Cryptocurrency Basics: All You Need To Know

The world is quickly moving towards digitalisation and now it has made such a drastic change that our currencies have turned into a digital collection of 1s and 0s. In the past decade, cryptocurrency has quickly become one of the most rapidly growing industries with more than 1.3 trillion USD in market capitalisation. If you have just come across the trend recently and don’t know how this digital cryptocurrency works then worry not as Clear House Accountants have created this guide to answer almost all your questions and to walk you through cryptocurrency basics. 

What is Cryptocurrency?

A cryptocurrency is a digital form of currency that is entirely decentralised and is established over blockchain technology. In layman terms, cryptocurrencies are sets of code written over the internet and secured by blockchain. 

The reason behind all this hype for cryptocurrencies is primarily due to their decentralised nature, meaning it operates outside the scope of your traditional banks and the government. This is also one of the more serious reasons why cryptocurrencies are too volatile to be accepted by businesses on a broader scale as a mode of transaction. Although you can still buy and sell these cryptocurrencies just like any other commodity. 

A lot of people treat cryptocurrencies as an investment opportunity due to their volatile value. For example, the price of the most renowned cryptocurrency, Bitcoin, went from £247 in December of 2015 to £30,864 when writing this. The cost of cryptocurrencies tends to rise over time as they are modelled with precious metals in mind, in the sense that there will be a time they will run out and no more could be mined, leading to a limited supply and a higher “value”.

Cryptocurrency Basics You Need To Know

Before we move on to address the more detailed questions, let us list down some of the cryptocurrency basics. 

• Cryptocurrency is digital, meaning there is no physical existence to your currency, and it exists only in the form of code over the internet.
• A blockchain is an online public ledger of all possible transactions made regarding cryptocurrency. It is regulated by a peer to peer network that is responsible for verifying transactions and creating new units of the currency.
• Cryptography is used to make sure that the transactions are secure and cannot be replicated. The two essential elements of cryptography are “hashing”, the process of verifying and maintaining the integrity of the blockchain and encrypting the address and transactions of people, and “Digital Signatures”, which work as proof of ownership towards a piece of encrypted information.
• Blockchain mining refers to recording a new transaction made over the blockchain and creating a new unit during the process. This requires a specific set of hardware equipment to crack down the cryptography and look for new codes on the blockchain, leading to more units of the cryptocurrency.

These are all the cryptocurrency basics you need to get familiar with if you are looking to start working or investing in cryptocurrency. We shall now move on to address some of the most frequently asked questions regarding cryptocurrency.

You Must also be Wondering

What can Cryptocurrency be Used for?

Cryptocurrency is famous for being some of the most secure forms of currencies currently available to use, but their use is limited as of now. Many big names over the internet accept cryptocurrency as a means of payment, such as Microsoft, Etsy, StockOver, and Expedia. This means that if you want, you can furnish your entire apartment and travel the world using cryptocurrencies. But the most significant benefit of cryptocurrency we have noticed till now is as a short-term investment. Due to their current business model, cryptocurrencies often see massive variability in their prices, making them a perfect source of short-term investments. 

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Now, if you’re a business owner, cryptocurrencies have their uses, number 1 being something that enables you to transfer large amounts of money quickly and with almost zero costs. For example, a recent transaction worth $99 million in Litecoins merely took a minute or two to process and cost the sender $0.40.

Is Cryptocurrency Secure?

This question is a little ambiguous to answer straightforwardly, as security can relate to different things regarding cryptocurrencies. If you mean, it is the currency in itself secure. Yes, blockchain technology ensures that a cryptocurrency can neither be replicated nor destroyed, making it one of the safest currencies in the world. But crypto trading is another story. Although the numbers are a lot better now, in the beginning, as the blockchain was still immature, there were a lot of cases of wallets and exchanges being hacked and currencies being stolen. But over time, the number of instances has wilted down, but it is still not something that we can ignore.

Is Cryptocurrency a Good Investment?

Like most long-term investments, cryptocurrencies can either make you filthy rich or lead you to lose all your savings, depending on how smart and knowledgeable you were when you made these investments. Cryptocurrencies strive based on their market acceptance and people who invest in them and increase their market capitalisation. If you can read the charts and predict the trend of a particular cryptocurrency, then there is no better investment than crypto right now. Another reason for cryptocurrencies to be a good investment is their business model. Most cryptos are said to have a cap regarding the units that could be produced; for example, bitcoins are said to have a maximum mineable limit of 21 million. This means that when the supply cap is hit, the value of the currency will undoubtedly go up. It’s just a question of whether you were patient enough for it to reach that or not. 

What is the best cryptocurrency to invest in?

According to recent statistics, the pandemic has caused an economic crisis all around the world. Rather than making huge profits, people have been searching for stability and inflation-free cryptocurrencies. Some of the most well-renowned currencies, such as Bitcoin, Ethereum, and Litecoin, have seen a rise in demand because of this. Bitcoin is considered to be the safest currency currently available in the market. At the same time, Litecoin is said to have a higher supply limit as compared to Bitcoin, making it more accessible yet just as secure, whereas Ethereum is considered to hold a very high liquidity rate and is also more globally acclaimed as it is deemed to be the most effective investment tool in the coming future. So, these three are considered to be the best cryptocurrencies if you are looking to invest in crypto in 2021.

Can cryptocurrency be taxed?

Yes, cryptocurrencies are subject to taxes, although there are different treatments towards cryptocurrency depending on the nature of the transaction. For example, suppose you have been holding on to cryptocurrencies as a personal investment. In that case, you will be subjected to paying a capital gains tax mentioned when selling those currencies, whereas if the transaction is classified as a business activity, any money you earn from it will be considered income and will be subjected to income tax. Although, all allowances apply to these investments as well. For example, assuming you bought a bitcoin at £100 and then sold it at £10,000, you’ll be earning £9,900 in capital gains. In the UK, you are allowed a capital gain allowance of £12,300; hence, no tax needs to be filed.

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Can cryptocurrencies be converted to cash?

Yes, cryptocurrencies can quite easily be converted into usable cash. The easiest way to go about this is by selling your owned coins in the local crypto exchange. Like stock exchanges, a crypto exchange is a place set up to facilitate the buying and selling of cryptocurrencies. However, to avoid any illegal activities, you will be required to use the same bank account details to withdraw the money from the currencies as the one you used to purchase them. The transaction usually takes up about 5-7 business days and is subject to transaction fees depending upon the country and exchange rates.

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What is a crypto wallet?

A crypto wallet usually comes in the form of software that helps you store your cryptocurrencies. When you buy cryptocurrencies, you are provided with an encrypted password that lets you make your currencies secure from illegal activities. Your crypto wallet saves these passwords and allows you easier access to your currencies. It also facilitates crypto transactions as they are directly linked with your local exchanges.

Who is a crypto miner?

A miner is a person who has set up a mining rig that acts as a node in the blockchain structure. It collects transaction information and organises it into blocks. When a transaction takes place on a blockchain, all nodes are notified about it and work together to organise them into a block, creating new currency units during the process. This is done by hashing the blocks repeatedly until the entire block is hashed and turns into a hash tree, an organised form of all the transaction hashes. The new unit of currency, or “the block reward’ is granted to the first miner who successfully finds the valid hash first.

How to buy cryptocurrency?

Any buying or selling of cryptocurrencies is done via crypto exchanges. But before you get to the buying part, you will need to be prepared. To be able to buy cryptocurrencies, you will first need a crypto wallet. For this, find the most accessible wallet and make an account, allowing you to store the currencies you are about to purchase. The next part is just deciding on a currency from a massive pool of over 4000 currencies available to you, buying them from your local exchange, and storing them in your wallet.

Are there legal markets for cryptocurrencies?

There are no legal marketplaces or tender for cryptocurrencies when it comes to exchanging them for goods and services. Still, if you are looking to buy and sell currencies, the crypto exchanges are legal entities that will help you make the whole process easier. Not having a legal tender for cryptocurrencies does not make them any less dependable as credit cards do not have a legal tender. Yet, they are one of the most popularly used cash alternatives. 

Who regulates cryptocurrencies?

Before 2013, like most of the world, the UK did not have a regulatory body to oversee the transactions regarding cryptocurrencies, but the governor of the Bank of England stated that cryptocurrencies are the next big thing and need to be regulated. This is where the FCA, The Financial Conduct Authority, was created. As an independent regulator, the FCA has the authority to regulate all businesses relating to cryptocurrencies in the UK.

Can you track your cryptocurrencies?

Yes, although cryptocurrencies are notorious for being semi-transparent. They can still be tracked. This is done by following the breadcrumbs left behind by the currency when a transaction is made. 

Will cryptocurrency replace traditional currency?

While it is highly unlikely, there is a slim possibility that cryptocurrencies will become the “cash” of the future. And if that does happen, there is a lot to look forward to and to fear. For example, being a decentralised currency like Bitcoin, it is challenging to manipulate the currency to benefit a particular party. The concept of a single-income world can become a reality with cryptocurrency taking over traditional currency. However, if cryptocurrencies do take over, making the current financial system of the entire world obsolete, and the need for an entirely new infrastructure will arise. And people who got into cryptocurrencies way earlier than the rest would have an unfair advantage over the rest as there would be no standard of exchange.

What can you expect from cryptocurrency in the future?

With countries and businesses moving towards making transactions in cryptocurrencies taxable and public, it can be assumed that governments plan to make cryptocurrencies a significant financial part of their economies. 

Schwartz predicted that “the next decade brings an explosion of low-cost, high-speed payments that will transform value exchange the way the Internet transformed information exchange”, which means that he believes cryptocurrencies to be a massive part of our future day-to-day life.

Ending Note

As the world moves towards a new form of currency, a revolution has silently started to occur in the world’s economy. People have been investing in cryptocurrencies like crazy, with the total market capitalisation reaching over 1.7 trillion dollars. We cannot say for sure if this is a good thing or a bad thing, but we can say that now is the perfect time to get started on your crypto investments. 

If you are looking for professional help in figuring out the current market speculations or cryptocurrency tax services, give us a call and talk to our cryptocurrency tax experts.