What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs and hashing functions.
Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Not all e-commerce sites allow purchases using cryptocurrencies. Today, cryptocurrencies, including the most popular Bitcoin, are hardly used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments. To a limited extent, they are also used for cross-border transfers.
Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.1The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.
Experts say that blockchain technology can be used in multiple industries, such as supply chain, and processes like online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.
Types of Cryptocurrency
Each cryptocurrency claims to have a different function and specification. For example, Ethereum’s ether markets itself as gas for the underlying smart contract platform. Ripple’s XRP is used by banks to facilitate transfers between different geographies.
In the wake of Bitcoin’s success, many other cryptocurrencies, known as “altcoins,” have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. They include Solana, Litecoin, Ethereum, Cardano, and EOS. At the start of 2022, the aggregate value of all the cryptocurrencies in existence had reached over £2.1 trillion – Bitcoin dominates the market with approximately 40% of the total value.
We have a page dedicated to the different crypto coins, although we can’t comment on all of them, we’ve picked out what we feel are the most important ones and will endeavor to add to them and keep the info updated. CLICK HERE to go to the Coins page.
Are Cryptocurrencies Legal?
Fiat currencies derive their authority as a medium of transaction from the government or monetary authorities. For example, each pound is backed and guaranteed by the Bank of England as token of which can use to exchange for goods or services.
But cryptocurrencies are not backed by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions of the world. It doesn’t help matters that cryptocurrencies have largely functioned outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of Travel Rule, which requires AML compliance.
As of January 2022, El Salvador was the only country in the world to allow Bitcoin as legal tender for monetary transactions. In the rest of the world, cryptocurrency regulation varies by jurisdiction.
Japan’s Payment Services Act defines Bitcoin as legal property. Cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer. China has banned cryptocurrency exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December.
Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will need to qualify as “financial instruments.” In June 2021, the Commission released the Markets in Crypto Assets (MiCA) regulation that sets safeguards for regulation and establishes rules for companies or vendors providing financial services using cryptocurrencies. Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives like Bitcoin Futures are available at the Chicago Mercantile Exchange. The Securities and Exchange Commission (SEC) has said that Bitcoin and Ethereum are not securities.
In the US, although cryptocurrencies are considered a form of money, the Internal Revenue Service (IRS) treats them as a financial asset or property. And, as with most other investments, if you reap capital gains in selling or trading cryptocurrencies, the government wants a piece of the profits. On May 20, 2021, the U.S. Department of the Treasury announced a proposal that would require taxpayers to report any cryptocurrency transaction of and above $10,000 to the IRS. The UK has taken a similar stance, classing cryptocurrency as a financial assist and will be subject to Capital Gains Tax in the same way gold and other investments are treated. More information on Capital Gains Tax can be found on the HMRC website HERE
Advantages and Disadvantages of Cryptocurrency
Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure. As with every revolution, there are trade-offs. At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.
Here are some advantages and disadvantages of cryptocurrencies are as follows:
- Cryptocurrencies represent a new, decentralized mechanism for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one that was triggered in 2008 by the failure of institutions in the United States.
- Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.
- Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. An example of such decentralized transfers are flash loans in decentralized finance. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading.
- Cryptocurrency investments can be used to generate profits. Cryptocurrency markets have skyrocketed in value, reaching over £2 trillion in the past decade. On of the 1st of January, 2022, Bitcoin was valued at more than £627 billion in crypto markets.
- One of the most prominent use cases of cryptocurrencies is being tested in the remittance economy. Currently, cryptocurrencies like Bitcoin are used as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to bitcoin (or other cryptocurrency) and transferred across borders and, subsequently, converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper.
- While they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. They leave a digital trail that can be deciphered by agencies like the FBI. This opens up possibilities of governments or federal authorities tracking the financial transactions of ordinary citizens.
- Cryptocurrencies have become a popular tool with criminals for illegal activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the Dark Web, is already well known. Cryptocurrencies have also become a favourite with hackers who use them for ransomware activities.
- In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. For example, an MIT study found that roughly 45% of Bitcoin is held by just 11,000 investors.
- One of the conceits of cryptocurrencies is that they can be mined by anyone using a computer with an internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much as that consumed by entire countries. The expensive energy costs, coupled with the unpredictability of mining, has concentrated mining among large firms whose revenues running into billions of dollars. According to an MIT study, 10% of miners account for 90% of its mining capacity.
- While cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes with millions of pounds worth of “coins” stolen.
- Cryptocurrencies traded in public markets suffer from price volatility. Bitcoin has experienced rapid surges and crashes in its value. In 2021 the price was at a low of £23,000 in July but then climbed to an all-time high of £48,000 in November. It’s safe to say the price is like a financial roller coaster… the key is knowing when to get on… and off if you want to make money.
- Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.