Bitcoin

 is a digital payment system with no intermediaries or banks; it was invented by a person or group using the alias Satoshi Nakamoto, and released as open-source software in 2009.

Bitcoin has been described as a decentralized, peer-to-peer virtual currency that is used like money – it can be exchanged for traditional currencies such as the U.S. dollar, or used to purchase goods or services, usually online. Unlike traditional currencies, Bitcoin operates without central authority or banks and is not backed by any government.

Overview
Think of bitcoin as a sophisticated computer program that encrypts, verifies and records bitcoin transactions. While bitcoin users are anonymous, a public record or "block chain" is public and shared between Bitcoin system users. Mathematical proofs are used to verify the authenticity of each transaction.

Bitcoins are created by a process called "mining." Like mining for gold, the process is labor intensive. Mining serves two purposes. First, miners use software algorithms to add transaction records to Bitcoin's public ledger of past transactions and verify legitimate bitcoin transactions. For their efforts, Bitcoin miners get transaction fees, as well as the newly generated bitcoins.

Bitcoins can also be bought and sold online or at physical locations. A growing number of physical establishments and exchanges allow customers to buy and sell bitcoins using cash, credit cards, money orders and other methods. Bitcoins reside in a digital "wallet," where they can be used to purchase items from establishments that accept bitcoins.

Bitcoins can be traded for traditional currency at exchange rates that fluctuate. Bitcoin prices have been extremely volatile, and subject to wide price swings.

Risk
Consider these risks when evaluating investments involving Bitcoin:


 * Not insured. While securities accounts at U.S. brokerage firms are often insured by the Securities Investor Protection Corporation (SIPC) and bank accounts at U.S. banks are often insured by the Federal Deposit Insurance Corporation (FDIC), bitcoins held in a digital wallet or Bitcoin exchange currently do not have similar protections. Some exchanges do take out extra insurance to protect against a large-scale hack, but will usually not cover account-level breaches.
 * History of volatility. The exchange rate of Bitcoin historically has been very volatile and the exchange rate of Bitcoin could drastically decline. For example, the exchange rate of Bitcoin has dropped more than 50% in a single day. Bitcoin-related investments may be affected by such volatility.
 * Government regulation. Bitcoins are not legal tender. Federal, state or foreign governments may restrict the use and exchange of Bitcoin. No law requires companies or individuals to accept bitcoins as a form of payment. Instead, Bitcoin use is limited to businesses and individuals that are willing to accept bitcoins. If no one accepts bitcoins, bitcoins will become worthless.
 * Security concerns. Bitcoin exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware. Bitcoins also may be stolen by hackers. Platforms that buy and sell bitcoins can be hacked, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked. As a result, consumers can – and have – lost money.
 * New and developing. As a recent invention, Bitcoin does not have an established track record of credibility and trust. Bitcoin and other virtual currencies are evolving.
 * Bitcoin payments are irreversible. Once you complete a transaction, it cannot be reversed. Purchases can be refunded, but that depends solely on the willingness of the establishment to do so.
 * Anonymity. In part because of the anonymity Bitcoin offers, it has been used in illegal activity, including drug dealing, money laundering and other forms of illegal commerce. Abuses could impact consumers and speculators; for instance, law enforcement agencies could shut down or restrict the use of platforms and exchanges, limiting or shutting off the ability to use or trade bitcoins.

Role in a portfolio
Bitcoin investments should be considered similar to the gambling portion of your portfolio. In other words, only invest in Bitcoins if you can afford to lose all of the investment.

Asset class

 * Bitcoin is a commodity. The Commodity Futures Trading Commission (CFTC) has ruled that Bitcoin and other virtual currencies are a commodity covered by the Commodity Exchange Act.

Taxes
Virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:


 * Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
 * Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
 * The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
 * A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Investing / Financial

 * Bitcoin, on Investopedia.
 * CryptoCurrency Market Capitalizations

General

 * Bitcoin, on Wikipedia.
 * Bitcoin.org
 * , Motley Fool.