Interested in bitcoin but too overwhelmed to get invested (literally)? We get it, and we’re here to help. First, take a look at our recent Intro to Crypto 101 for the basics. Now, let’s get into some of the details you’ll need to invest.
Is bitcoin legal?
Misconceptions around BTC’s legality can be confusing, and to some, it might seem similar to torrenting movies or music (RIP Limewire). It’s money that isn’t money, but you can spend it like it is money? What?
Further, if you ask the Canadian government (via the people’s proxy, a Google search), you’ll find a confusing answer.
“Digital currencies, such as Bitcoin or other cryptocurrencies, are not legal tender in Canada,” reads the Government of Canada website. “Only the Canadian dollar is considered official currency in Canada.”1
That sounds potentially bad.
So what does this mean for you, your investments, and us, a bunch of bitcoin fanatics? The good news is: bitcoin is legal to purchase in Canada, it’s just not legal tender. This important distinction provides insight on what bitcoin is and how it operates.
Enter: the rabbit hole. But stay with us. It’ll be worth it.
So how does bitcoin work? In short: bitcoin is generally viewed by entities like the Canada Revenue Agency as a commodity (like precious metals) that has value, whereas the Canadian dollar is legal tender (read: cash money) which also has value. That value is created, and interacts with our financial systems, in different ways—even though currency and bitcoin can seem very similar. This might sound confusing, but we’re at the 201-level here people, and we’re not mincing words!
How is bitcoin created?
The first big difference is at the creation of value. Where the Canadian government grants value to the dollar, Bitcoin is instead created by “mining.” And yes, for the most part, the analogy you’re imagining stands.
Just like ol’ Yukon Cornelius out searching for gold (when he’s not helping Rudolph and his friends), bitcoin miners can search for bitcoin, earning cryptocurrency without investing any of their own money. Only where Yukon Cornelius uses a pickaxe, BTC miners use computers.
These miners are charged with auditing and verifying the blockchain rather than prospecting, and the job is a tough one. Miners have to verify 1MB of blockchain, and then must find “proof of work.” This proof is found by using a big ol’ chunk of computing power to find a specific and correct 64-digit hexadecimal number (called a hash) which confirms and validates the miner’s work.
The course of mining is integral to bitcoin’s functioning: it is the mechanism by which the blockchain is independently verified, and it’s also the only way to release new bitcoin into the system. To make matters more difficult, Satoshi Nakamoto—the person or people who created BTC—ensured it would become harder to mine bitcoin as time went on to ensure the slow dispersion of the cryptocurrency (so if you’re interested in mining, you should start, like, yesterday).
What is a fiat currency?
So BTC is mined, and the Canadian dollar has value… because Justin Trudeau says so? Not quite.
A fiat currency is what most modern countries use as their currency. Back when gold coins were used as currency, those coins themselves had value that was intrinsic. When using literal gold became untenable for pre-modern economies, countries switched to fiat currencies.
Fiat currencies use tokens or representation of money that have no intrinsic value. Our twenty dollar bills don’t have value in and of themselves—the material that makes the bills isn’t worth very much at all. But because our economy is stable and our government has deemed that twenty dollar bill to be worth a fixed amount, we can still use it to pay for goods or services.
This is where bitcoin diverges from national fiat currencies. Bitcoin is like a fiat currency in that it does not have intrinsic value, but it’s different in that it’s not related to any central government or authenticating body. But without being deemed valuable by the government, how can it be used as currency?
Is bitcoin money?
In short, kind of. It is like a fiat currency which is not regarded as legal tender. So bitcoin is legal in Canada, but not as money—rather, as we pointed out above, it is generally recognized by entities like the CRA as a commodity that can be used to barter.
Yes! Bartering, like in the stone ages. We’ll trade you a cool rock for a... goat? Like that, but instead, we’d trade you a bunch of satoshis for a goat. Because bitcoin is regarded in this way, it may be taxed differently in Canada depending on whether you are buying the currency to invest, or using the currency to buy a product or service.
Okay, let’s test your knowledge. Bitcoin is produced by ______. You can use bitcoin to ______, or to _____. To invest bitcoin, you should check out Mogo’s _________________ for super low fees, fast and free money transfers, and up to date info on your __________ performance.
Did you get it?
This blog post is provided for informational purposes only and is not intended as legal, tax or investment advice. For more information on the tax treatment of bitcoin or other cryptocurrencies, you should consult with a qualified tax professional or refer to the Canada Revenue Agency’s guidance available at: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html.
1 Canada, Financial Consumer Agency of. “Digital Currency.” Aem, 17 June 2016, https://www.canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html.