When you hear the word cryptocurrency, what comes to mind? Do you feel emboldened and excited about the opportunities that lay ahead, or do you feel dwarfed by the potential? If you happen to lean more towards the latter, have no fear! Now a global phenomenon, cryptocurrency is rife with jargon and multi-layered ideas that might make it inaccessible to the average investor — here, a little education goes a long way. It’s a fascinating time, to be on the cusp of an entirely new currency, but it is important to tread lightly when exploring these new waters.
First, some vocabulary! Cryptocurrency is a technology that acts as a unit of exchange. Blockchain, which you will hear about often in the crypto-world, is what makes cryptocurrency possible. The blockchain keeps track of all transactions across a certain network, freeing the currency from the need of an authoritative body. When talking specifically about cryptocurrency, there are three main types that you need to know: currency-based cryptocurrency (such as Bitcoin) which stores value to be used in transactions, application-based cryptocurrency, which is made to solve specific problems, and platformed-based cryptocurrency (Ethereum, OmiesGo), which is able to be built upon and can evolve to fit certain needs. Though Bitcoin is by far the most well known cryptocurrency (almost reaching something of a celebrity status), platform-based cryptocurrencies are quickly gaining ground by filling the holes that are left by Bitcoin.
So, why are people losing their minds to get involved with crypto? Well, for one, absolutely anyone can use cryptocurrency; it’s accessible to anyone with a mobile phone or an internet connection. There’s no accrediting body, no government control — the only rules that apply are the rules written into the contract and verified by the peer-to-peer transactions. The blockchain is unalterable, so all transactions are more or less permanent; this can be a good thing, when considering fraud and identity theft. Moreover, cryptocurrency itself does not charge any fees and is transferred virtually instantly, even when sending money overseas.
Bitcoin (the cryptocurrency currently en vogue) is becoming weighed down by its own limitations. For example, don’t you dare lose your password — if you do, consider it gone! That’s why you’ll see so many other variations out there, adapting and building upon the framework left by its predecessors. Onwards and upwards! That’s why there’s an intimidatingly large number of cryptocurrencies out there, and why you’re allowed the freedom of buying into a bespoke market that suits your individual needs. Bitcoin is the most well-known, but by no means your only option.
Dealing with cryptocurrency can have tax and investment implications, as well. As you could expect, if you exchange dollars for bitcoins, there is no tax — however, when you trade it back, you’ve created a taxable event. If you are fortunate enough to earn a profit trading cryptocurrency, be sure to report the gains the IRS. If you have any questions, seek out a reputable accountant for help.
All in all, Cryptocurrency is an illusion of substance, and a means to transfer wealth, not an investment. You’re paying for a platform, as well as the ability to buy coins online. In the future we may see more mainstream uses of cryptocurrency, but for now BARR Financial Services will remain on the sidelines.