When it comes to Bitcoin, there is a lot of confusion out there. What exactly is a Bitcoin? Is it a digital currency? Is it an asset? Is it a commodity? The answer is: all of the above.
Let’s take a closer look.
A Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto. Transactions are verified by network nodes through cryptography and recorded in a public dispersed ledger called a blockchain.
Bitcoin is unique in that there are a finite number of them: 21 million.
Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services.
As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment.
The IRS classifies bitcoins as property, not currency. This has come with some benefits and some challenges.
One benefit is that capital gains taxes don’t apply to bitcoins, at least not yet. One challenge is that bitcoins are not widely accepted as payment by most businesses.
So what exactly is a Bitcoin? It’s a digital asset, a payment system, and (in some cases) a currency. Its value comes from its rarity and its usefulness as a way to make secure, decentralized transactions without the need for a third party such as a bank or credit card company.