intriguing at first, but this elaborate database only shows pseudonyms of the users. This means, that only the sending and receiving address, the transferred amount and the date can be seen. The real identities of the users and the purpose of the transactions remain undisclosed.
During the early stages, Bitcoin’s reputation was mainly tied to the dark web, where it was a common form of payment for illegal products, e.g. drugs and weapons. The blockchain made it hard to find out who really is behind a pseudonym. However, governments and authorities have started to develop institutions that deal with these types of cyber-crime (e.g. the Cyber Crime Competence Center in Austria) in order to identify the people behind cyber-crime tied to virtual currencies. More about this topic can be found in our blog post: How serious is the persuit of crypto-taxes?
The first documented transaction that used Bitcoin happened in May 2010: two pizzas where exchanged for 10.000 Bitcoin. Back then, the price of one Bitcoin was just under one cent, while now it is at USD 10,550 (July 2019). In June 2011, the scandal around WikiLeaks and them accepting Bitcoin as donations caused the public to pay more attention to virtual currencies. The topic finally went mainstream in 2017 when the media included Bitcoin and the increased amount of transactions pushed it to an all-time-high of USD 20,000.
The Taxation of Bitcoin
These extreme gains made financial authorities realize that they can no longer ignore Bitcoin and have to set up rules and regulations. Many countries have set up their own legal frameworks on taxation of Bitcoin. Similar to stock trading, any person making profit off trading crypto-currencies has to tax them accordingly. However the declaration and taxation is not something that the bank or a depository manager automatically does, it is the responsibility of the trader to do so.
According to the current legal situation, Bitcoin and other cryptocurrencies are subject to income tax. If the period of time between buying and selling the asset is not longer than one year, it is seen as speculation (like stocks) and has an effect on the progressive rate of the income tax (max. 55%).
However, if the period between buying and selling Bitcoin is longer than one year, any realized profit a natural person makes is tax-exempt.
For businesses, any crypto-trading is always subject to a corporate tax of 25%.
For more information on the taxation of cryptocurrencies in other countries visit our blog series Countries & their Crypto-Laws.
The Future of Bitcoin
Due to its characteristic as a Store of Value, the crypto-community views Bitcoin as a type of gold 2.0. This is the main idea that Satoshi Nakamoto also had in mind when he referred to the creation of Bitcoins as mining. He determined that every four years, the amount of mineable bitcoins halves itself. He says:
“As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: – boring grey in colour – not a good conductor of electricity – not particularly strong, but not ductile or easily malleable either – not useful for any practical or ornamental purpose and one special, magical property: – can be transported over a communications channel If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it […].”
Stay curious – we will take a closer look at more coins in our upcoming blog series.