Cryptocurrency: Everywhere you look, there it is. Businesses are offering for you to purchase items with it. Banks and credit unions are investing in it. The financial world is, simply put, obsessed with it. And despite it being a fairly new technology, every time anyone looks, it keeps getting more and more relevant.
So what exactly is cryptocurrency? And what does your financial institution need to know? We’ll start with the basics, and then share five essential things to remember as you consider your next move.
The Basics of Blockchain
Simply put, cryptocurrency is a decentralized network for digital cash that was created by Satoshi Nakamoto in 2008. Stripped even further down, it’s limited entries in a database (also known as the blockchain) that is uneditable without the permission of the majority. Essentially, it’s digital money created from code.
Developed to be a “peer-to-peer electronic cash system,” Bitcoin was the first cryptocurrency, and it is still the most popular cryptocurrency today, but it’s not the only cryptocurrency. Other offerings, such as Ethereum, Dogecoin, Ripple, and Litecoin, are additional assets that are also popularly traded.
So why is cryptocurrency so popular? It’s got a few key features that make it attractive:
- It exists outside of government supervision.
- It is monitored by individuals rather than a central system.
- And it is protected against the devaluation of the national currency.
These three features, as well as many more, are reasons that so many are flocking to cryptocurrency as an opportunity.
What You Need To Know About Cryptocurrency
Now that you know what cryptocurrency and blockchain is, there are many ways that it is applicable. Here are few of the most important things to consider:
1. The U.S. treats cryptocurrency like property.
As regulated by the IRS, the value of cryptocurrency must be reported with the fair market value at payment or receipt in U.S. dollars. One of the things this immediately requires is excellent record keeping: When it comes to tax time, you’ll need very specific records to appropriated calculate gains and losses of a cryptocurrency asset. In fact, cryptocurrency acts a lot like stock in that way, and you must show the price that you both bought and sold it.
2. There are lots of benefits of accepting cryptocurrency as a payment method.
Many small businesses, including small banks and credit unions, are extremely hesitant to begin accepting cryptocurrency because of its reputations for being volatile, as well as its newness as an asset. But there are actually many things that make cryptocurrency an incredibly valuable asset, including:
- Security: Cyber hackers get more and more relevant every day, but because of it’s decentralized storage, cryptocurrency is incredibly safe and hack-resistant. It doesn’t require personal information to access, and therefore it’s much less likely to be stolen. In a study on blockchain and cybersecurity by Deloitte, in terms of assets, blockchain could increase security for both identities and ideas, prevent fraud, and detect data tampering.
- International potential: Feel constrained by local currency exchange rates? Cryptocurrency exists outside of borders and removes some of a headache associated with seeking new opportunities outside of your immediate market. Plus the growth possibilities are endless, and as more and more people invest in cryptocurrency, the more powerful it becomes as an asset.
3. Cryptocurrency and blockchains are like gold.
Cryptocurrency isn’t like fiat-money; it’s like gold blocks. They represent themselves, and their value is intrinsically part of their composition so they have absolute value. Whereas fiat-money is created by debt, cryptocurrencies are as much money as gold coins are money.
4. Most cryptocurrency supplies are controlled.
And because it’s controlled, it’s possible to calculate their value at any point in the future today and there are no surprises when it comes to monetary supply. Bitcoin, in particular, is decreasing its supply over time, with the final Bitcoins being released sometime around 2140. As money, they’re impervious to inflation, deflation, or any other manipulation of supply.
5. It’s fast, and it’s global.
A cryptocurrency is completely independent of a specific location, which is why international transactions are impossibly easy with cryptocurrency. Transactions can be sent instantly and confirmed within minutes. However, there is one thing to consider: Cryptocurrency transfers are irreversible — absolutely, and without exception — so it’s imperative that you confirm the receiver prior to sending.
Constantly evolving, cryptocurrency and blockchain may take a second to understand, but one thing is certain — it’s not hard to understand their appeal and popularity. For more about the latest in financial industry news and updates, sign up for our newsletter, and get articles like this delivered to your inbox.