Cryptocurrency Basic Inside Out Guide
Ever conceptualised the idea of digital innovation taking over every aspect of our daily lives so that even digital currency would become an actual exchange medium? Still, confused about whether cryptocurrency is genuine or not? Have unanswered questions regarding how crypto is different from traditional currency and how it works?
This detailed article aims to provide you with in-depth insights into all the basics of crypto to keep you updated and prevent any FOMO (fear of missing out) because it is the trending big talk. Consistently, many futurists expect crypto to modify the future of exchange mediums drastically, while on the other hand, economists sceptically judge cryptocurrencies and their ambitions to date.
Without further ado, let’s begin with the fundamental understanding of what cryptos are and how various properties identify with cryptos to analyse and help you pick a side precisely.
What is Cryptocurrency?
Cryptocurrencies are digital currencies utilised, stored, and traded online. It’s similar to buying tokens in exchange for actual pounds. The primary purpose of creating electronic currency is to maintain a decentralised system and avoid any central point of failure, like the bank.
Numerous successful companies have indulged in the crypto world due to its attractive and innovative concept, like Facebook’s Libra cryptocurrency and Tesla’s billion-dollar investment in bitcoin. It depicts how trading in crypto was once just something we could imagine but has gradually become a modern-day realistic financial revolution in today’s fast-paced time.
Even after going through the most recent news of crypto and its advancement, many of us fail to differentiate cryptocurrency from traditional currency; therefore, it is vital to distinguish between them with a clear mind.
Traditional Currencies Vs. Cryptocurrencies
The traditional currency system that includes paper money, plastic money and other commodities are all utilised as a medium of exchange. However, some apparent loopholes exist, like a technical issue may arise while transferring money, your account may get hacked, or your transfer limit may exceed. All these scenarios depict that a central point of failure exists. It is problems like these that have pushed individuals like Satoshi Nakamoto and his followers to come up with an improved form of currency- crypto.
Cryptocurrency promises to eliminate these modern banking problems with its essential features and differs from traditional currencies in many aspects, as demonstrated in the detailed chart below.
Properties of Cryptocurrencies
The new way of storing and transacting currency with cryptocurrency appears to be better than traditional fiat money and gold due to the properties of cryptocurrency. These mainly include:
- Decentralisation – the ownership and control of cryptocurrencies do not lie with any individual, state, or single computer as cryptocurrencies are spread across a network of thousands of computers. This property ensures seamless resistance to censorship from the government body.
- Peer-to-Peer– you can directly pass on cryptocurrencies to other people online without dealing with third parties like banks or PayPal.
- Portability– you can quickly move crypto from one account to another.
- Divisibility– just like money, cryptocurrency can be divided into small units.
- Scarcity– there is a fixed supply of cryptocurrencies, keeping them scarce.
Are Cryptocurrencies Legal?
The legality of cryptocurrencies diverges from country to country, whereas buying and selling cryptocurrency is legal in the UK. Crypto-friendly banks like Barclays operate within the UK, and HMRC’s rules indicate tax policies over capital gains made on crypto investments. Thus, guaranteeing the legitimisation of mining and trading cryptocurrencies within the UK. In fact, our expert cryptocurrency accountants have acquired sufficient experience to help businesses with accounting, tax and business planning all-encompassing cryptocurrency transactions.
However, If you want to get more updated information about cryptocurrency basics.
How Does Cryptocurrency Work?
After understanding the basics of what cryptocurrencies are, it’s vital to know what goes behind the working of cryptocurrencies to understand the system. Here comes the key concept of blockchain.
What is Blockchain?
Cryptocurrency entirely operates on blockchain technology, meaning that distributed ledger technology (DLT) helps remove third party interference from the cryptocurrency system. The blockchain records every transaction regarding cryptocurrency on the DLT shared database, where a group of information is called a block. These blocks are continually added to the database one by one, forming a linear chain of blocks. With blockchain, the ledgers are maintained on a consensus; therefore, everyone in the chain must approve of a transaction to be added to the chain. It is only then that the chain can be secured with cryptography. Moreover, blockchain technology also enables real-time ledger updates and accessibility for all the involved parties to ensure that all the ledgers are identical and updated. It’s important to note that it can neither be amended nor omitted once a transaction is added to the chain and confirmed.
The Main Concept of Cryptography
Cryptography is an encryption and decryption technique that provides a unique code to each coin(cryptocurrency) to prevent any third-party interference, be it through eavesdropping or for any other malicious purpose against your data. Cryptography uses computer-generated algorithms like SHA-256, where the hashing algorithm is a public key shared with every person.
This technique is mainly carried forward for three reasons:
- To keep your online transactions secure
- secondly, to control the supply of cryptocurrencies
- To verify the transfer of assets
How Does Blockchain Work?
The cryptocurrency transactions are verified through crypto mining, and it’s essential to know all about what it is and how it works when learning about the basics of cryptocurrencies.
The term ‘mining’ refers to two things that occur. One, where cryptocurrency transactions are verified as discussed above and two, where new cryptocurrencies are created. Cryptocurrency creation mainly depends on three things:
- The community of individuals who mine and convert coins through the cryptocurrency network.
- The correct code to create and encrypt the software on which the cryptocurrency will operate.
- The brokers’ confidence in value and trade with cryptocurrencies builds further trust in digital currency.
Cryptocurrencies are created when miners use their excelling computing powers to solve complex mathematical problems to verify transactions to add to the blockchain. The first individual who successfully solves the problem and authenticates the related transactions on each block is rewarded with a set of coins for his services. This process is called mining, where instead of mining for gold or coal, miners dig for new cryptocurrencies.
Among the number of ways cryptocurrencies are obtained, mining and trading are the most popular ways to carry forward. While they both work efficiently, one may work better for you than the other, depending on your knowledge and expertise. Crypto trading follows a procedure of either speculating on cryptocurrency price changes through a CFD trading account or buying and selling coins via a crypto exchange.
The CFD trading derivatives enable traders to speculate on cryptocurrency price movements without taking ownership of the coins. Thus, you will short sell the coins you believe will fall and buy the cryptocurrencies you think may rise in value when trading. The buying and selling of coins are leveraged; therefore, you will be required to deposit a small amount called a margin to gain total exposure to the cryptocurrency trading market.
If you trade cryptocurrencies via a crypto exchange (like Coinbase or Binance), you will be purchasing the coins yourself. you will have to set up a digital wallet like a Coinbase Wallet, create an exchange account, assign the asset value, and store the tokens in your wallet until you are prepared to sell them off.
Some exchanges may not be relatively easy to use and may hold deposit limits and expensive maintenance costs; therefore, you will have to get the hang of the technology involved in crypto exchanges before diving deep into the trading process.
After going through the working of cryptocurrencies, be it through mining, trading, or both, it’s essential to have updated information regarding the different types of cryptocurrencies present in the current digital market and their market worth so that you can make precise and lucrative decisions regarding buying and investing cryptocurrencies.
How Many Cryptocurrencies Are There?
According to statistics, over 4000 different cryptocurrencies exist in 2021, which depicts a massive increase from the handful of digital coins in 2013. The total market worth of cryptocurrencies has risen to a great extent as well, and we will see how market capitalisation depicts the influence of the best cryptocurrencies ahead. But before that, it is best to recognise the different types of cryptocurrencies present in the market to understand how cryptocurrencies function distinctively.
Types of Cryptocurrency
Fiat money is a currency that holds no intrinsic value of its own but is utilised as a medium of exchange by the general public. Therefore, fiat cryptocurrencies are currencies that do not aim to do anything beyond creating a cheaper, decentralised, and easy to use fiat currency. These primarily include bitcoin (the original fiat cryptocurrency), Litecoin and Monero.
Unlike fiat cryptocurrency, the price of Stablecoins is tied to a stable asset to minimise extreme fluctuations. This enables Stablecoins owners to benefit from cryptocurrency features along with minimising volatility. Cryptocurrencies are indeed better than fiat currencies in terms of security, anonymity, and portability, as discussed earlier as well, but the factor of instability is permanently attached to them, and this is where Stablecoins come into play.
You can hold your assets in cryptocurrencies like Tether to ensure stable asset values as it is known as the most well-known Stablecoin because its price is tied to the US dollar.
Utility tokens are cryptocurrencies used to power business and additional functions on a blockchain network. The utility tokens do not function as currencies but hold a monetary value because a particular demand for utility tokens exists. The most popular utility tokens are Ether, XRP and EOS.
What Are They Worth?
The worth of cryptocurrencies has surpassed $1 trillion in 2021, where it has now become the world’s fifth-most circulated currency by value in the world. Especially after the pandemic where our lives have increasingly depended on digitalisation and inflation has risen massively due to the printing of bills, fresh opportunities like cryptocurrencies have been on the rise significantly.
Best Cryptocurrencies by Market Capitalisation
Illustrating the ten largest trading cryptocurrencies by market capitalisation according to the latest statistics available
While many see cryptocurrency as a replacement to the traditional currency, especially after the market value it holds, other individuals like investors and speculators find cryptocurrencies to be great investments. Let’s see why.
Investing in Cryptocurrencies
Businesses invest in cryptocurrencies due to several reasons. If you are an investor constantly heading towards the speculative element of making massive profits from value fluctuations, the crypto market could be a great place to experience the drill. Apart from the speculative element, you can consider investing in cryptocurrencies as a geopolitical step. Investors have recognised past trends that show how bitcoin’s price increases with growing political instability, giving you insights into how investment decisions work.
Another major element of investing in cryptocurrencies involves ICOs. A fundamental phenomenon under the cryptocurrency investing bracket is initial coin offerings. With ICOs, you can build business capital to develop crypto technologies and create new blockchains. Thus, instead of offering shares to gain equity, you will be able to offer digital coins. It’s advisable to consult an investment advisor when considering ICO as a funding option for your business to make the right decision.
Additionally, you can follow our investing tips before investing in cryptocurrencies to stay on the safer edge. These include:
- Allocate a small fraction of your portfolio to cryptocurrencies or hire a good financial advisor to allocate your assets and invest your money safely.
- Choose the cryptocurrency you will be investing in after going through all the types.
- Choose the most suitable platform(exchange) for buying cryptocurrencies.
- Store your cryptocurrencies in a crypto wallet.
- Stay updated with market fluctuations.
We have spent most of our time lauding cryptocurrencies; however, both supporters and sceptics exist in the crypto world; hence it is vital to identify and understand the several issues that prevent these technologies from excelling unquestionably.
The Outstanding Issues with Cryptocurrencies
1. Complex technology
Cryptocurrency is based on complex blockchain technology, and developing a perfect grasp of the details is a highly challenging task. This technology’s complexity and exclusivity have pushed many businesses away from considering cryptocurrencies as an opportunity, be it in ICO or trading.
2. Volatility with the Lack of Inherent Value
A severe problem attached to cryptocurrency is price volatility. Influential economists like Warren Buffet believe that a lack of inherent value is tied to cryptocurrencies, thus declining business confidence. Your business can overcome this issue by using Stablecoins to ensure that market volatility does not adversely impact you.
3. Regulatory Implications
As crypto technology is decentralised and unregulated by the governments, the risk factor of owning and investing in cryptocurrencies will always be a concern. Again, referring to Buffet, some economists consistently disregard the survival of cryptocurrency due to regulatory implications, giving many business owners a heads-up to stand back.
4. Implementation Challenges
The implementation challenges businesses face with cryptos are scalability, high energy consumption, lack of adequate skill set, adverse public perception, and inefficient technological design.
Even though these issues exist with crypto technology, regulators, banks, governments, and other central agencies within the UK are looking forward to making cryptocurrency a more functional currency by developing crypto-friendly banks and proper HMRC rules. What is essential to consider is how tax authorities worldwide are now paying more attention to crypto tax-related issues. It would be best if you fully remained compliant with your crypto tax obligations to avoid any unnecessary trouble for your business. But the question is:
How Are Cryptocurrencies Taxed?
The HMRC rules for crypto taxation depend on how your business deals with cryptocurrency. If your business trades cryptocurrency as a business operation, then income tax rules will apply. However, if your business holds cryptocurrency and assets as investments, gains will be subject to capital gains tax rules , updated by the government.
The latest rules by HMRC regarding cryptocurrency taxation seem to have many exceptions regarding different scenarios for every business due to the complex and emerging crypto technological system. It’s a prime choice to hire a cryptocurrency advisor and ensure to file and pay your business taxes without any hassle before it is too late.
Also, We have the latest information regarding cryptocurrency Tax in the UK.
The Future of Cryptocurrencies
The crypto market is excelling every day as new cryptocurrencies emerge every week. However, the future of crypto is still perceived to suffer from a conflict between anonymity and regulation as several cryptos have been linked to terrorist attacks, making the governments more furious to regulate the cryptocurrency. Crypto assets and currencies are taxed in the UK, regardless of cryptocurrency’s primary emphasis on remaining anonymous and unregulated.
Irrespective of that, Futurists believe that crypto will take over 25% of the world’s national currency by 2030, meaning that cryptocurrency will then be used as a well-known and trustable mode of transaction globally.
The revolution of crypto has already begun as institutional investors have started investing in cryptocurrencies, and businesses are gradually discovering the power of smart contracts like tokens on Ethereum. Likewise, businesses buy currencies like bitcoin to protect themselves from significant national currency devaluations to emerge as flourishing businesses in the highly competitive market. But the potential of government involvement in regulating these currencies stands ahead of us, thus leaving the decision for you to either stand beside and observe the market shift or become part of history in the making.
Contacting Clear House and speaking to our crypto experts can help you get better insights into the crypto market. Additionally, subscribing to our blog and reading about the latest updates on crypto can guide your business to make prudent decisions.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 13 years of experience in practice across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. This dexterity led him to be Enterprise Nation’s Top 50 Advisors. Jibran recognised the need to manage the innovative disruptions sustainably early on and shaped Clear House Accountants not just to be compliance specialists but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
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