A completely digital form of currency known as the Bitcoin has captured the attention of many businesses as of late because it allows for easier and more convenient online transactions. Unlike PayPal, Bitcoin payments are not monitored by a trusted central authority, but rather payments are verified using a consensus in an immense peer-to-peer (P2P) network. This non reversible payment method does not freeze accounts, and has substantially lower transaction fees.

5 Benefits of Bitcoins

1. No third party involvement- With other systems, third parties potentially have access to personal information, not with Bitcoins! Bitcoin users have freedom to use their money any way they please, since no one can seize the Bitcoins.
2. No taxes- Since Bitcoins are free from third party involvement, there is no way to implement a taxation system for the currency.
3. No tracking- There’s no way that transactions can be traced back to the user unless the user publicizes their wallet address. A new address can be generated very easily, too, if a user does expose their wallet address to the public.
4. No risk of theft- The wallet addresses can only be changed by the owner, so there is no way someone can steal Bitcoins unless they have access to that person’s device. The Bitcoin system is unique in the fact that it requires physical access for verification as opposed to simply validation via passwords.
5. Irreversible and low-cost transactions- The address changes after each transaction, so it is impossible to revert once the transaction goes through. So there’s no risk for “charge-backs” in the Bitcoin process. In addition, Bitcoin users contribute to the network with every transaction, so they share the transaction cost burden, and costs usually decrease significantly as a result.

Drawbacks?

Businesses and individuals cannot rely on Bitcoins mainly because they are not a widely accepted method of payment, at least for now. There are a number of other concerns about Bitcoins including:

• Lost wallets: Unfortunately, if a Bitcoin wallet file is lost or stolen, it is gone forever. A Bitcoin user who experiences this can become bankrupt within seconds and have no means of recovery.
• Irreversible transactions: Though this can be a benefit, it is also a disadvantage for Bitcoin users. If the customer does not receive the goods purchased with Bitcoins, the transaction cannot be challenged or reversed.

While Bitcoins allow more freedom and convenience than traditional forms of payment, it helps to be aware of the risks involved. Since the system is still developing, users and potential users should be hesitant before fully involving themselves in the process.

From time to time, we provide information on topics that are of interest to our readers. For more information on bitcoins or the IRS guidance on taxation of “convertible virtual currencies” such as Bitcoin download the IRS virtual currency guide.