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Edit 1: More ARKQ buying today (~50k shares). Thank you everyone for the positive feedback and discussion!
Bottom Line Up Front (BLUF) or TL;DR for the non-military types:
LMT is a good target if you want to literally go to the moon, and my PT is $690.26 in two years (more than 2x from current levels). Justification and some possible trade ideas are listed below, just CTRL-F “Trade Ideas”. I hope you guys enjoy this work and would appreciate any discussion or feedback. I hope to catch you in the comments.
Team,
We interrupt today’s regularly scheduled short squeeze coverage to discuss a traditionally boring stock, LMT (Lockheed Martin), with significant upside potential. To be clear, this is NOT a short squeeze target like many reddit posts are keying on. I hope that this piece sparks discussion, but if you are just looking for short squeeze content, all I have to say is BUY, HOLD, and GODSPEED.
The source of inspiration for me writing this piece is threefold; first, retail investors are winning, and I believe that we will continue to win if we continue to identify opportunities in the market. In my view, the stock market has always been a place for the public to shine a light on areas of innovation that real Americans are excited about and proud to be a part of. Online communities have stolen the loudspeaker from hedge fund managers and returned it to decentralized online democracies that quickly and proudly shift their weight behind ideas they believe in. In GME’s case, it was a blatant smear campaign to destroy a struggling business. I think that we should continue this campaign by identifying opportunities in the market and running with them. It may sound overly idealistic, but if reddit can take on the hedge funds, I non-ironically believe that we can quite literally take good companies researching space technology to the moon. I think LMT may be one of several stocks to help get us there.
Second, a video where the Secretary of State of Massachusetts argues that internet boards are full of a bunch of unsophisticated, thoughtless traders really ticked me off. This piece is designed to show that ‘the little guy’ is ready to get into the weeds, understand business plans, and outpace analysts that think companies like Tesla are overvalued by comparing them to Toyota. That is a big reason that I settled on an old, large, slow growth company to do a deep-dive on, and try my best to show some of the abysmal predictive analysis major ‘research firms’ do on even some of the most heavily covered stocks. LMT is making moves, and the suits on wall street are 10 steps behind. At the time of writing this piece, Analyst Estimates range from 330-460 (what an insane range).
Third, and most importantly, I am in the US military, and I think that it is fun to go deep into the financials of the defense sector. I think that it helps me understand the long-term growth plans of the DoD, and I think that I attack these deep-dives with a perspective that a lot of these finance-from-day-one cats do not understand. Even if no one ever looks at this work, I think that taking the time to write pieces like this makes me a better Soldier, and I will continue to do it in my spare time when I am feeling inspired. I wrote a piece on Raytheon Technologies (Ticker: RTX) 6 months ago, and I think it was well-received. I was most convicted about RTX in the defense sector, but I have since shifted to believing LMT is the leader in the defense space. I am long both, though. If this inspires anyone else to do similar research on other companies, or sparks discussion in the community, that is just a bonus. Special shout-out to the folks that read more than just the TL;DR, but if you do just read the TL;DR, I love you too!
Now let us get into it:
Leadership
I generally like to invest in companies that are led by people that seem to have integrity. Jim Taiclet took the reins at LMT in June of last year. While on active duty, he served as a C-141B Starlifter pilot (a retired LMT Aircraft). After getting out he went to work for the American Tower Corporation (Ticker: AMT). His first day at American Tower was September 10, 2001. The following day, AMT lost 13 employees in the World Trade Center attack. He stayed with the company, despite it being decimated by market uncertainty in the wake of 9/11. He was appointed CEO of the very same company in 2004. Over a 16 year tenure as CEO of AMT the company market cap 20x’d. He left his position as CEO of AMT in March of last year, and the stock stagnated since his departure, currently trading at roughly the same market cap as to when he left.
Jim Taiclet was also appointed to be the chairman of the board this week, replacing the previous CEO. Why is it relevant that the CEO came from a massive telecommunications company?
Rightfully, Taiclet’s focus for LMT is bringing military technology into the modern era. He wants LMT to be a first mover in the military 5G space, military application of AI space, the… space space, and the hypersonic glide vehicle (HGV) space. These areas are revolutionary for the boomer defense sector. We will discuss this in more detail later when we cover the company’s P/E multiple and why it is absolute nonsense.
It is not a surprise to me that they brought Taiclet on during the pandemic. He led AMT through adversity before, and LMT’s positioning during the pandemic is tremendous relative to the rest of the sector, thanks in large part to some strong strategic moves and good investments by current and past leadership. I think that Taiclet is the right CEO for the job.
In addition to the new CEO, the new Secretary of Defense, Secretary Lloyd Austin, has strong ties to the defense sector. He was formerly a board member for RTX. He is absolutely above reproach, and a true leader of character, but I bring this up not to suggest that he will inappropriately serve in the best interest of defense contractors, but to suggest that he speaks the language of these companies effectively. I do not anticipate that the current administration poses as significant of a risk to the defense sector as many analysts seem to believe. This will be expanded in the headwinds section below.
SPACE
Cathie Wood and the ARK Invest team brought a lot of attention to the space sector when the ARKX, The ARK Space Exploration ETF, Form N-1A was officially filed through the SEC. More recently, ARK Invest published their Big Ideas 2021 Annual Report and dedicated an entire 7-page chapter to Orbital Aerospace, a new disruptive innovation platform that the ARK Team is investigating. This may have helped energize wall street to re-look their portfolios and their investments in space technology, but it was certainly not the first catalyst that pushed the defense industry in the direction of winning the new space race.
In June 2018, then President Trump announced at the annual National Space Council that “it is not enough to merely have an American presence in space, we must have American dominance in space. So important. Therefore, I am hereby directing the Department of Defense (DoD) and Pentagon to immediately begin the process necessary to establish a Space Force as the sixth branch of the Armed Forces". Historically, Department of Defense space assets were under the control of the Air Force. By creating a separate branch of service for the United States Space Force (USSF), the DoD would allocate a Chairman of Space Operations on the Joint Chiefs of Staff and clearly define the budget for space operations dedicated directly to the USSF. At present, this budget is funneled from the USAF’s budget. The process was formalized in December of 2019, and the DoD has appropriated ~$15B to the USSF in their first full year of existence according to the FY21 budget.
Among the 77 spacecraft that are controlled by the USSF, 29 of them are Lockheed Martin GPS satellites, 6 of them are Lockheed Martin Space-Based Infrared Systems (SBIRS), and LMT had a hand in creating and/or manufacturing for several of the other USSF efforts. The Next Generation Overhead Persistent Infrared Missile Warning Satellites (also known as Next-Gen OPIR) were contracted out to both Northrup Grumman (Ticker: NOC) and LMT. LMT’s contract is currently set at $4.9B, NOC’s contract is set at $2.37B.
Tangentially related to the discussion of space is the discussion of hypersonic glide vehicles (HGVs). HGVs have exoatmospheric and atmospheric implications, but I think that their technology is extremely important to driving margins down for both space exploration and terrestrial point-to-point travel. LMT is leading the charge for military HGV research. They hold contracts with the Navy, Air Force, and Army to develop HGVs and hypersonic precision fires. The priority for HGV technology accelerated significantly when Russia launched their Avangard HGV in December of 2019. Improving the technology for HGVs is a critical next-step in maintaining US hegemony, but also maintaining leadership in both terrestrial and exoatmospheric travel.
LARGE SCALE COMBAT OPERATIONS (LSCO)
The DoD transitioning to Large-Scale Combat Operations (LSCO) as the military’s strategic focus. This is a move away from an emphasis on Counter-Insurgency operations. LSCO requires effective multi-domain operations (MDO), which means effective and integrated strategies regarding land, sea, air, space, and cyberspace. To have effective MDO, the DoD is seeking systems that both expand capabilities against peer threats and increase the ability to track enemy units and communicate internally. This requires a modernizing military strategy that relies heavily on air, missile, and sensor modernization. Put simply, the DoD has decided to start preparing for peer or near-peer adversaries (China, Russia, Iran, North Korea) rather than insurgencies. For this reason, I believe that increased Chinese and Russian tensions are, unfortunate as it may be, a boon to the defense industry. This is particularly true in the missiles/fires and space industry, as peer-to-peer conflicts are won by leveraging technological advantages.
There are too many projects to cover in detail, but some important military technologies that LMT is focusing on to support LSCO include directed energy weapons (lasers) to address enemy drone technology, machine learning / artificial intelligence (most applications fall under LMT’s classified budget, but it is easy to imagine the applications of AI in a military context), and 5G to increase battlefield connectivity. These projects are all nested within the DoD’s LSCO strategy, and position LMT as the leader in emergent military tech. NOC is the other major contractor making a heavy push in the modernization direction, but winners win, and I think a better CEO, balance sheet, and larger market cap make LMT the clear winner for aiding the DoD in a transition toward LSCO.
SECTOR COMPARISON (BACKLOG)
The discussion of LSCO transitions well into the discussion of defense contractor backlogs. Massive defense contracts are not filled overnight, so examining order backlogs is a relatively reliable way to gauge the interest of the DoD in a defense contractor’s existing or emerging products. For my sector comparison, I am using the top 6 holdings of the iShares U.S. Aerospace & Defense ETF (Ticker: ITA). I hate this ETF, and ETFs like it (DFEN) because of their massively outsized exposure to aerospace, and undersized allocation to companies like LMT. LMT is only 18% smaller than Boeing (Ticker: BA) but is only 30.4% of the exposure of BA (18.46% of the fund is BA, only 5.62% of the fund is LMT). Funds of this category are just BA / RTX hacks. I suggest building your own pie on a site like M1 Finance (although they are implicated in the trade restriction BS… please be advised of that… hoping other brokerages that are above board will offer similar UIs like the pie design… just wanted to be clear there) if you are interested in the defense sector.
The top 6 holdings of ITA are:
Boeing Company (Ticker: BA, MKT CAP $110B) at 18.46%
Raytheon Technologies (Ticker: RTX, MKT CAP $101B) at 17.84%
Lockheed Martin (Ticker: LMT, MKT CAP $90B) at 5.62%
General Dynamics Corporation (Ticker: GD, MKT CAP $42B) 4.78%
Teledyne Technologies Incorporated (Ticker: TDY, MKT CAP $13B) at 4.74%
Northrop Grumman Corporation (Ticker: NOC, MKT CAP $48B) at 4.64%
As a brief aside, please look at the breakdowns of ETFs before buying them. The fact that ITA has more exposure to TDY than NOC and L3Harris is wild. Make sector ETFs balanced how you want them to be balanced and it will be more engaging, and you will likely outperform. I digress.
Backlogs for defense companies can easily be pulled from their quarterly reports. Here are the current backlogs in the same order as before, followed by a percentage of their backlog to their current market cap. All numbers are pulled from January earning reports unless otherwise noted with an * because they are still pending.
Boeing Company backlog (Commercial: $282B, Defense: $61B, Foreign Military Sales (FMS, categorized by BA as ‘Global’): 21B, Total Backlog 364B): BA’s backlog to market cap is a ratio of 3.32, which is strong, but most of that backlog comes from the commercial, not the defense side. Airlines have been getting decimated, I am personally not interested in having much of my backlog exposed to commercial pressures when trying to invest in a defense play. Without commercial exposure, their defense only backlog ratio is .748. This is extremely low. I understand that this does not do BA justice, but I am keying in on defense exposure, and I am left thoroughly unsatisfied by that ratio. Also, we have seen several canceled contracts already on the commercial side.
Raytheon Technologies backlog (Defense backlog for all 4 subdivisions: 67.3B): Raytheon only published a defense backlog in this quarter’s report. That is further evidence to me that the commercial aerospace side of the house is getting hammered. They have a relatively week backlog to market cap as well, putting them at a ratio of .664, worse off than the BA defense backlog.
Lockheed Martin backlog (Total Backlog: $147B): This backlog blows our first two defense backlogs out of the water with a current market cap to backlog ratio of 1.63.
General Dynamics Corporation backlog (Total Backlog: $89.5B, $11.6B is primarily business jets, but it is difficult to determine how much of their aerospace business is commercial): Solid 2.13 ratio, still great 1.85 if you do not consider their aerospace business. The curveball here for me is that GD published a consolidated operating profit of $4.1B including commercial aerospace, whereas LMT published a consolidated operating profit of $9.1B. This makes the LMT ratio of profit/market cap slightly in favor of LMT without accounting for the GD commercial aerospace exposure. This research surprised me; I may like GD more than I originally assumed I would. Still prefer LMT.
Teledyne Technologies Incorporated backlog (Found in the earnings transcript, $1.7B): This stock is not quite in the same league as the other major contractors. This is an odd curveball that a lot of the defense ETFs seem to have too much exposure to. They have a weak backlog, but they are a smaller growing company. I am not interested in this at all. It has a backlog ratio of .129.
Northrop Grumman Corporation backlog ($81B): Strong numbers here. I see NOC and LMT as the two front-runners in the defense sector. I like LMT more because I like their exposure to AI, 5G, and HGVs more than NOC, but I think this is a great alternative to LMT if you like the defense sector. Has a ratio of 1.69, slightly edging out LMT on this metric. LMT edges out NOC on margins by ~.9%, though, which has significant implications when considering the depth of the LMT backlog.
The winners here are LMT, GD, and NOC. BA is attractive if you think anyone will have enough money to buy new planes. BA and RTX are both getting hammered by commercial aerospace exposure right now and are much more positioned as recovery plays. That said, LMT and NOC both make money now, and will regardless of the impact of the pandemic. LMT is growing at a slightly faster rate than NOC. Both are profit machines, but I like LMT’s product portfolio and leadership a lot more.
FREE CASH FLOW
Despite the pandemic, LMT had the free cash flow to be able to pay a $2.60 per share dividend. This maintains their ~3% yearly dividend rate. They had a free cash flow of $6.4B. They spent $3.9 of that in share repurchases and dividend payouts. That leaves 40% of that cash to continue to strengthen one of the most stalwart balance sheets outside of big tech on the street. Having this free cash flow allowed them to purchase Aerojet Rocketdyne for $4.4B in December. They seem flexible and willing to expand and take advantage of their relative position during the pandemic. This is a stock that has little downside risk and significant upside potential. It is always reassuring to me to know that at the end of the day, a company is using its profit to continue to grow.
HEADWINDS
New Administration – This is more of an unknown than a headwind. The Obama Administration was not light on military spending, and the newly appointed SecDef is unlikely to shy away from modernizing the force. Military defense budgets may get lost in the political shuffle, but nothing right now suggests that defense budgets are on the chopping block.
Macroeconomic pressure – The markets are tumultuous in the wake of GME. Hedgies are shaking in their boots, and scared money weighed on markets the past week. If scared money continues to exert pressure on the broader equity markets, all boomer stocks are likely weighed down by slumping markets.
Non-meme Status – The stocks that are impervious to macroeconomic pressures in the above paragraph are the stonks that we, the people, have decided to support. From GME to IPOE, there is a slew of stonks that are watching and laughing from the green zone as the broader markets slip deeper into the red zone. Unless sentiment about LMT changes, I see no evidence that LMT will remain unaffected by a broader economic downturn (despite showing growth YoY during a pandemic).
TAILWINDS
Aerojet Rocketdyne to the Moon – Cathie Wood opened up a $39mil position in LMT a few weeks ago, and this was near the announcement of ARKX. The big ideas 2021 article focuses heavily on satellite technology, deep learning, and HGVs. I think that the AR acquisition suggests that vertical integration is a priority for LMT. They even fielded a question in their earnings call about whether they were concerned about being perceived as a monopoly. Their answer was spot on—the USFG and DoD have a vested interest in the success of defense companies. Why would they discourage a defense contractor from vertical integration to optimize margins?
International Tensions – SolarWinds has escalated US-Russia tensions. President Biden wants to look tough on China. LSCO is a DoD-wide priority.
5G.Mil – We still do not have a lot of fidelity on what this looks like, but the military would benefit in a lot of ways if we had world-wide access to the rapid transfer of encrypted data. Many units still rely on Vietnam-era technology signal technology with abysmal data rates. There are a lot of implications if the code can be cracked to win a DoD 5G contract.
TRADE IDEAS
Price Target: LMT is currently at a P/E of ~14. Verizon has roughly the same. LMT’s 5-year P/E ratio average is ~17. NOC is currently at a P/E of ~20. TSLA has a P/E Ratio of 1339 (disappointingly not 1337). P/E is a useless metric because no one seems to care about it. My point is that LMT makes a lot of money, and other companies that are valued at much higher multiples do not make any money at all. LMT’s P/E ratio is that of a boomer stock that has no growth potential. LMT’s P/E is exactly in line with the Aerospace and Defense Industry P/E ratio standard. LMT’s new CEO is pushing the industry in a new direction. I will arbitrarily choose a P/E ratio of 30, because it is half of the software industry average, and it is a nice round number. Plus, stock values are speculative and nonsense anyway.
Share price today: $321.82
Share price based on LMT average 5-year P/E: $384.08 (I see this as a short term PT, reversion to the mean)
Share price with a P/E of 30: $690.26
Buy and Hold: Simple. Doesn’t take much thought. Come back in a year or two and be happy with your tendies (and a few dividends to boot).
LEAPS Call Debit Spread (Based on last trade prices): Buy $375 C 20 JAN 23 for $26.5, Sell $450 C 20 JAN 23 for $12. Total Cost $14.5 for a spread width of $75. Max gain 517% per spread. Higher risk strategy.
LEAPS: Buy $500 C 20 JAN 23 for $7.20. Very high-risk strat. If the price target is hit within two years, these would be in the money $183 per contract for a gain of 2500%. This is the casino strat.
SOURCES
https://www.lockheedmartin.com/en-us/news/features/2020/james-taiclet-from-military-pilot-to-successful-ceo.html
https://www.warren.senate.gov/newsroom/press-releases/in-response-to-senator-warrens-questions-secretary-of-defense-nominee-general-lloyd-austin-commits-to-recusing-himself-from-raytheon-decisions-for-four-years
https://news.lockheedmartin.com/2019-08-30-Lockheed-Martins-Expertise-in-Hypersonic-Flight-Wins-New-Army-Work
https://www.lockheedmartin.com/en-us/capabilities/hypersonics.html
https://research.ark-invest.com/hubfs/1_Download_Files_ARK-Invest/White_Papers/ARK%E2%80%93Invest_BigIdeas_2021.pdf?hsCtaTracking=4e1a031b-7ed7-4fb2-929c-072267eda5fc%7Cee55057a-bc7b-441e-8b96-452ec1efe34c
https://www.deseret.com/2018/6/19/20647309/twitter-reacts-to-trump-s-call-for-a-space-force
https://comptroller.defense.gov/Portals/45/Documents/defbudget/fy2021/fy2021_Budget_Request_Overview_Book.pdf
https://www.airforcemag.com/lockheed-receives-up-to-4-9-billion-for-next-gen-opir-satellites/
https://spacenews.com/northrop-grumman-gets-2-3-billion-space-force-contract-to-develop-missile-warning-satellites/
https://www.lockheedmartin.com/en-us/capabilities/directed-energy/laser-weapon-systems.html
https://emerj.com/ai-sector-overviews/lockheed-martins-ai-applications-for-the-military/
https://www.defenseone.com/business/2020/07/new-ceo-wants-lockheed-become-5g-playe167072/
https://www.wsj.com/articles/defense-firms-expect-higher-spending-11548783988
https://www.etf.com/ITA#efficiency
https://s2.q4cdn.com/661678649/files/doc_financials/2020/q4/4Q20-Presentation.pdf
https://investors.rtx.com/static-files/dfd94ff7-4cca-4540-bc4b-4e3ba92fc646
https://investors.lockheedmartin.com/static-files/64e5aa03-9023-423a-8908-2aae8c7015ac
https://s22.q4cdn.com/891946778/files/doc_financials/2020/q4/GD_4Q20_Earnings_Highlights-Outlook-Final.pdf
https://www.fool.com/earnings/call-transcripts/2021/01/27/teledyne-technologies-inc-tdy-q4-2020-earnings-cal/
https://investor.northropgrumman.com/static-files/6e6e117f-f656-4c68-ba7f-3dc53c2dd13a

Ok, so you’re reading this cause you are slacking off and doing anything to avoid studying. Some of this will probably not apply or some people will disagree(maybe strongly), but this is what I learned/experienced from my experience taking the CPA exam. This is long, so strap in and lets go for a ride.
Background
I am an advisory associate at a Big 4 firm. I had Becker paid for since I signed my return offer after my internship. I have both a bachelors and masters degree in accounting. I started studying in Feb 2019 and just found out I passed my final part, with BEC the only one I had to take while working. I passed all parts on my first try. I love subjective qualitative questions (AUD) and despise quantitative calculation heavy questions (everything else). I had terrible study habits/motivation and typically I am a bad test taker. So anyways lets get started
1. Understand the concepts and underlying logic
a. You have heard this time and time again and just let it brush by you without a 2nd thought. You probably only want to just memorize and regurgitate material. If you want to get the most out of your studying, you should aim to truly understand why things are the way they are and from what point of view you need to look from. For example, why would an audit firm be cautious about taking on a new client (i.e. Enron)? What could make management want to “cheat” on their financials and how does the FASB curb those actions? Etc. I cannot emphasize this enough. Oh wait, hold on. AM I EMPHASIZING THIS ENOUGH??!!!!!!!! Do this and be able to teach the concepts to others. Being able to teach it helps reinforce it.
2. Be curious and listen/read about biz outside of studying
a. You should ask questions to yourself that go beyond the review course. “Why do I share memes on Facebook and avoid social interaction in real life?” “Do I really want to do public accounting?” “I wonder what it’ll be like not having to study for this stupid exam?” oh wait, not those questions. Lol, listen to podcasts like planet money, the Wall street journal, etc. Google questions you have that go beyond the scope of your review course. Try to make connections to your life (individual tax and how that might apply to you). Doing this will, hopefully, make you curious/interested and tie things to what you’re studying. Not making any connections to your personal life financial decisions or what is going around you or being curious can make the study process that much worse.
3. Practice and use excel
a. DO NOT USE A TI 84 when studying. Yes, I know you have an emotional connection to it since it was your ex girlfriend’s back in high school. Get in the habit of using excel. From what I understand, if you are really close, like a 74, the graders will take a special look at your exam and see if you really deserve a 75. Excel would help by allowing you to write notes for problems and show your thought process to the graders. It helps out in sims, when you are using the research tool and find a code that applies but you want to keep searching for a better citation. You can copy and paste that section and passages into excel for reference if you want to come back. You can format how you calculate stuff too, vs that crappy on screen calculator trying to figure out which step of the calculation you’re at. Plus getting in the habit of using the main program you’ll use at work also helps. Should also learn hot keys, show em what dem fingers do. Get your mind out of the gutter.
4. MCQs, MCQs, MCQs
a. Your eyes should be bleeding. After understanding and grasping the concepts, you should aim to get above 60% (75% if you’re competitive) correct on your first try on MCQs for each module. If you don’t, go back into the book and relearn. MCQs are great practice and honestly its probably the best way to prepare in a short amount of time. I aimed to get through the material about 45% of my time and the remaining being for reviewing mostly through doing MCQs. I aimed to do about 200-300 MCQs each day during my review period. Others have said that they did 1000 a day. Its not a contest. Heck, I’ve even seen some of the same MCQs (or very similar) between Becker and the actual exams. Doesn’t hurt to practice.
5. Still in undergrad? Take more finance classes
a. Something I found helpful was doing a dual accounting and finance bachelors degree. I got both perspectives from accounting and finance. Yes, I incurred more student loans, but at least I can talk the talk and understand obscure finance related topics (financial markets and institutions, risk management, forecasting, etc).
6. Need more education credits? Do a masters in accounting(MAcc), not an MBA or a masters in tax, etc
a. Ok, this is controversial and this probably only applies to juniors in college. Look, taking classes that interest you are great. But if you truly want those three letters after your name, you’ll have to put yourself in a position that truly sets you up for success. An MBA: you’ll have exposure to all sorts of classes and topics, but you probably won’t focus too much on auditing or tax and other accounting stuff as much. Plus, there’s a whole debate on if an MBA is even worth it anymore vs a specialized masters (MAcc, Master of supply chain,etc). Let me know if you want me to elaborate, but googling recent news articles/threads can show you. A masters in tax: yes, you’ll probably destroy REG. However, if you don’t like qualitative and subjective questions, AUD will kick you in the ass. FAR will probably be a little difficult since you mostly studied tax. A MAcc: you’ll get an overall selection of accounting courses (audit to cost accounting, etc). Overlapping your classes while studying for a CPA exam section is only gonna help (audit class while studying for AUD; killing 2 birds with one stone). Employers will be a little bit more at ease knowing you aren’t these “no brained MBA students that don’t know anything” -grad school prof. Look at schools that have flexibility and have high pass rates for the CPA exam. I’ve heard great things about BYU, Texas, and Michigan.
7. Never waste a testing window, if you can afford it. Take it at the end too.
a. Now, I’m not too sure how this is gonna play out with the new testing rules upcoming in July. However, I would always try to aim to get through all my material a week before the testing window ended and aimed to take the exam on the last day of the testing window. If I failed, I’d find out the following week and I’d have all that material still fresh in my mind to grind for early next testing window. From what I’ve heard and experienced, you can typically be pleasantly surprised with the result, as long as you know enough basic stuff. Don’t quote me on that, but if you got the cash, might as well do it. If you plan it right, the first year bonus should be able to cover all the exam fees you incurred taking exams multiple times. Jk, plan to pass it the first time, it’ll save you some $$.
8. For the love of God, pass them all before working
a. My heart goes out to all those who haven’t taken a single part when they begin work. I was studying for BEC while working and Jesus, I legit could not find time or have energy to study while working (get home at 9, bed at 11, up at 5am, leave for client at 6am). If I were to redo it again, I would ask during your internship to get access to Becker early and start studying before grad school. I spent about 10+ hours a day during the bright blue skied summer in the library depressed that I had to learn about pension and lease accounting. I’ve heard that some places/firms are great at giving you time to study, but probably don’t pay as much. I’ve heard GCAS (GCASconnect.org) is a great option. Probably hard to break into Big 4 afterwards, but at least you’ll kinda get that work life balance. Get it done ASAP. If you are working FT and haven’t taken any or are currently taking it, its not the end of the world. I know plenty of people who passed all of em in Big 4 within their first 4 years.
9. Impatient and want to know if you passed/failed a little bit early? Eyeball trick
a. I think this applies mostly NASBA states, but yea google it. Your credit/fail status will pop up like half a day before the actual release date (typically).
10. Getting through the material is the hardest part
a. So what if you fail an exam, at least you did the hardest part, getting through and understanding the material. If you fail, you aren’t starting back at square 1. You’ll pretty much be at >=70%, depending on how diligent you were at studying the first time, if you find out if you failed. If you haven’t started work yet, just get through all the material. Learning obscure topics in FAR &BEC while working 60+ hours a week will drive you crazy. As mentioned below, write outlines, so that it’ll be easier and quicker to refresh on the material if you need to come back.
11. Find a friend, a study routine, and test ritual
a. If you’re like me, you have borderline ADHD and cannot concentrate or keep yourself accountable. I had a group in grad school that we all struggled together in the library and kept each other accountable. Cancel your Netflix, take Youtube out of your bookmarks, just make it difficult to find distractions. Your job is to study, not find an excuse to have a study break *points at you*. Finally, find a ritual. Mine was booking a hotel the night before my exam at a hotel across the street from Prometric (Since I was scared to death that my love for sleep would get the best of me). I would go to Red Robin and eat dinner, go to a movie the night before and take Z quil and go to bed early. Before my exam, I would wake up 3-4 hours before my exam to get myself awake, eat a very light breakfast, and take a 5 hour energy right before I walked into the exam room. I would carry gum, a granola bar, redbull, Advil, ear plugs, and a water bottle to the exam. I fidget a lot so I would chew gum, and while Prometric typically gave us headmuffs, I would carry in my ear plugs and squish them (fidgeting habit) while I read prompts or if my test taking neighbor was noisy, put in the earplugs underneath the headmuffs. After my exam, I would treat myself. Go play 9 holes, watch another movie, and go out drinking. Treat yourself, even if you failed it, you deserve some positivity in your life. Depending on how you feel, wait 2 days(recovery) before studying the same section or moving onto the next section.
12. Do not redeem your Becker books until after you are done
a. Want a little extra cash? I wish I had thought of this earlier. But, one of my buddies only used the online textbook and online final review textbook. He never redeemed his becker books. After he finished, he put up a listing on ebay for his becker books. Since the books keep getting updated, he could say that these books were current. He also bundled all the books together on ebay and sold them for like $350, instead of selling one by one which would take longer. Plenty of people have their books go out of date fast and are in need of new fresh paper to massacre with their pencil and highlighter. If you don’t need the hardcopy, pass on it and get a little bit of extra cash after you pass the exams.
13. If Becker ever offers you a lifetime subscription, take it
a. Yes, while they do say that if you don’t pass a section they’ll let you keep using your account, you do have to demonstrate that you didn’t pass (salt in the wound). During grad school, a couple of my friends at another big 4 firm said they got an email about Becker giving them lifetime access until they passed. I reached out to Becker to see if I could opt in for that. It was free. That way it was one less thing on my mind knowing that my software would expire in 18 months unless I showed substantial progress in reviewing through Becker.
14. Becker really done screwed up by removing the desktop app
a. I might be in the minority here, but I highly doubt it. Starting Jan 2020, Becker will no longer support the desktop application for your laptop. I absolutely loved the native downloaded application. You didn’t need to be connected via internet and could pull up excel. I only needed the internet to update the contents. Having access to the internet was a slippery slope to a 7 hour youtube binge. By turning off my wifi and going to a spot in the library with no WIFI access, I ultimately only had the Becker app for entertainment. Sad yes, I know. Becker only now offers the online version and the app version for mobile devices. Sorry for all those who didn’t get to download the desktop app back in June 2019 for the last time.
15. Find a good prometric
a. I have been fortunate and not had problems. However, I have heard nightmare scenarios where a few of my friends had a prometric that couldn’t get their exam loaded and had to have them reschedule. If you’re working and take PTO that would be terrible. I had one friend who tried to take an exam at the end of a testing window before his other exam credit expired the next testing period and lost credit cause prometric had to keep rescheduling him. Put your mind at ease and don’t experience an emotional rollercoaster finding out you have to reschedule. Some Prometrics are control freaks and will lose their s*** if you do something minor like chewing gum or kick off your shoes while you are taking your exam. Just depends on who your proctor is. Ask your friends which locations are good. Heads up though, typically those are the ones that fill up the quickest.
16. You got 4 mins to write down everything
a. Don’t know if this is allowed by Prometric, can someone attest to this? Remember those 4 mins that are admin disclaimers before your actual exam begins? Good, use that free time to your advantage. Write down formulas fresh in your mind or concepts or acronyms that will help you or that you truly struggle with. I wish I had done this when I took it, but write down all the major amounts (i.e. 3k), concepts, rules, and formulas on that little crappy laminated sheet Prometric gives you during that 4 mins before your exam starts. Some people will say this is not necessary or bad for you, but if I were you, I’d live in comfort having that sheet of material.
17. Becker keeps repeating certain things over and over
a. If you haven’t gotten the hint yet, you should.*Don’t be like me when a girl laughs at your 2/10 dad joke and tell her she is a great friend* Topics that mysteriously keep popping up again and again, are typically the ones that will most likely show up on your exam. *cough*Basis*cough*gov &NFP*cough*Internal control*cough*IT*
18. The exam is “fair”, MCQs only adaptive
a. Yes, only the MCQ testlets are adaptive. If you find that a sim is easy, don’t worry your little mind about it. SIM difficulty is random, even though you’ll stare at your screen for 30 min wondering where it all went wrong. Look, the examiners only want you to know enough to keep the public safe (so basically AUD matters). Those really difficult sections you have in your review course typically won’t be big areas in the exam, unless you’ve got bad luck. If that’s the case, then I’m sorry dude. When I took FAR, I kept reviewing the sections that I could not grasp that well, in reality it consisted of most of the questions I was really strong in already. However, I hadn’t kept up in those areas and I thought I failed. It’s a fair exam, not too hard but not easy, the studying/review part is in my opinion the worst part of the whole process.
19. Watch out for absolutes
a. Use standard test taking strategies. If you see the words: only, all, none, never, always, etc. in answers, your eyes should pop and you should start reevaluating your life choices. That’s how I got through AUD, just looking for absolutes. If you see one, that’s typically one less answer choice you have to worry about. There is always the exception to the rule. That being said, you should also get in the habit of watching out for the question prompt saying except, none, only, etc. I can’t tell you how many questions I missed cause I was not careful reading the prompt correctly. Get in the habit of knowing what the question is truly asking.
20. For BEC WC, repeat the prompt
a. How does the AICPA keep up with grading the BEC exam with all those essays you gotta write? They (probably) don’t. It’s most likely a computer that uses a similar grammaspelling function to that of MSFT word and/or Grammarly with a few extra conditions like searching for key words. As long as you can write with decent grammar, you are set my friend. Just make sure you almost repeat exactly what the prompt says, so that the system sees you are on track. Even if you have no clue what the hell the answer is, repeat the prompt. You’ll get points for writing something and being on track. Just a little sneaky tip for ya.
21. Is the Elijah Watt Scholarship worth it?
a. Short answer: no, in my opinion. “Yes, we will definitely pay you $20,000 if you get 95.5 avg across all the exams and passing on your first try!”-accounting firm. From what I have heard, pretty much all the firms will try their best to back out of this promise and say, “ooof, ummm, how about no and we instead give you $5,500. Cool right?! Hey did you by chance get around to that one project we assigned you yesterday?” I think PWC has been the only one to honor the higher bonus, but even then, I haven’t heard too great of things from them lately from my friends who did get the Elijah Watt award. Your goal is to pass. A CPA is still a CPA no matter if you scored 99 on all the sections or if you got 75 on all sections. A really smart friend of mine once told me, “You’re a complete idiot if you get anything above a 75, a 75 says that you studied just the right amount, Idk why xyz has spent 5 months studying for BEC doing 10+ hours a day.” Probably study enough to aim for an 85, rather pass than have to retake.
22. This platform (another71, reddit,etc) will help keep your sanity
a. Yes, while some people here can be very brash and tell you to work harder and not really give you comfort. There are plenty of people here to give encouragement and support. Lots of people here are in the same boat as you and are trying to pass. After every exam I would rant about how little I studied and how I knew I had for sure failed and how others felt about their exams. Remember, for every rant you put, give two comments of support/advice to someone who is struggling. Also, while youtube reactions to CPA exams is nice, don’t dive too deep and waste precious study time. Breeze through them and see what is recommended and how to prepare, nothing more. Shoutout to those who actually make youtube videos on their journeys, yall helped me out.
23. Take FAR first, BEC=What the hell was that?
a. FAR is a B****. It’s a mile wide but an inch deep. When I studied for AUD, I honestly had fun studying for it. REG was not as fun, but was able to connect it to my life. FAR…. FAR is a beast. It is so freakin long that I was honest to God exhausted after it. If I had to redo things, I would take it first. It’s just the amount of material, the exam I found was quite fair. You’ll also realize that FAR is systemic and touches every other section. Taxes for Reg (M1&M3 schedules), ratios for Audit, and hedges for BEC. Trust me, it’ll be easier to transition vs hearing Olinto and Gearty say “remember in FAR..” when you actually hadn’t event studied for it yet. Ok, now lil ol’ BEC. At first glance its this little cute section that’s like “I’m just glad to be here” In reality, its this random hodgepodge of misc material that couldn’t make up separate exams. While the other sections build on each other, the BEC material is so different it is hard to transition your mindset. I woulda also tried to take this towards the beginning. Be comfortable with calculation and quantitative heavy problems. Its amazing how financy and quantitative it really is. I like qualitative subjective logic based questions, so AUD basically.
24. Use Becker Final Review and take mock exams. Make an outline as you go through
a. Final Review in my opinion is underrated. I’m one to be looking for pure efficiency and find out where my weakest areas are. At least you can still download the desktop version of final review and don’t need internet to access it. Another issue I had was I never did the progress tests. I would get through all the material and take a mock. Find out I got like a 30-50 on it and be depressed since I hadn’t kept up in the earlier parts of the material. Make sure to always constantly refresh on older parts of the material, it’ll save you so much time and effort. One thing I started in REG was making an outline. Did I ever come back and read my work? No, but the process of actually writing down concepts and material subconsciously internalizes in your brain. I did this in case I had to retake a section so I could breeze through and find the areas I was weak in. Thankfully, that never happened. Make sure to write examples that you can understand and to put jokes/big4accountant memes in it to prevent your eyes glazing over.
25. Why on earth are you still reading this slacker? Get to work
a. In all honesty, the CPA exam in my opinion isn’t that bad. It’s just getting through the material. Only you have the power to stop wildfires, wait, I mean pass the CPA exam. Life will throw crazy things at you. You might be in a relationship and need to sit your significant other down and have them understand the time commitment this really is. You just need to put yourself in a situation that will set you up for success. Stay late at work/library, put in earplugs/headmuffs (the ones you use for mowing lawns), sit in isolation away from any windows (the casino effect), drink coffee, take Adderall, exercise, move across the country, quit public accounting, start a multi tiered marketing business, marry a model, live your best life. IDK im not your mother, just do it.

CRYPTOCURRENCY BITCOIN
Bitcoin Table of contents expand: 1. What is Bitcoin? 2. Understanding Bitcoin 3. How Bitcoin Works 4. What's a Bitcoin Worth? 5. How Bitcoin Began 6. Who Invented Bitcoin? 7. Before Satoshi 8. Why Is Satoshi Anonymous? 9. The Suspects 10. Can Satoshi's Identity Be Proven? 11. Receiving Bitcoins As Payment 12. Working For Bitcoins 13. Bitcoin From Interest Payments 14. Bitcoins From Gambling 15. Investing in Bitcoins 16. Risks of Bitcoin Investing 17. Bitcoin Regulatory Risk 18. Security Risk of Bitcoins 19. Insurance Risk 20. Risk of Bitcoin Fraud 21. Market Risk 22. Bitcoin's Tax Risk What is Bitcoin?
Bitcoin is a digital currency created in January 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity is yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite it not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of other virtual currencies collectively referred to as Altcoins.
Understanding Bitcoin Bitcoin is a type of cryptocurrency: Balances are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bitcoins. The private key (comparable to an ATM PIN) is meant to be a guarded secret and only used to authorize Bitcoin transmissions. Style notes: According to the official Bitcoin Foundation, the word "Bitcoin" is capitalized in the context of referring to the entity or concept, whereas "bitcoin" is written in the lower case when referring to a quantity of the currency (e.g. "I traded 20 bitcoin") or the units themselves. The plural form can be either "bitcoin" or "bitcoins."
How Bitcoin Works Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bitcoin network, also known as "miners," are motivated by rewards (the release of new bitcoin) and transaction fees paid in bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places. Bitcoin mining is the process through which bitcoins are released to come into circulation. Basically, it involves solving a computationally difficult puzzle to discover a new block, which is added to the blockchain and receiving a reward in the form of a few bitcoins. The block reward was 50 new bitcoins in 2009; it decreases every four years. As more and more bitcoins are created, the difficulty of the mining process – that is, the amount of computing power involved – increases. The mining difficulty began at 1.0 with Bitcoin's debut back in 2009; at the end of the year, it was only 1.18. As of February 2019, the mining difficulty is over 6.06 billion. Once, an ordinary desktop computer sufficed for the mining process; now, to combat the difficulty level, miners must use faster hardware like Application-Specific Integrated Circuits (ASIC), more advanced processing units like Graphic Processing Units (GPUs), etc.
What's a Bitcoin Worth? In 2017 alone, the price of Bitcoin rose from a little under $1,000 at the beginning of the year to close to $19,000, ending the year more than 1,400% higher. Bitcoin's price is also quite dependent on the size of its mining network since the larger the network is, the more difficult – and thus more costly – it is to produce new bitcoins. As a result, the price of bitcoin has to increase as its cost of production also rises. The Bitcoin mining network's aggregate power has more than tripled over the past twelve months.
How Bitcoin Began
Aug. 18, 2008: The domain name bitcoin.org is registered. Today, at least, this domain is "WhoisGuard Protected," meaning the identity of the person who registered it is not public information.
Oct. 31, 2008: Someone using the name Satoshi Nakamoto makes an announcement on The Cryptography Mailing list at metzdowd.com: "I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party. The paper is available at http://www.bitcoin.org/bitcoin.pdf." This link leads to the now-famous white paper published on bitcoin.org entitled "Bitcoin: A Peer-to-Peer Electronic Cash System." This paper would become the Magna Carta for how Bitcoin operates today.
Jan. 3, 2009: The first Bitcoin block is mined, Block 0. This is also known as the "genesis block" and contains the text: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks," perhaps as proof that the block was mined on or after that date, and perhaps also as relevant political commentary.
Jan. 8, 2009: The first version of the Bitcoin software is announced on The Cryptography Mailing list.
Jan. 9, 2009: Block 1 is mined, and Bitcoin mining commences in earnest.
Who Invented Bitcoin?
No one knows. Not conclusively, at any rate. Satoshi Nakamoto is the name associated with the person or group of people who released the original Bitcoin white paper in 2008 and worked on the original Bitcoin software that was released in 2009. The Bitcoin protocol requires users to enter a birthday upon signup, and we know that an individual named Satoshi Nakamoto registered and put down April 5 as a birth date. And that's about it.
Before Satoshi
Though it is tempting to believe the media's spin that Satoshi Nakamoto is a solitary, quixotic genius who created Bitcoin out of thin air, such innovations do not happen in a vacuum. All major scientific discoveries, no matter how original-seeming, were built on previously existing research. There are precursors to Bitcoin: Adam Back’s Hashcash, invented in 1997, and subsequently Wei Dai’s b-money, Nick Szabo’s bit gold and Hal Finney’s Reusable Proof of Work. The Bitcoin white paper itself cites Hashcash and b-money, as well as various other works spanning several research fields.
Why Is Satoshi Anonymous?
There are two primary motivations for keeping Bitcoin's inventor keeping his or her or their identity secret. One is privacy. As Bitcoin has gained in popularity – becoming something of a worldwide phenomenon – Satoshi Nakamoto would likely garner a lot of attention from the media and from governments.
The other reason is safety. Looking at 2009 alone, 32,489 blocks were mined; at the then-reward rate of 50 BTC per block, the total payout in 2009 was 1,624,500 BTC, which at today’s prices is over $900 million. One may conclude that only Satoshi and perhaps a few other people were mining through 2009 and that they possess a majority of that $900 million worth of BTC. Someone in possession of that much BTC could become a target of criminals, especially since bitcoins are less like stocks and more like cash, where the private keys needed to authorize spending could be printed out and literally kept under a mattress. While it's likely the inventor of Bitcoin would take precautions to make any extortion-induced transfers traceable, remaining anonymous is a good way for Satoshi to limit exposure.
The Suspects
Numerous people have been suggested as possible Satoshi Nakamoto by major media outlets. Oct. 10, 2011, The New Yorker published an article speculating that Nakamoto might be Irish cryptography student Michael Clear or economic sociologist Vili Lehdonvirta. A day later, Fast Company suggested that Nakamoto could be a group of three people – Neal King, Vladimir Oksman and Charles Bry – who together appear on a patent related to secure communications that were filed two months before bitcoin.org was registered. A Vice article published in May 2013 added more suspects to the list, including Gavin Andresen, the Bitcoin project’s lead developer; Jed McCaleb, co-founder of now-defunct Bitcoin exchange Mt. Gox; and famed Japanese mathematician Shinichi Mochizuki.
In December 2013, Techcrunch published an interview with researcher Skye Grey who claimed textual analysis of published writings shows a link between Satoshi and bit-gold creator Nick Szabo. And perhaps most famously, in March 2014, Newsweek ran a cover article claiming that Satoshi is actually an individual named Satoshi Nakamoto – a 64-year-old Japanese-American engineer living in California. The list of suspects is long, and all the individuals deny being Satoshi.
Can Satoshi's Identity Be Proven?
It would seem even early collaborators on the project don’t have verifiable proof of Satoshi’s identity. To reveal conclusively who Satoshi Nakamoto is, a definitive link would need to be made between his/her activity with Bitcoin and his/her identity. That could come in the form of linking the party behind the domain registration of bitcoin.org, email and forum accounts used by Satoshi Nakamoto, or ownership of some portion of the earliest mined bitcoins. Even though the bitcoins Satoshi likely possesses are traceable on the blockchain, it seems he/she has yet to cash them out in a way that reveals his/her identity. If Satoshi were to move his/her bitcoins to an exchange today, this might attract attention, but it seems unlikely that a well-funded and successful exchange would betray a customer's privacy.
Receiving Bitcoins As Payment
Bitcoins can be accepted as a means of payment for products sold or services provided. If you have a brick and mortar store, just display a sign saying “Bitcoin Accepted Here” and many of your customers may well take you up on it; the transactions can be handled with the requisite hardware terminal or wallet address through QR codes and touch screen apps. An online business can easily accept bitcoins by just adding this payment option to the others it offers, like credit cards, PayPal, etc. Online payments will require a Bitcoin merchant tool (an external processor like Coinbase or BitPay).
Working For Bitcoins
Those who are self-employed can get paid for a job in bitcoins. There are several websites/job boards which are dedicated to the digital currency:
Work For Bitcoin brings together work seekers and prospective employers through its websiteCoinality features jobs – freelance, part-time and full-time – that offer payment in bitcoins, as well as Dogecoin and LitecoinJobs4Bitcoins, part of reddit.comBitGigs
Bitcoin From Interest Payments
Another interesting way (literally) to earn bitcoins is by lending them out and being repaid in the currency. Lending can take three forms – direct lending to someone you know; through a website which facilitates peer-to-peer transactions, pairing borrowers and lenders; or depositing bitcoins in a virtual bank that offers a certain interest rate for Bitcoin accounts. Some such sites are Bitbond, BitLendingClub, and BTCjam. Obviously, you should do due diligence on any third-party site.
Bitcoins From Gambling
It’s possible to play at casinos that cater to Bitcoin aficionados, with options like online lotteries, jackpots, spread betting, and other games. Of course, the pros and cons and risks that apply to any sort of gambling and betting endeavors are in force here too.
Investing in Bitcoins
There are many Bitcoin supporters who believe that digital currency is the future. Those who endorse it are of the view that it facilitates a much faster, no-fee payment system for transactions across the globe. Although it is not itself any backed by any government or central bank, bitcoin can be exchanged for traditional currencies; in fact, its exchange rate against the dollar attracts potential investors and traders interested in currency plays. Indeed, one of the primary reasons for the growth of digital currencies like Bitcoin is that they can act as an alternative to national fiat money and traditional commodities like gold.
In March 2014, the IRS stated that all virtual currencies, including bitcoins, would be taxed as property rather than currency. Gains or losses from bitcoins held as capital will be realized as capital gains or losses, while bitcoins held as inventory will incur ordinary gains or losses.
Like any other asset, the principle of buying low and selling high applies to bitcoins. The most popular way of amassing the currency is through buying on a Bitcoin exchange, but there are many other ways to earn and own bitcoins. Here are a few options which Bitcoin enthusiasts can explore.
Risks of Bitcoin Investing
Though Bitcoin was not designed as a normal equity investment (no shares have been issued), some speculative investors were drawn to the digital money after it appreciated rapidly in May 2011 and again in November 2013. Thus, many people purchase bitcoin for its investment value rather than as a medium of exchange.
However, their lack of guaranteed value and digital nature means the purchase and use of bitcoins carries several inherent risks. Many investor alerts have been issued by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau (CFPB), and other agencies.
The concept of a virtual currency is still novel and, compared to traditional investments, Bitcoin doesn't have much of a long-term track record or history of credibility to back it. With their increasing use, bitcoins are becoming less experimental every day, of course; still, after eight years, they (like all digital currencies) remain in a development phase, still evolving. "It is pretty much the highest-risk, highest-return investment that you can possibly make,” says Barry Silbert, CEO of Digital Currency Group, which builds and invests in Bitcoin and blockchain companies.
Bitcoin Regulatory Risk
Investing money into Bitcoin in any of its many guises is not for the risk-averse. Bitcoins are a rival to government currency and may be used for black market transactions, money laundering, illegal activities or tax evasion. As a result, governments may seek to regulate, restrict or ban the use and sale of bitcoins, and some already have. Others are coming up with various rules. For example, in 2015, the New York State Department of Financial Services finalized regulations that would require companies dealing with the buy, sell, transfer or storage of bitcoins to record the identity of customers, have a compliance officer and maintain capital reserves. The transactions worth $10,000 or more will have to be recorded and reported.
Although more agencies will follow suit, issuing rules and guidelines, the lack of uniform regulations about bitcoins (and other virtual currency) raises questions over their longevity, liquidity, and universality.
Security Risk of Bitcoins
Bitcoin exchanges are entirely digital and, as with any virtual system, are at risk from hackers, malware and operational glitches. If a thief gains access to a Bitcoin owner's computer hard drive and steals his private encryption key, he could transfer the stolen Bitcoins to another account. (Users can prevent this only if bitcoins are stored on a computer which is not connected to the internet, or else by choosing to use a paper wallet – printing out the Bitcoin private keys and addresses, and not keeping them on a computer at all.) Hackers can also target Bitcoin exchanges, gaining access to thousands of accounts and digital wallets where bitcoins are stored. One especially notorious hacking incident took place in 2014, when Mt. Gox, a Bitcoin exchange in Japan, was forced to close down after millions of dollars worth of bitcoins were stolen.
This is particularly problematic once you remember that all Bitcoin transactions are permanent and irreversible. It's like dealing with cash: Any transaction carried out with bitcoins can only be reversed if the person who has received them refunds them. There is no third party or a payment processor, as in the case of a debit or credit card – hence, no source of protection or appeal if there is a problem.
Insurance Risk
Some investments are insured through the Securities Investor Protection Corporation. Normal bank accounts are insured through the Federal Deposit Insurance Corporation (FDIC) up to a certain amount depending on the jurisdiction. Bitcoin exchanges and Bitcoin accounts are not insured by any type of federal or government program.
Risk of Bitcoin Fraud
While Bitcoin uses private key encryption to verify owners and register transactions, fraudsters and scammers may attempt to sell false bitcoins. For instance, in July 2013, the SEC brought legal action against an operator of a Bitcoin-related Ponzi scheme.
Market Risk
Like with any investment, Bitcoin values can fluctuate. Indeed, the value of the currency has seen wild swings in price over its short existence. Subject to high volume buying and selling on exchanges, it has a high sensitivity to “news." According to the CFPB, the price of bitcoins fell by 61% in a single day in 2013, while the one-day price drop in 2014 has been as big as 80%.
If fewer people begin to accept Bitcoin as a currency, these digital units may lose value and could become worthless. There is already plenty of competition, and though Bitcoin has a huge lead over the other 100-odd digital currencies that have sprung up, thanks to its brand recognition and venture capital money, a technological break-through in the form of a better virtual coin is always a threat.
Bitcoin's Tax Risk
As bitcoin is ineligible to be included in any tax-advantaged retirement accounts, there are no good, legal options to shield investments from taxation.
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Related Terms
Satoshi
The satoshi is the smallest unit of the bitcoin cryptocurrency. It is named after Satoshi Nakamoto, the creator of the protocol used in block chains and the bitcoin cryptocurrency.
Chartalism Chartalism is a non-mainstream theory of money that emphasizes the impact of government policies and activities on the value of money.
Satoshi Nakamoto The name used by the unknown creator of the protocol used in the bitcoin cryptocurrency. Satoshi Nakamoto is closely-associated with blockchain technology.
Bitcoin Mining, Explained Breaking down everything you need to know about Bitcoin Mining, from Blockchain and Block Rewards to Proof-of-Work and Mining Pools.
Understanding Bitcoin Unlimited Bitcoin Unlimited is a proposed upgrade to Bitcoin Core that allows larger block sizes. The upgrade is designed to improve transaction speed through scale.
Blockchain Explained
A guide to help you understand what blockchain is and how it can be used by industries. You've probably encountered a definition like this: “blockchain is a distributed, decentralized, public ledger." But blockchain is easier to understand than it sounds.
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By Satoshi Nakamoto
Read it once, go read other crypto stuff, read it again… keep doing this until the whole document makes sense. It’ll take a while, but you’ll get there. This is the original whitepaper introducing and explaining Bitcoin, and there’s really nothing better out there to understand on the subject.
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party