Things To Know About Getting Paid In Bitcoin

Would you be willing to accept your salary in the form of Bitcoin (BTC)?

Some people are willing to accept their salary in the form of cryptocurrency like Bitcoin. These are not just ordinary people, but includes athletes, celebrities, social influencers and even politicians. It is becoming a popular way for some brands to gain exposure by building up the hype around Bitcoin and other cryptocurrency by using public figures as ambassadors.

In the sports world, you have athletes like Aaron Rogers, Odell Beckham Jr., Russell Okung and Sean Culkin who have agreed to accept some part of their salary in the form of Bitcoin. These athletes did not have to do that, but the incentives are great. Either they had done their own research or someone may have advised them on the value of Bitcoin.

Some politicians have also agreed to get paid in Bitcoin. One example is Miami mayor Francis Suarez, who agreed to get a paycheck in Bitcoin. This falls in line with the mayor’s own plans of transforming Miami into a cryptocurrency hub. Another example is the mayor of New York, Eric Adams, agreeing to have his first salary paid in Bitcoin. These moves could be politically motivated to promote their respective cities as being open to the crypto space. Nonetheless, it sends a positive signal.

There are countries that are also allowing Bitcoin as payment for salaries. At the top of this list is El Salvador, which is officially the first country to accept Bitcoin as a form of legal tender. Prior to El Salvador, New Zealand had been the first country to allow salaries in Bitcoin, back in 2019. Elsewhere in Latin America, there are proposals in Brazil to accept Bitcoin as an option for salary payments. 

Since the world has become more global in terms of business, Bitcoin is also providing a way for companies to pay for workers who are based overseas. There are now crypto payroll services that process such transactions. What is important here is that these services meet legal requirements, in order to be able to allow companies to pay their workers in Bitcoin. It is much easier with integration to Layer 2 payment rails like the Lightning Network (LN). The LN works with apps to allow Bitcoin payments to be made quickly and cheaply, so it is just like sending any electronic payment. This can be made using a smartphone app, which can help adoption since many users around the world own a smartphone.

Getting paid in Bitcoin is not yet common, but gaining popularity. What is important for anyone who accepts their salary in Bitcoin is to understand that this is a volatile asset. Prices are subject to swings, where the value can fall by 40%, but it can then suddenly recover much higher. This also does not excuse anyone from not paying taxes. Treating it more as an investment asset rather than as just another form of currency is the whole idea of Bitcoin. It may not be ideal if you need fast liquidity like cash, but more so for storing value in the long run.

Another important thing to know about getting paid in Bitcoin are tax laws in respective jurisdictions. In the US, this is a taxable event. An accountant or lawyer who has an understanding of virtual currency laws as it relates to cryptocurrency can help. The taxes are to be paid in fiat, unless the jurisdiction accepts BTC for tax payments. There are states like Arizona which will allow it, so if a payment is received in BTC, the taxes can also be paid in BTC that is commensurate to the fiat amount of that payment. For the most part, taxes are paid in fiat based on the conversion from the Bitcoin payment.

It is easy to just convert Bitcoin to fiat currency after every paycheck. However, it has future price appreciation in valuation for holders which is just like stocks. You also get the benefits of a non-confiscatable store of value that grows over time. If you custody your own Bitcoin in your own digital wallet, it cannot be frozen or taken by anyone. As more people realize that there is more to Bitcoin than currency, perhaps they will be more open to considering it for their next paycheck.

(Photo Credit by David McBee)

Disclaimer: This is not financial advice. The information provided is for reference and educational purposes only. DYOR always to verify any information.

Would You Buy Bitcoin For $6,000 In 2021? In The Philippines It Happened

A digital exchange in the Philippines called PDAX sold Bitcoin (BTC) for $6,000 or roughly worth PHP288,000 (in Philippine Pesos). This comes from a report from Bitcoin.com (link here) about an incident that occurred in the middle of February 2021, amidst Bitcoin reaching new all time highs. Some users on the PDAX exchange noticed that BTC was selling for $6,000. That was at a time the rest of the market was selling BTC at prices over $50,000, so this was almost like a steal. Perhaps that was the way PDAX saw it because they are now asking for their Bitcoin back. It appears that there was a system glitch that caused an error when listing BTC prices. The exchange had also experienced an outage due to a surge in volume of network activity.

It sounds crazy to think that you can reverse transactions with Bitcoin. You won’t be able to because the blockchain is immutable and not modifiable. You cannot undo a transaction once it has been committed on a blockchain. According to the report, the exchange is requesting the users to return their BTC or else they will face legal action. Some accounts were even locked to prevent them from further activity. How can you force the users to return something they bought legally, which by all means was compliant to the rules and regulations set forth?

In all of this, the one thing that has been proven is that the blockchain does work the way it was intended. If the blockchain could be manipulated, then PDAX would have reversed the transactions already and this would probably not be reported. Users will lose the BTC they bought at $6,000 but will get a refund from the exchange. Instead, the blockchain secured the transaction and proved that it was allowed by PDAX. The BTC the users purchased can also not be confiscated by any entity because BTC requires the private key of the owner. It can be forcibly taken, but that would still require a user to grant access to their BTC through a digital wallet.

The users merely used the exchange to make their purchase and go about their way. This is how a blockchain is supposed to work and to think otherwise goes against the basic principles of Bitcoin and cryptocurrency. How this case ends up is something to follow because we shall see how things unfold. Can an exchange require users to return digital assets due to unusual activity or are transactions on the blockchain final? I would like to think the latter but we shall see if further investigations reveal anomalies or will the ruling be in favor of the users.

The UTXO Model Explained In Cryptoeconomic Terms

Bitcoin uses the UTXO (Unspent Transaction Output) accounting model for processing transactions. In Bitcoin, a user’s balance is indicated by the unspent amount of BTC that is recorded on the blockchain. A user’s input to a transaction is the output from the last transaction. If the user has no previous transaction, then the input is the output from another user’s transaction. These are processed continuously and written to the blocks which are added to the main chain for immutability. Every transaction on the Bitcoin blockchain has an input and output to prove the transfer and ownership of a digital asset.

There is a misconception that digital wallets store the digital assets. That is actually not the case since the digital assets are always stored on the blockchain. They are just values that indicate the balance or quantity and the ownership by a private key. The digital wallet is really an application that provides users access to their digital assets on the blockchain via a private key. The wallet also contains the public address, which is used to identify the user to the blockchain. Once the wallet is opened, the users can see their digital assets from the blockchain. In Bitcoin, the BTC is always stored on the blockchain. The information is accessed by the user from their wallet with authorization from their private key. Without the private key, a user will not be able to access the information. The private key also creates a digital signature which authorizes a user to send their BTC to another user as a way to transfer the ownership of the digital asset.

When the digital asset is transferred, it is recorded as an output O from the sender. It is then the new input I to the user it was transferred to. It has to always be an input/output relationship for provability. The transactions can be referenced by cryptographic hashes that is called the TxHash (Transaction Hash). Users can view this information on a blockchain explorer like blockchain.com/explorer. The best way to understand this is that inputs reference outputs when making transactions on the Bitcoin blockchain.

Key concepts to understand:

  • Each input to a new transaction was the output from a previous transaction, which can be referenced by a TxHash.
  • Each output was the result of a transaction from a spent amount.
  • The input from an output is considered an unspent amount.
  • All unspent amounts are considered the balance of the digital asset the user owns.
  • The spent amounts become the unspent amounts of other users who received the digital asset.
  • Only unspent outputs can be used as inputs to a transaction in a Bitcoin network.
  • The sum of all unspent outputs is the total balance available to the user.

Let’s take an example.

Bob wants to pay Alice 5 BTC. Bob has a balance of 100 BTC, while Alice has 30 BTC. According to the protocol, the sender is Bob and the recipient is Alice. Both users have a Bitcoin public address, which is a hexadecimal string. The public address is like the e-mail address, it allows users to identify other users for sending digital assets. Bob will send the 5 BTC to Alice via her public address.

Here is how the process works:

  1. Bob unlocks his unspent outputs using his digital wallet to send 5 BTC to Alice.
  2. Bob’s UTXO of 100 BTC is his input to the transaction. Once Bob indicates from his wallet that he only wants to send 5 BTC to Alice, the 5 BTC is deducted from the 100 BTC. (100 – 5)
  3. The 5 BTC are sent to Alice’s address and the remainder of 95 BTC are sent back to Bob.
  4. Alice’s balance is increased by 5 BTC (30 + 5) for a total of 35 BTC.

This is a simplified overview of how the process works. In reality, the transaction must undergo confirmations in order to be validated to the blockchain. This is another mechanism that uses the PoW (Proof-of-Work) consensus algorithm.

Bob’s output (95 BTC) from the transaction will become his input to his next transaction. Multiple transactions can occur on the network at the same time. Suppose that Carol wanted to pay Bob 20 BTC at around the same time that Bob was sending 5 BTC to Alice. This is possible since transactions can run in parallel, though they are still processed in sequence. While Bob’s transaction with Alice has a UTXO of 95 BTC, Bob’s transaction with Carol is a UTXO of 20 BTC.

Bob’s total balance is the sum of all his UTXO,

∑ ( utxo1 + utxo2 + … + utxon ) = utxo’

where n is the last term of the UTXO. In our example Bob’s total balance would be:

Total Balance = 95 BTC + 20 BTC = 115 BTC

Using blockchain analytics, all of Bob’s transactions can be viewed based on the TXHash. This contains information like the block number, number of confirmations and total fees.

On another note, the sum of the UTXO between Bob and Alice must not change. Before the transaction Bob had 100 BTC and Alice had 30 BTC.

100 BTC + 30 BTC = 130 BTC

At the end of their transaction, not including other UTXO, the sum must still be 130 BTC.

95 BTC + 35 BTC = 130 BTC

If the amount remained the same for Bob after he sent 5 BTC to Alice, then this is an example of a “double spend”.

100 BTC + 35 BTC = 135 BTC

The amount of 135 BTC is not correct since 5 BTC was spent from Bob’s UTXO. It should remain balanced at 130 BTC.

UTXO allows the Bitcoin blockchain to keep track of a user’s balance. Every BTC spent becomes a UTXO for another user. It also helps to prevent “double-spending” of a digital asset through a system of confirmations to verify the UTXO exists. The confirmations are possible because the UTXO is read by nodes on the Bitcoin network for validation. When there is a consensus among the nodes on the network that the UTXO is valid and has not been spent on another transaction, it is recorded on the blockchain. Once it is recorded, the data cannot be modified, changed or deleted unless there is a majority consensus to do so. This means no single entity can reverse or commit a double spend of the same transaction (Note: The exception is if they have the majority control (e.g. hash power), which requires at least 51% of the network). The transfer of ownership of BTC is thus concluded in the transaction.

The Halving Has Arrived

The third Bitcoin Halving has finally occurred on May 11, 2020 at block height 630,000 at 19:23 UTC without any glitches.

This was reported by Coindesk:

“In an homage to Satoshi Nakamoto’s iconic “brink of a second bailout” message in the 2009 genesis block, f2pool, which mined the 629,999th block (the last before the halving), embedded a reference to the current financial crisis: “NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue.”

The reward for miners is now at 6.25 BTC per validated block. This means that although the block subsidy incentive has been reduced, the price remains volatile. Either a miner can earn more due to the appreciation in price value or profit less due to operating inefficiencies (e.g. old ASIC miners, higher costs of electricity, etc.). Miners who stand more to lose than gain should reconsider their configuration to adjust to the difficulty target and network’s hash rate.

Within the next two weeks after the halving occurred, difficulty should adjust (every 2,016 blocks). Miners should keep an eye out for the hash rate as well to see whether it has fallen (takes more time to produce blocks) or increased (more competition). Factor in the market price, and it gives an indication of whether the rewards are better or much worse.

While the Feds have quantitative easing, Bitcoin has quantitative hardening, a principle that has yet to be fully explained. The understanding is that Bitcoin is sound money because it uses an anti-inflationary model that limits the total supply (21 Million Coins). The code does not mint new coins at all and no one can mint more coins on the Bitcoin network. It is fixed at the supply set in code, and it is never created out of thin air.

While that sounds good in theory, in reality it has not been a perfectly deflationary model. While the supply is not reduced over time (it is fixed), there are new BTC still put into the circulating supply. It is when the amount of new BTC in circulation hits zero that it becomes deflationary. At that point, there will be no more rewards to miners but they can still collect transaction fees for their participation.

Right now the current economic landscape will have more influence on the price of BTC post-halving. What investors would like to see are the Fed’s injections into the economy trickling into BTC through stimulus. There are different ways that can happen and have been made available through the largest digital exchanges like Binance and Coinbase. For now, Bitcoin has proven itself once again as a stable and mature blockchain built on sound principles.

Note: While no bugs have been reported at the moment, it seems the halving occurred successfully.