Earlier this year, the combined market cap for public cryptocurrencies surged around 70%, with billions of new investment dollars flooding into the market. Some express concern that there may be a bubble, but the market for this type of currency is still in its toddler state.
What is Bitcoin?
Bitcoin is a relatively new electronic payment system (also described as a decentralized peer-to-peer system). Unlike other electronic payment systems such as PayPal, Bitcoin has its own currency — a virtual denomination known as Bitcoins, which are sometimes referred to as virtual currency, electronic money or cryptocurrency.
The Bitcoin system is driven by a concept called blockchain, a public record of all transactions carried out within the Bitcoin network. The transactions are recorded in a public record that is collectively maintained by everyone who uses the currency.
When Bitcoins are received, they’re stored in a digital wallet in the cloud or on a local system to maximize security.
For a more detailed discussion of Bitcoin go to: https://bitcoin.org/en/faq
Who created Bitcoin?
An unknown person (or persons) using the name Satoshi Nakamoto published the rules to the Bitcoin portal in 2008. The Bitcoin network was launched in 2009. Nakamoto’s true identity remains a mystery.
How to create (earn) Bitcoins
According to BTCTrade, “Bitcoins are created as a reward for payment processing work in which users who offer their computing power, verify and record payments into a public ledger. Called mining, individuals engage in the activity in exchange for transaction fees and newly minted Bitcoins.
Bitcoins can also be obtained in exchange for products, services or other currencies. In fact, there are now exchanges and online malls that accept Bitcoin currency.
The pros and cons of Bitcoin
- No charge when making payments in Bitcoins, either locally or internationally
- Eliminates credit card fees for processing transactions
- Difficult for anyone to make fraudulent payments using Bitcoins
- Has its own currency and is not controlled by any central authority
- Has a volatile valuation; the price of a single Bitcoin has ranged from about $1,100 to nearly $1,800 in the last month, while a year ago it was less than $500.
- Exchanges are a tempting target for hackers
- Can be lost, or destroyed
- Lacks consumer protection
From an audit perspective, Bitcoins are basically the same as any other foreign currency. However, teams auditing clients with Bitcoins should include an IT specialist to verify the Bitcoin balances. Verification should include traditional confirmation letters to third-party wallet holders and verifying balances from the block chain.
Once the amount of Bitcoins at the balance sheet date has been determined, the auditor needs to verify that the amount is properly translated into the company’s reporting currency, in accordance with FASB ASC-830-20-25. The currency translation from Bitcoins to dollars is accounted for through an adjusting entry that includes the gains and losses reflecting changes in the exchange rate between Bitcoins and dollars. The same translation calculation must be made for receivables and payables that the company expects to settle in Bitcoins.
The future of Bitcoin
No one knows exactly what will come of the Bitcoin system, but it doesn’t appear that it will go away any time soon. However, there’s no doubt that Bitcoin and cryptocurrencies will have a far-reaching impact on how money is dealt with online.
By Winfred Paschall on CPE Blog and updated in May 2017.