I Don’t Get it, but I am Making Money…CRYPTOCURRENCY
So many people tell me they are making money on Bitcoin (they really mean some form of cryptocurrency). The conversation usually goes something like this, “you should purchase Bitcoin, I am making great money on it, I don’t understand it, but the money I am making is great.”
Every time I log into my PayPal account a banner for the PayPal Cryptocurrency appears. This morning I heard that bodegas are offering cryptocurrency in the ATM machines. I do not get it, but, I am determined to no longer have question marks above my head about Cryptocurrency. This article shares some of what I learned.
The fictional person, Satoshi Nakamoto, is accredited with inventing bitcoin (the original cryptocurrency) as a decentralized currency hedge on gold. Cryptocurrency is comprised of blocks of information (blockchain) time stamped chronologically to show transaction history.1 This means, every transaction builds on the previous transaction, adding new information while retaining information from the previous block. A peer-to-peer distributed timestamp server generates computational proof of the chronological order of transactions (blocks). The first 50 bitcoin were the genesis block created by Nakamoto.2 It helps to think of a brick wall. Each brick (block) is a new part of the wall. Each individual brick needs the support of the previous bricks to build strength (block chain). In the case of cryptocurrency, the strength comes from each block using the support of the prior blocks to add to the overall strength of the block chain.
Cryptocurrency mining consumes enough energy to power a small European country for a year. Due to the high energy demand miners pool their computing power and share the reward (cryptocurrency). All of the miners share the same information. There is no central controlling database. Mining hardware keeps the network secure by means of a proof of work consensus protocol (transaction). This is a service that gets rewarded (with cryptocurrency) after every block is added to the blockchain.
WARNING – cryptocurrency is a computer program stored in a database/cloud and can be hacked. The transaction process uses personal identification measures that are points of infiltration. A pirate block can break the chain if it has a strong enough power source (a pirate block would require cooperation with all other verification nodes, so would need either collusion between them or elimination of players to independently verify a new block).
What keeps the chain honest is the CPU power. The longer the blockchain the greater the demand for CPU time and electricity. The honest nodes need to control more CPU power than any attacker nodes.
The processing power of the pool is measured as hashpower (PH/s or H/s). The hash rate is a measure of the ability to solve the mathematical puzzle presented (transaction) every second. The higher this hashpower number the more secure the pool.
WARNING – Where is the cheapest power? Make sure the cryptocurrency you invest in has a secure strong power source and a high hashpower.
The risk in cryptocurrency hit hard in the Mt. Gox scandal. Mt. Gox was once the world’s largest Bitcoin exchange before losing about 850,000 of the customer’s Bitcoin. Mt. Gox filed for Chapter 15 bankruptcy protection in Tokyo District Court (Dkt. No. 42-8) and in the US Bankruptcy Court for the Northern District of Texas (Dkt. No. 37) March 2014. 3 The customers lost their investment.
The lawyers are making lots of traditional currency on cryptocurrency litigation. The cases are numerous and will be increasing in numbers. I have listed a few here.
United States of America v. Twenty-four Cryptocurrency Accounts
- forfeiture action against twenty-four cryptocurrency accounts engaged in criminal activity (473F.Supp.3d1), decided July 20,2020. The government analyzed the blockchain to identify Bitcoin exchanges.
SEC v. Ripple Labs, Inc.
- Sections 5(a) and 5(c) of the Securities Act require that whenever an issuer of securities, its control persons, or affiliates offers or sells securities to the public, those securities must first be registered with the SEC, absent certain exemptions. See 15 U.S.C. §§ 77e(a), 77e(c). The SEC claims that XRP is an investment contract, and therefore a security. SEC v. Ripple Labs, Inc., 2021 U.S. Dist. LEXIS 69563
- The SEC alleges that in approximately late 2011 or early 2012, Larsen and another co-founder began to work on the idea and code for what would become the XRP Ledger. In September 2012, Larsen (with others) founded Ripple Labs, Inc. Id. at ¶ 44. Upon completion of the XRP Ledger in December 2012, and as its software was deployed on the first computer servers on which it runs, its development team created a fixed supply of 100 billion XRP. Id. at ¶ 45. The development team then transferred 80 billion XRP to Ripple and 9 billion to Larsen as compensation. Id. [*3] at ¶ 46. Garlinghouse joined Ripple in 2015, and subsequently received at least 357 million XRP from Ripple as compensation. See id. at ¶¶ 74, 87. The SEC claims that from 2013 to the present, the Individual Defendants offered or sold a portion of their individual holdings of XRP to the public in exchange for hundreds of millions of dollars (1.7 billion XRP netting $450 million for Larsen and his wife; 375 million XRP netting $159 million for Garlinghouse). See id. at ¶¶ 86-88. SEC v. Ripple Labs, Inc., 2021 U.S. Dist. LEXIS 69563, *2-3
- This is an ongoing investigation.
SEC v. NAC Found., LLC.
- Another case of millions raised through a coin offering invoking the SEC to allege fraudulent and unregistered sale of digital securities. What is interesting in this case is that the defendant attempted to use the blockchain-related patent as a defense. LLC, 2021 U.S. Dist. LEXIS 4079
Although the patent was not helpful in this case, the fact there is a patent mentioned in the case prompts the next warming.
WARNING – There are lots of patents covering cryptocurrency and there is likely to be extensive litigations for patent infringement in the future.
The original blockchain (Bitcoin) is not covered by IP. There is an argument that this lack of IP protection allows the currency to change and grow.
That is no longer the case. Mastercard holds 283 patents and applications on cryptocurrency.
Mt Gox – Stellar Development Foundation – Coinlab- Bitfinex-BTC hold patents 10/885,740, 10/362,006, 10/198,325, 2019,003,4926.
Craig Wright, the self-proclaimed bitcoin inventor, filed a copyright case in the UK, April 22, 2021 on the ownership of the bitcoin white paper
WARNING – another rumor is that no tax needs to be paid on cryptocurrency.
The New York Department of Financial Services (DFS) governing the virtual currency business (Title 23, Chapter 1, Part 200 of the NYCRR) became effective June 24, 2015.
The Federal government is reviewing current laws to include tax provisions on cryptocurrency.
You owe tax on cryptocurrency income and profits on the entire value of the day you received the income and profits..
A way for miners to make money is to trade on the cryptocurrency. Marathon Patent Group, Inc. is an example of a publicly traded cryptocurrency mining company. Trading on cryptocurrency is similar to any stock trade and you can go long or short. If you purchase cryptocurrency outright it is a long-term investment purchased at full value.
I will continue to watch the patent and litigation developments in cryptocurrency. Visit me at joygoudie.tech.
- Blockchain Explained by Luke Conway, November 17, 2020, Investopedia.com/terms/b/blockchain.asp.
- Satoshi Nakamoto – inventor of bitcoin (a decentralized currency) (hedge on gold) – white paper – Bitcoin: A Peer-to-Peer Electronic Cash System (https://bitcoin.org/bitcoin.pdf) 2008.
- Coinlab Inc. v. Mt Gox KK 513 B.R. 576, 578 (W.D. Wash. 2014)