A cryptocurrency is a digital or virtual currency secured by cryptography, making it extremely difficult to counterfeit. Cryptocurrencies allow for secure online payments which are labelled in terms of virtual “tokens,” which are represented by ledger entries. Crypto refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as public-private key pairs, and hashing functions.
Most cryptocurrencies are built on decentralized networks such as Ethereum and Binance Smart Chain to name a few, which are based on blockchain technology which is a distributed ledger enforced by a disparate network of
computers.
A defining feature of cryptocurrencies is that they are predominantly not issued by any central authority, rendering them apparently exempt to government interference or manipulation.
Types of Cryptocurrencies
Bitcoin is the first blockchain-based cryptocurrency, which remains the most popular and most valuable. Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto”.
Over the years, thousands of alternate cryptocurrencies with various functions and specifications have been created. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.
Some of the popular cryptocurrencies include, but not limited to Ethereum, Litecoin, Stellar, Binance Coin, Cardano, just to name a few.
Value of Cryptocurrencies in Commerce
- Cheap and instant worldwide payments – The transaction costs of cryptocurrencies are low, and payments can take place almost immediately and worldwide without the intervention of a bank or third party (transactions are peer-to-peer).
- Banking the unbanked – Approximately 2 billion people worldwide lack access to a bank account. However, a high percentile of these people own a mobile phone. Cryptocurrencies and blockchain technology make it possible for these people to carry out financial transactions via biometrics and a mobile phone and thus increase their prosperity.
- Security and Privacy – Personal data is not required for payments using cryptocurrency and the transactions take place anonymously.
- Traceability of transactions – Each transaction within the blockchain is verified by a decentralized network of devices (called nodes), timestamped, and linked to the previous transaction, creating a chronological series of transactions. The ledger of these successive and irreversible transactions (also called the blockchain) is continuously synchronized and updated on all nodes participating in the blockchain network. This makes it impossible that a third party manipulates the payment, or the sender reverses the payment.
Conclusion
Cryptocurrency bills itself as a form of money, and as a result, respective government tax agencies consider it a financial asset or property. So, as with most other investments, if you reap capital gains in selling or trading it, it will be expected and the responsibility of crypto users to declare their profits to the respective tax agency.