Should You Put Bitcoin in Your Wallet?

Deciphering Bitcoin and Cryptocurrency

Bitcoin and other cryptocurrencies like Dogecoin offer an alternative to the US dollar, the Euro and other government-backed currencies.

Consumers and merchants have the opportunity to buy and sell goods and services without using hard currency or the banking system.

Why Do We Have Bitcoin and Cryptocurrencies?

Cryptocurrencies are appealing for three reasons.

  1. No government or group controls the currency’s value. There is no group like the US Federal Reserve that can decide to flood the system with more dollars, which decreases the value of each dollar. The production growth of Bitcoins and Dogecoins is set by each currency’s creators when the currency is released to the public. This makes Bitcoins and Dogecoins scarce — sort of like precious metals — and tends to increase the value of each Bitcoin and Dogecoin over time.
  2. Cryptocurrencies avoid conventional banking systems. Although Bitcoin and Dogecoin are not designed to provide anonymous transactions, both offer more privacy than is available with today’s banking system. Bypassing conventional banks cuts the fees for transactions, too.
  3. Speculators buy cryptocurrencies as in investment, similar to investing in precious metals. The value of a bitcoin was about $125 in October 2013, then jumped to more than $1,000 in December 2013, and as of June 2014 hovered in the $600 range. This volatility makes cryptocurrencies highly appealing to speculators.

What Are Cryptocurrencies Good For?

Today, Bitcoin, Dogecoin and other cryptocurrencies are a novelty — you don’t need them to pay for anything. Right now, only a limited number of merchants accept Bitcoin, Dogecoin, and other cryptocurrencies. But as of June 2014, there’s no well-known vendor accepting cryptocurrencies only.

You can pay for pizza, socks, legal services, and some Internet services with bitcoins.

It is likely online merchants will embrace cryptocurrencies at a rate faster than brick-and-mortar stores. Until cryptocurrencies are accepted by more merchants, it is unlikely Bitcoin and Dogecoin will see widespread consumer use.

The road to the widespread use of cryptocurrencies has been bumpy so far. Bitcoin, in particular, has gone through several controversies, including its use to buy contraband and the collapse of a large bitcoin exchange. There are at least four reasons bitcoin could fail.

The new IRS reporting requirements for cryptocurrencies have created a new burden. If you don’t keep detailed records of cryptocurrency transactions, you could create a big tax problem for yourself.