Crash Course Bitcoin. Currency Of The Future

PUBLICATIONS / Newsletters / 2013 / Newsletter November

Crash Course Bitcoin. Currency Of The Future

You have seen it in the news. After years in the shadows, Bitcoin has emerged.
Like everything new: Bitcoin brings in excitement, speculation, rumor, and downright confusion. And rightly so. After all, it’s an entirely new global monetary system.
Both a currency and a payment network for that currency.
What is it? Where will it go?
Stay tuned for a crash course in Bitcoin.
 
What is Bitcoin?
Bitcoin is two things: it is a digital currency unit and it is a global payment network with which one sends and receives those currency units.
There are number of characteristics:
  • There is a maximum of 21 million Bitcoins worldwide, which are released over time at a declining rate. There is no inflation. There is a finite supply.
  • Each Bitcoin is unique and cannot be faked.
  • The price of a Bitcoin is determined by supply and demand. They are traded on currency exchange sites.
  • Bitcoin is unregulated. There is no central authority or company that controls Bitcoin. Transactions can be made untraceable and anonymous. No banks, central banks or payment providers (like Paypal and Western Union) need to be involved in instant transactions worldwide.
  • Bitcoins are fungible and can be divided into bits for small payments.
  • Bitcoins are more and more accepted by merchants and websites worldwide.
 
So how does it work…?
…You might be asking — Keep reading…
To use Bitcoin you download a “wallet”. A piece of software that operates as your bank account.
As soon as this piece of software is installed one can receive and wire funds anywhere in the world with a click of the mouse. Just as easy as sending an email.
It is a free and open-source system downloadable from Bitcoin.org. Transactions are sent and accounts are secured using what’s known as “public key cryptography.”
You have a public key (bank account) and a private key (password). Anyone can send funds to your account and you can send money to everybody that you know the account of. But funds in your wallet can only be accessed with your private key. As long as you keep that safe, your funds are safe.
Accounts look something like this:  3FWWgdwoijfwd64Vdeeojiw5334wfwWww
Put that on your website or blog, invoice or business card and everybody can pay you. Instantly, without costs and relatively anonymous.
 
Why is it valuable?
Because it is useable and scarce.
As mentioned, Bitcoin offers users a lot of benefits. Instant payments and low costs. It gives individuals the means to perform transactions and engage in business in ways they see fit, without restrictions, accountability and interference. Usability for Bitcoins is thus very high.
We also mentioned that Bitcoins are finite. There is not a central authority that can print Bitcoins “to stimulate the economy” and there is no way of changing that. It is a mathematical certainty. Bitcoins are scarce.
Bitcoin is not very different from the currencies we use every day: pieces of paper that we assign a certain value to. Besides, most of the currency used today is digital as well. One’s and zero’s in the computer of a bank with no real backing.
 
How to obtain Bitcoins
There are two ways to obtain Bitcoins. The first one is to provide an (online) service. Find a service that someone is willing to pay for, perform it and have your clients wire funds to the account as discussed.
The second way to obtain Bitcoins is to buy them on the open market using an exchange like: MtGox.com or (mainly for Europeans) BitStamp.net. As soon as you have Bitcoins in your wallet you can make instant payments to people all over the world.
 
Are there any downsides to Bitcoin?
Let us discuss a few objections to Bitcoin.
1. Isn’t Bitcoin used by criminals?
Probably. But so are USD Dollars.
And we are sure that criminals shop in Walmart. And take their kids to McDonald’s. Should we ban them all?
One of the early markets where Bitcoin was used was Silk Road, an online black market where everything from illegal drugs to assassins could be purchased. This fall, the US authorities terminated this website.
However that site is being set up again and Bitcoins is getting now known to general public.
2. Is Bitcoin really an alternative to our current system?
At the current stage no. There are simply too few people who actually use it. And it is unlikely that it will change soon. It will probably be existing parallel to our current monetary arrangements. But because it has such great benefits it will likely increase in popularity. We expect it (or a new alternative of it) to become as regular part of our live as twitter is now. It will alter the way we view mediums of exchange and business in general.
3. Is it really anonymous?
Not really. When you put your public account code on your website people can link that to you. Also, when Bitcoins get transferred, a piece of data will be added that that describes its history of being in your account.
The only way to pay anonymously is to use services that stack Bitcoins and hussle payments from it. Then the source of each individual Bitcoin is untraceable.
4. Does the government like Bitcoin?
We assume that the government is looking at Bitcoins and wants to do what governments always do. Regulate it and take a part of it to give to their sponsors / special interest groups. However, Bitcoin is such a decentralized system that it cannot be controlled. They could try to regulate the exchanges, and target businesses that accept Bitcoins. Fact is, the genie is already out of the bottle. Likely, it will follow the same path as the attempts to stop illegal downloading.
5. Can Bitcoins be stolen?
Yes. Although Bitcoins are saved on your computer or USB, they have to be stored somewhere. However, they are useless without your code. As long as you use a sufficiently complicated code, it will be very difficult to crack. When you make a few backup copies of your Bitcoin wallet on different locations you are also not at risk of losing all your funds when your hard drive crashes.
 
What do we think?
Good question. We think that there is future for digital currencies. It might be Bitcoin. It might be a future alternative that is not yet stained with propaganda. It might be a combination of the above.
The means of transferring funds at high speed and low costs should catch interest every international businessman.
We do think that at the moment most of the news regarding Bitcoin is speculative, but there might be huge movements as soon as the greater public understands what Bitcoin can mean for them.
That is why we think that people should be educated at this interesting opportunity.
Let us know what you think or if you have any questions.
 


Save Tax While Skiing

Next to skiing, hiking and opera, Dutch residents have an additional reason to love Austria: They can save a lot of money by purchasing a property there.
This is how a tax treaty can be used in their favor:
Dutch inheritance legislation is based on the rule that the heirs of a deceased person (decedent) who, at the time of his death, was resident of The Netherlands, are in principle taxed on all worldwide assets of the testator in The Netherlands.
The inheritance tax varies between 10 % and 40 %, depending on the degree of relationship between the deceased and the heirs (Article 24 Inheritance Law).
Based on the Article 3 paragraph 1 of the Inheritance Law, even if the deceased person at the time of his death was no longer resident of the Netherlands, the inheritance tax may be payable in the Netherlands. The tax duty does not apply only if the decedent was not a Dutch resident for longer than ten year prior to his death.
Luckily there are exceptions to these basic rules, often defined in bilateral tax treaties to avoid double taxation. Treaties, that The Netherlands concluded with other countries. In the field of inheritance and gift tax, the number of treaties is relatively small. One of them was concluded in November 2001 (Treaty Series 2002/27) between The Netherlands and Austria.
Under Article 5 of the said Treaty, real estate property located in Austria and owned by deceased Dutch residents, is being taxed by the Austrian inheritance tax. But in 2008, the inheritance tax in Austria was abolished. This leaves all Austrian houses and apartments belonging to Dutch decedents untaxed!
A simple calculation example to clarify the situation: A Dutch resident who owns a second home in the Alps, a house valued at EUR 500,000, dies leaving two children (=heirs) behind. The tax saving here represents 20% of the value of the property = EUR 100,000. (Should this house be located in The Netherlands, the children would owe EUR 100,000 on inheritance tax).
And it is getting better: Exactly the same rules apply to gift tax. Currently, based on the aforementioned Article 5, the donation of such an Austrian located property e.g. to the children of a Dutch resident, remains untouched by the gift tax as well.
For Dutch residents, an investment in an Austrian property can be used as a powerful estate planning tool.
All while skiing and enjoying the beautiful mountains and operas, off course…
 


Shanghai Free Trade Zone. The New Chinese Miracle?

Ever since Deng Xiaoping’s in the 70’s had the realization that the planned economy is not working, China has been on a different course. We have all seen the ongoing liberalization of China, and we all know that their economy is becoming more open and competitive.
This is being manifested today with a real Free Zone, an area in which government intervention is reduced, and business is aimed to thrive.
These ideas are a blue print for further liberalization of China so the world is excitingly watching.
 
What are the main characteristics?
The Free zone itself consists of 4 areas in Shanghai totalling 29 square kilometres.
The red carpet is rolled out for foreign service businesses like financials, trading companies, architecture and law firms, travel agencies and even bars.
Foreign companies in the zone will be able to invest in domestic fund markets and issue Renminbi-denominated bonds and experience waived taxes and streamlined customs to encourage the transport of goods. There are even plans to set up an international crude oil futures trading platform.
 
What are the main expected reforms?
  • Financial reforms: The zone will make use of market-based interest rates and Yuan convertibility on the capital account. The zone is expected to pioneer China’s attempts to promote interest-rate liberalisation plus, eventually, Renminbi convertibility.
  • More investment opportunities: The zone will open up the door for foreign investors. However, not all business activities will be liberalized. There will be a “negative list”, which means that foreign investors can invest in all industries except those specifically named by the government.
  • To name an interesting example: golf. Once banned by Chairman Mao. He saw it as a bourgeois pleasure and ordered ploughing of all the nation’s golf courses. It still lingers.
  • Demonstration of decentralization of power by the government: The zone may allow Chinese companies to make foreign investments without seeking approval from central government ministers.
  • Commodities trading: The government will gradually allow foreign enterprises to participate in commodity futures trading. Given that China consumes 40% of the world’s metals and is expected to surpass the US in oil demand in four years, this could be very interesting for foreign companies.
In short: Capital-account convertibility, interest-rate liberalization, renminbi cross-border usage and foreign-exchange management are some of the reforms expected to be tested in the zone before becoming national policy. And Beijing will be closely watching.
 
What will be the challenges?
So far the Free Zone still has its share of challenges.
First of all the free flow of capital. The idea of having an offshore RMB hub is interesting, but the Chinese government will want to control the flow of capital onto the mainland to prevent creation of unfair advantages in areas outside of the Free Zone. This arbitrating role can seriously limit progress and so far even the ways to interact with mainland China are unclear.
Secondly, there are a lot of vested interests. The current situation is very favourable for existing local companies and local governments. They are the major stakeholders in this phase. All good ideas aside, the question remains if powerful stakeholders will want this to be an extreme game changer.
The third potential bottle neck is the lack of available space. The total area of 29 square kilometres of land seems way too small for housing all the activities that Beijing intends to allow. While potential business license holders are lining up on the sideline, waiting for the regulatory smoke to clear, speculators have already started buying up companies and subsequent real estate (every company needs physical presence, so space is limited). Driving up prices and (contemporarily) influencing the business climate for businesses that are looking for investment opportunities.
One final aspect that is obscuring the attractiveness is that the 4 different zones are all overseen by different tax and customer offices, with no basic frame work bringing the areas together.
 
What do we think?
The fact that China is taking steps to liberalize the country is very positive. We are strong believers in less government intervention.
It remains to be seen if China will be able to maintain the road to freedom and prosperity, and if vested interests are willing to give up their current immense power and return it to the market.
The fact is that China is on the way to becoming more free and decentralized. The West is currently on a road of less freedom and more centralization.
China is growing. The West is declining. You do the math.
 


Cyprus Back On Track?

According to recent statements of the European Commission, European Central Bank and the International Monetary Fund, also known as the ‘troika’, the “Cyprus programme is on track.”
“All fiscal targets have been met with considerable margins, reflecting the ambitious fiscal consolidation underway, prudent budget execution and a less severe deterioration of economic activity than originally projected.”
For the second time, troika was reviewing the Cyprus economy last month, a research necessary for receiving the next tranche of the EUR 10 billion bailout negotiated in spring. The investigators reported that “structural reforms are also advancing” and that, since the last review, “there has been significant progress toward the recapitalisation and restructuring of the financial sector.” Cyprus was forced to agree with many reforms and with downsizing of its traditionally strong banking sector.
Luckily, there is positive news to be read in the reports: The general domestic product in 2013 will shrink less than predicted. This is mostly thanks to tourism and professional services that have both shown a great level of resilience. It seems like foreign investors still show confidence in the island economy.
Nevertheless, Cyprus remains closely watched by the troika.
Reacting to the research reports, Haris Georgiades, the Minister of Finance, expressed the “readiness and good will of the government to apply and implement the programme has been reconfirmed.” According to him, the banking sector was now stable and well capitalised, while government finances were under control.
Also in the field of privatisation, troika’s statements were positive. The researchers witnessed that Hellenic Bank, the second largest lender, has been successfully recapitalised with private funds, including foreign investment, and remains totally without state support.

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