Cryptocurrency 101
A digital currency intended to be used as a medium of exchange is called cryptocurrency, or simply “crypto.” Cryptography is used to control the creation of new units of a specific digital currency and to secure and verify transactions.
Blockchain technology, which is a distributed ledger maintained by a dispersed network of computers, is the foundation for many cryptocurrencies. Because they are not issued by a central bank, cryptocurrencies are not like fiat currencies like the US dollar or the British pound, which makes them potentially resistant to manipulation or intervention by the government.
This essay will go over a number of cryptocurrency concepts to aid in your understanding of this cutting-edge financial technology.
How does cryptocurrency work?
Most cryptocurrencies operate independently of governments or central banks. Cryptocurrencies operate on a decentralized technology called blockchain, rather than on promises from the government.
There is no such thing as a pile of coins or notes in cryptocurrency. Rather, they exist solely online. Think of them as virtual tokens, the value of which is determined by forces in the market that those looking to buy or sell them create.
The process of mining, which involves using computer processing power to solve challenging mathematical problems in order to earn coins, is how cryptocurrency is created. Additionally, users can buy the currencies from brokers, storing and using them through encrypted wallets.
Who has historically impacted cryptocurrency?
Over the years, a number of people have had a big impact on the cryptocurrency market. When Satoshi Nakamoto created Bitcoin BTC, he ignited the industry.
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renowned for creating Ethereum (ETH)
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The cryptocurrency movement has also been significantly impacted by Vitalik Buterin. ERC-20 tokens are an entirely new class of tokens that Ethereum introduced to its network.
Despite its initial purpose as a gathering place for Magic: The Gathering players, Mt. Gox, which Jed McCaleb founded, regularly hosted Bitcoin trading, contributed to the early industry’s rise of Bitcoin. That became notorious, though, when the platform collapsed in 2014.
Changpeng Zhao, one of the creators of, expanded the availability of cryptoassets.
Why are cryptocurrencies so volatile?
Because the cryptocurrency space is so new, there is a lot of volatility in it. In an attempt to make quick money, investors are experimenting with their funds to see how cryptocurrency prices fluctuate and whether they can influence them.
The price of cryptocurrency is influenced by the quantity and type of users that use it (i.e., utility). If more people use them to make purchases instead of just keeping them, the price will go up.
Another factor driving the value of cryptocurrencies is scarcity. This suggests the limited mechanism of cryptocurrencies. The maximum number of Bitcoins that can be mined is set at 21 million by the Bitcoin protocol. Consequently, as more individuals get involved in the cryptocurrency market, Bitcoin’s scarcity will inevitably grow, driving up its price.
Types of cryptocurrency
Coins are created on their own blockchain and intended to be used as a form of currency. One cryptocurrency that is built on the Ethereum blockchain is called Ether.
Any cryptocurrency built on the blockchain that isn’t Bitcoin is referred to as a “altcoin.” The majority of altcoins were developed in an effort to make Bitcoin better in some way, and the term “altcoin” was originally used to refer to alternatives to Bitcoin. Litecoin, Namecoin, and Peercoin
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Coins: Ethereum and USD
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are illustrations of altcoins.
There is a limited supply of some cryptocurrencies, such as Bitcoin, which serves to increase demand and validate their perceived value. As an illustration, the creator(s) of Bitcoin set a maximum supply limit of 21 million units.
Tokens are regarded as programmable assets that allow the creation and execution of one-of-a-kind smart contracts, even though they are built on an established blockchain. These contracts can be used to prove asset ownership even when they are not part of the blockchain network. Tokens can be sent and received and can be used to represent value units like cash, coins, digital assets, and electricity.
The values of stablecoins are fixed to a range of fiat currencies or assets, including gold. Stablecoins, which are typically pegged exactly to the US dollar, allow users to invest in an asset that has the same value as their home country’s currency but can still be transacted and stored within the ecosystem in a manner akin to cryptocurrencies.
Another kind of cryptocurrency is called a nonfungible token (NFT), which stands for a unique asset that cannot be replaced. For example, a Bitcoin is fungible, which means you can swap one for another and get exactly the same thing. A unique trade card, on the other hand, is not replicable. If you switched it out for another card, you would receive something completely different.
Depending on your objectives, it might be necessary to research the type and function of any given asset before using it. Not every digital asset was made with investing in mind.
Are cryptocurrencies legal?
Global regulation has become necessary due to the expansion of the cryptocurrency market. Over time, the United States has increased its surveillance efforts in space. Following the ICO frenzy of 2017 and 2018, the Securities and Exchange Commission (SEC) took tough measures against these initial coin offerings. Various roles have also been played by the Commodity Futures Trading Commission (CFTC) and other U.S. agencies.
Furthermore, due to changing regulatory guidelines, the regulation of cryptocurrencies outside of the United States has evolved over time. For instance, the European Union’s fifth Anti-Money Laundering Directive mandates that, in some areas, buying, selling, and other cryptocurrency-related activities must adhere to specific regulations.
Since cryptocurrency is a relatively new industry in comparison to other industries, there is currently a lack of legal clarity regarding the requirements for all sectors of the market. Classifying assets is one aspect of this clarity. Commodities include Bitcoin and Ether, but many other assets are not sure how to be classified.
Conclusion:
The first question posed to community currency designers is often about this sensitive subject, even though it’s the last thing they want to think about.
In most regulatory regimes, a CIC is essentially a tradable voucher at the time this chapter was written. Taxation on these vouchers is, at best, ambiguous, much like trading any cryptocurrency. Formal tax regimes are entered when cryptocurrency, including CCs, is exchanged for national currency. I say “at the time of writing” because the tax system is dynamic and it is critical to actively consider the best ways to levy, collect, and distribute taxes. The following are some ideas about CC taxation that need to be thought about.
