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Cryptocurrency Basics

Bitcoin Basics 1.1

Editor’s Note
The following transcript was taken from one of Kelly’s live classes for tax professionals.

What on earth is all the fuss about?

In January 2011, the price of a bitcoin was about 30 cents. Don’t you wish you had bought 50 bucks worth back then? In June 2015, when I jumped in, it was about $250. If you see the little blip right around the end of 2013, that’s when it jumped up to about $1,100. You can see the price in late 2017 jumped up to about $20,000. If you had bought $100 dollars worth of bitcoin in January of 2011, you would have gotten about 333 bitcoins. Today at roughly an approximate price of $8k, you’d have $2.6 million. When I had my three bitcoins I missed out on selling it at the peak.

The next cryptocurrency that came out that caught my attention was called Ether or Ethereum. How many of you have heard of ether? Probably about 65% of you. So when ether came out, it was right before Christmas holiday, I believe in 2016. It was just about a dollar around Thanksgiving, and then I went to a family gathering down in California. I was talking to my nephew and he was curious, so we looked at the price and it had already shot up to like five bucks and I’m like, dang, Sean, I think I’m going to buy some of this. Sean just graduated with a degree in finance. He’s like, I think I’ll wait till it comes back down. As soon as I got home, I started buying it, and I bought it and I bought it. I bought it at five bucks. I bought it at seven bucks. I bought it at 10 bucks. I bought it at 20 bucks. I bought it all the way up until I got to about 300 bucks. And then I said, okay, that’s enough.

That was just before this big spike. If I had sold all my holdings, when the spike of Bitcoin went to $20,000, I would have retired with $250,000 and do I still kick myself? I sure do. And what I want to make sure is that if there’s another bubble, that I don’t miss it. Now, trading is not for everybody, but there’s a lot of people around the world doing exactly what I’m doing. And they’re going to start realizing that there’s tax consequences if we do that.

So one last caveat: it is predicted that the price of Bitcoin is going to $100,000. I do not doubt it. There’s a good chance it’ll go higher than that. How long it’s going to stay up there? I don’t know.

Question: I was wondering why it will go up? Answer: I’m not predicting it. Others in the market are predicting it. There’s lots of reasons behind it that we could go into. I just don’t have time in this training to go into those kinds of fun details, which I’d love to explore, but there are reasons why they think that. And some of these other slides I think will give you a hint as to why they think that.

SLIDE

This slide shows you the kind of interest there is in Bitcoin and other cryptocurrencies. June of 2015 is a marker for me because that’s when I started buying.

This particular wallet is called Blockchain, they keep track of their users. In 2015 of June, they had about three and a half million users. Today they got about 43 million users. So the projection is there’s lots and lots of people that keep coming in to this, I’ll call it a market. There’s lots of people interested.

Please note that the blockchain technology is not just about cryptocurrency. That is one wonderful application of blockchain. And I’m only going to hint at those other applications during this training, because they don’t have anything to do with taxes. But on my educational website, Life with Crypto, we go into all the other uses of blockchain such as privacy and security. There are blockchain applications that’ll do all kinds of things for nonprofits, for all kinds of businesses. The largest businesses in the world are almost all adopting blockchain, but they’re doing it quietly. They’re not telling us about it unless you go do your research. More’s coming.

SLIDE

One more slide to convince you why this is a big deal right now. This is a chart that compares bitcoin to the S&P 500. Bitcoin is the blue line. The S&P 500 is that little red line down at the bottom that looks like it’s lost its heartbeat. This chart is telling you that bitcoin could be a better investment than the S&P 500.

Who do you suppose is starting to pay attention now that they’re noticing charts like this? Yep, the banks, the IRS. Who else is starting to notice? Yep, the Stock market. Okay I call them, and many people call them “the institutional investor.” Institutional investors are paying attention. How many of you have heard of BAKKT? Look that one up. BAKKT is … I might get my language wrong, but the concept I think I can get right. They are a new firm. They were founded by, I think ICE (Intercontinental Exchange). I forget what it stands for. They’re the company that created the Stock Exchange. I don’t know if it was the New York one or the NASDAQ one (it’s the New York Stock Exchange), but anyway, they’re the founder of one of those stock exchanges. They’ve created their own custody company. They’re making it possible for institutional investors to trade cryptocurrency without having to control a wallet. They’re going to “custody” the coins for them. They just opened their doors for business. More is coming, is what I’m trying to get at. More trading is coming, more people are getting involved, more people having potential tax liability.

SLIDE

Some more Bitcoin basics. So, how do you get it?

• A friend can give you some, I don’t have any friends like that.

• A friend can sell you some, like the guy that tried to be my friend and sold me a laptop.

• You can buy it from an online crypto exchange, which is how most people seem to get it these days. Coinbase.com is the most popular, at least in the U.S., but not around the world.

• You can buy it from a Bitcoin ATM. I was on vacation a few months ago in little ole, Hot Springs, Arkansas, visiting some family and friends. I went to a raw food restaurant. They had a Bitcoin ATM in there! They had three people in the store and it was the newest, most new age looking Bitcoin ATM. I was so excited! My friends and I were there for a crystal conference. We went and looked at it and I said, you guys need to buy a little bit of Bitcoin. So we all spent 20 bucks and we bought some Bitcoin and it was easy. The next day I went back and bought $20 more and I videotaped it! If you’d like to see that video, it’s on my website for free.

• You can also work for it. You can be a contractor for hire. I have a client that is a (software) developer. He works with projects around the world and he gets paid in ether. You could be an employee and get paid in Bitcoin, but then what do you do?

• You can mine for it. I heard somebody here say that her husband has mined a bunch of cryptocurrency. My nephew decided not to buy ether because he was going to wait for the price to come down. Instead, he decided to go figure out how to build his own little mining rig. Just a simple little computer that would mine, ether. He mined enough either to pay for his equipment and said, that’s enough. Audience: Can we can talk more about mining and how that works? Answer: We will, in the blockchain technology section.

• You can also sell products or services and get paid in bitcoin. I’m kind of hoping someday I can get paid for doing a tax return in Bitcoin. I’ve had one client do that.

But there’s a caveat. There is an issue with that.

Question: Anybody want to guess what that issue might be?
Audience: Tracking it?

There’s a big issue and that’s not it.

If I want to sell my products or services and get paid in Bitcoin, the biggest issue is that banks are scared!

I bank with US Bank. I have been told by my banker: do not accept Bitcoin or other cryptocurrencies and convert it to cash and then put it in a US Bank account. There’s a good chance they’ll shut down all my accounts. I was absolutely surprised to find that out, but that’s only if I do it as a business. If I trade cryptocurrencies personally and then sell them back into cash and then put that in my bank, he said that’s no problem, but as a business, they don’t like it. So I’m a little bit surprised by that.

Audience: Why?
Answer: Probably because they’re worried about money laundering. That’s probably a good guess. If anyone’s interested in that, I highly recommend checking out some of the cryptocurrency merchant providers, because they can pay you in bitcoin and you don’t convert it back into cash. They just leave it in bitcoin. Check out BitPay.com