Unless you have been marooned on a desert island for the last decade you have probably heard of cryptocurrency, or “crypto”. With a cryptic name like that, many of us (admittedly including myself) are wondering just what on Earth is it. Well, let’s see if we can get to the bottom of this mysterious concept and what it means to us.
Cryptocurrency is a type of currency that unlike traditional currencies such as dollars and pounds, has no physical form in the real world- there is no mint, no paper bills, and no metal coins for grandmas to count out in the convenience store to pay the exact amount. Cryptocurrency is entirely digital, existing only in the virtual world of the internet and computing and is accessed using special crypto accounting software instead of traditional banking institutions.
So, what is it for? Cryptocurrency provides an alternative form of payment that isn’t distributed or controlled by any central authorities. It is most often used for buying online goods and services like apps and games, or as an investment to be traded for profit. The name cryptocurrency comes from the special cryptographic coding techniques that enable people to buy, sell or trade securely without involving a third party like those nosy governments and banks.
This is where it gets tricky. The value of cryptocurrencies are backed by a coding technology called blockchain. This is basically a virtual accountant who maintains tamper-resistant records of transactions and keeps track of ownership. Blockchains solved a problem faced by previous attempts to create purely digital currencies by preventing the production of copies that could be spent twice.
Some types of cryptocurrencies are created by a process called mining, perhaps the most famous example of this is Bitcoin. Mining Bitcoin is a highly energy-intensive process in which supercomputers work to solve complex puzzles to verify the authenticity of transactions. The owners of those computers that achieve this strike digital gold and receive newly created Bitcoins as a reward.
Currently, over 20,000 various cryptocurrencies are offered for public trading. Some of these are valued at hundreds of billions of dollars, whilst other more obscure types are basically worth nothing. If you have followed this so far, you might be considering getting into the game yourself. If you do, start with a cryptocurrency that’s well-established in the market and is commonly traded.
Some of the most well-known and ostensibly more reliable options are:
- Bitcoin, of course, was the first kid on the blockchain and still holds the crown of most valuable.
- Litecoin is a cousin of Bitcoin with fewer calories and is used to simplify making payments.
- Dogecoin was lightheartedly named for a dog, and is now considered to be one of the most valuable options available.
- Ethereum is a heavy hitter designed to handle financial transactions more complex than those Bitcoin can manage.
- Cardano competes with Ethereum and is another very popular currency.
- Solana says it’s better than Ethereum because it is speedier and more cost-effective.
- Stablecoins are a group that includes Tether and USDC, whose values are intended to stay stable by being tied to real-world assets like the US dollar.
As well and managing your crypto portfolio it is also just as important to keep your accounts in order to manager your taxes. Managing crypto taxes is vital and utilising crypto accounting software can greatly assist in this process. Compliance is crucial to avoid legal consequences, penalties, and fines. By accurately reporting cryptocurrency transactions, individuals can calculate gains or losses, maximize deductions, and minimize tax liabilities. Additionally, adopting crypto accounting software streamlines the tax management process, making it more efficient and reliable. Ultimately, adhering to tax regulations fosters the integrity and acceptance of cryptocurrencies in the financial landscape.
