More people are exploring ways they can earn money through various online platforms on a daily basis. At the same time, people are also looking for ways to earn through cryptocurrencies. The crypto sector is heading towards mass adoption and many people will soon be earning funds in digital currencies.
For individuals with interest in cryptocurrencies, we have various ways to earn. The interesting part is that earning cryptocurrencies does not require much work. Here are some of the ways you can earn cryptocurrencies in 2019.
Use Brave Browser
Brave browser became a solution for people that don’t want to see ads at all. But what they don’t know is that Brave recently launched their service where you could actually get paid for seeing ads. And the best about this? You can control the ads frequency and if you want to see it or not. Don’t expect now to get rich overnight from it, but its still a perfect option to either block ads or wish some extra BAT while watching ads. And who knows? Maybe BAT would reach $1 or more in the future – improving your earnings. Its a nice & simple way to get some extra cash while browsing – which you do anyway – but this time you can get paid for it.
Under this category, you earn through completing micro tasks. Some of the microtasks include article writing, social media management, and referrals. With micro tasks, your goal is to push for large scale participation. The compensation is based on factors like quality of work and the type of job. Looking for micro jobs is also known as bounty hunting and it can be traced back on the Bitcointalk platform.
Bounty hunting has been growing with time. Platforms like Bounty0x, are known to legitimize micro-tasks. The platform has a mutually incentivized ecosystem for companies to host bounty hunters to complete tasks. Bounty0x is set up on a blockchain with its own token, BNTY. The token incentivizes work and solves the trust issues with other bounty platforms. Bounty0x aims to be the leading base for crypto earning.
In terms of popularity, masternodes are still not very common in the cryptocurrency world. However, masternodes can be a real source of cryptocurrency income online. Masternodes draws some similarities from cryptocurrency mining. Masternodes are utilized in the Proof-of-Stake projects for block verification. Users only dedicate their computer’s processing power to the network. Every single masternodes requires a specific amount of its native token to be staked.
Earning from master nodes is based on a number of factors. Recently, masternodes have been attracting the attention of scammers. To invest in masternodes, you need a long term investment plan. For example, Dash masternodes earn about 6.8% yearly.
We have the existence of Proof-of-Stake coins that pay users rewards. Holders earn rewards by staking their coins. This model of earning resembles the placement of masternodes but requires less work. This model is simple, as a cryptocurrency holder, all you have to do is store your coins is a specific wallet and earn rewards by staking more coins.
This means of earning cryptocurrency shows signs of growing considering that big players like Cardano and Ethereum are planning to offer staking services. Some of the best paying platforms include Komodo which pays 5% commission on all staked coins.
Accepting Payments In Cryptocurrencies
Receiving cryptocurrency payments works well for e-commerce websites. If you own a company or business, accepting cryptos will be a viable way to earn. Some of the popular platforms that accept cryptos include Shopify and WordPress plugin like WooCommerce. With this platform, you can earn different cryptos where you can store them, sell or convert to fiat.
Crypto faucets pay for your time and attention. They range from websites with ads or games. With basic websites, users only need to complete a CAPTCHA while other platforms offer a survey that should be completed. In other cases, we have applications that pay satoshis for eliminating aliens. However, it is important to note that crypto faucets are the least lucrative form of earning cryptos online.
Mining is among the most lucrative form of earning cryptocurrencies. This mode of earning has produced millionaires in the crypto sector. It was more lucrative during the earlier years of cryptocurrency inception.
Normally, cryptocurrencies deploy Proof-of-Work consensus algorithm. In return, miners conduct mathematical algorithms in exchange for a block reward. Profit margins are controlled by the crypto’s market value, cost of electricity and cooling of mining rigs. Although mining profit has dropped, you can still earn through setting up your own mining rig or taking part in cloud service mining that handles the complex part.
Over the years, the number of casinos paying gamblers in cryptocurrencies has been on the rise. If you can handle the risks of gambling, then this should be your next venture. With online casinos, you enjoy some convenience since you don’t need to verify your personal details before gambling.
Typical casinos are usually tedious to sign up as they require a user to undergo a cumbersome verification process. However, before venturing in cryptocurrency gambling, you should do sufficient research about the authenticity of the platform you have selected. The industry is very unregulated and you can be exposed to risks. Visit platform like CoinClarity to learn more about cryptocurrency gambling.
If you have experience in trading, then your doors to earning in cryptocurrencies are open. Note that day trading requires patience and experience. If you have experience, use platforms like Bitmex and Coinbase to trade.
If you have the relevant skills, then freelancing is the best option for you to earn in cryptos. You can earn through skills like writing, photography, and editing. If you don’t harbor these skills, no need to worry as we have numerous online resources to help you get started. Unlike other platforms, freelancing is easy to start. We have countless companies that pay freelancers in cryptocurrencies. We also have freelance job service platforms that only pay through cryptocurrency. Visit platforms like Bitgigs.com, CryptocurrencyJobs.com, and Cryptogrind.com.
If you can manage the volatility within the cryptocurrency sector, then this is the best platform to earn in cryptos. All you have to do is buy cryptos in fiat and hold on to it. The next phase will require you to buy low, sell high, repeat on a long-term scale. If you are patient enough, you will earn big when the crypto market improves.
However, before getting into this business, conduct enough research. Always be on the lookout for cryptos that are near the bull run phase. Gain trading experience and sell some of your cryptocurrencies. The bottom line is to have enough experience and knowledge to enhance your chances of earning big.
With airdrops, you can conduct simple tasks like following a company or holding cryptos at the correct time and earn digital assets. Airdrops are mostly utilized when marketing ICOs. One of the recent companies to conduct airdrops is Stellar. The airdrop had a giveaway of $125 million in XLM tokens to Blockchain wallet users.
Crypto Blogging Platforms
We have online platforms where cryptocurrency writers can post articles and earn cryptocurrencies. Articles posted on these platforms get claps or upvotes. If it gets 50 claps, the writer begins building an audience. The claps are then converted into Satoshi. A platform like Steemit operates on such a model. With more claps, you earn more cryptocurrencies. Steemit operates under EOS and BitShares. It needs the use of STEEM. We also have Publish0x where writers sign up and earn tips from readers based on their cryptocurrency of choice.
Generally, affiliate marketing is one of the popular means of earning online. You can earn in cryptocurrencies if you have the right affiliate marketing strategy. Platforms like Coinbase and wallets like Ledger Nano S pay commissions in cryptocurrencies for individuals who wish to market their products.
Notably, before becoming a good affiliate marketer, you need some capital to learn how to build an audience and sales. Starting is always easy but it is difficult to sustain and earn from affiliate marketing. To earn more in cryptocurrencies, you need an audience that has more interest in cryptocurrencies.
Cryptocurrency Guide The short and easy answer to the title question is that cryptocurrency is decentralized digital money. But what exactly does that mean and how does it work?
What is Cryptocurrency
In this guide, I will answer all the questions you have about cryptocurrency. I’m going to tell you when it was invented, how it works and why it’s going to be so important in the future. By the end of this guide, you’ll be able to answer the question, “what is a cryptocurrency?” for yourself.
The world of cryptocurrency moves fast so there’s no time to waste. Let’s get started!
When I hear a new word, I look up its definition in my dictionary. Cryptocurrency is a new word for most people so let’s write a crypto definition.
What is Cryptocurrency and How Does Cryptocurrency Work?
Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.
What is Cryptocurrency
Miners try to solve mathematical puzzles first to place the next block on the blockchain and claim a reward.
What is Cryptocurrency EXCHANGE
An exchange is a business (usually a website) where you can buy, sell or trade cryptocurrencies.
What is Cryptocurrency WALLETS
Cryptocurrency wallets are software programs that store public and private keys and enable users to send and receive digital currency and monitor their balance.
There have been many attempts at creating a digital currency during the 90s tech boom, with systems like Flooz, Beenz and DigiCash emerging on the market but inevitably failing. There were many different reasons for their failures, such as fraud, financial problems and even frictions between companies’ employees and their bosses.
Notably, all of those systems utilized a Trusted Third Party approach, meaning that the companies behind them verified and facilitated the transactions. Due to the failures of these companies, the creation of a digital cash system was seen as a lost cause for a long while.
Then, in early 2009, an anonymous programmer or a group of programmers under an alias Satoshi Nakamoto introduced Bitcoin. Satoshi described it as a ‘peer-to-peer electronic cash system.’ It is completely decentralized, meaning there are no servers involved and no central controlling authority. The concept closely resembles peer-to-peer networks for file sharing.
7 Benefits of using cryptocurrency
Digital: Cryptocurrency only exists on computers. There are no coins and no notes. There are no reserves for crypto in Fort Knox or the Bank of England!
Decentralized: Cryptocurrencies don’t have a central computer or server. They are distributed across a network of (typically) thousands of computers. Networks without a central server are called decentralized networks.
Peer-to-Peer: Cryptocurrencies are passed from person to person online. Users don’t deal with each other through banks, PayPal or Facebook. They deal with each other directly. Banks, PayPal and Facebook are all trusted third parties. There are no trusted third parties in cryptocurrency! Note: They are called trusted third parties because users have to trust them with their personal information in order to use their services. For example, we trust the bank with our money and we trust Facebook with our holiday photos!
Pseudonymous: This means that you don’t have to give any personal information to own and use cryptocurrency. There are no rules about who can own or use cryptocurrencies. It’s like posting on a website like 4chan.
Trustless: No trusted third parties means that users don’t have to trust the system for it to work. Users are in complete control of their money and information at all times.
Encrypted: Each user has special codes that stop their information from being accessed by other users. This is called cryptography and it’s nearly impossible to hack. It’s also where the crypto part of the crypto definition comes from. Crypto means hidden. When information is hidden with cryptography, it is encrypted.
Global: Countries have their own currencies called fiat currencies. Sending fiat currencies around the world is difficult. Cryptocurrencies can be sent all over the world easily. Cryptocurrencies are currencies without borders!
The FATF’s recent guidelines have widespread implications on what private information exchanges need to track and collect from customers. Here are some insights on the recent regulation from CipherTrace’s Nov. 5 Cryptocurrency Travel Rule Compliance Conference and Hackathon.
An event oriented around the integration of cryptocurrency into the modern financial infrastructure may be at odds with the cypherpunk ethos. However, next year the cryptocurrency Travel Rule is going into effect and will affect cryptocurrency holders and blockchain-based institutions.
CipherTrace, a blockchain tracing and security company, put the conference together to shed light on the impacts of the upcoming Financial Action Task Force guidelines that take effect in June 2020.
The event also featured a hackathon, a competition where software developers attempt to build solutions in a limited timeframe. The competition was focused on developing better industry-wide solutions for transferring sensitive customer information while maintaining user privacy. The solutions developed would be integrated into CipherTrace’s Travel Rule Information Sharing Architecture.
FATF Overview and Impact In June 2019, the FATF issued its suggestions for the regulation of cryptocurrencies, which impacts financial institutions that conduct cross-border transactions. FATF is an intergovernmental entity (comprised of 37 countries and two regional entities) that aims to combat money laundering and disrupt terrorist financing.
The June 20 FATF guidelines outline new standards that virtual asset service providers must implement. Notably, the “Travel Rule,” a byproduct of the U.S. Bank Secrecy Act, requires financial institutions share personal identifying information of their customers who transact with other users across platforms.
Exchange between digital assets and fiat currencies;
Exchange between one or more forms of digital assets;
Transfer of digital assets;
Safekeeping and/or administration of digital assets or instruments enabling control over digital assets; and/or
Participation in and provision of financial services related to an issuer’s offer and/or sale of a digital asset.
Examples of entities expected to be impacted include cryptocurrency exchanges, custodial wallets, and non-custodial exchange operators.
Once the regulations go into effect, individuals conducting transactions between VASPs must provide the following information:
Originator’s account number,
Originator’s physical (geographical) address, national identity number, or customer identification number,
Why does a new global regulation for an emerging technology resemble an outdated U.S.-based regulation? The answer lies within the leadership model of the FATF organization.
FATF Guidelines and U.S. Regulations
The FATF presidency runs for a term of one year and the senior official appointed to the position is chosen by the FATF’s decision-making body, the Plenary. From July 1st, 2018, through June 30th, 2019, the FATF President was Marshall Billingslea, the Assistant Secretary for Terrorist Financing of the U.S. Department of the Treasury.
Given a year term and a desire to enact policy surrounding the transfer of digital assets, Billingslea proposed a variety of ideas that closely mirrored the BSA’s existent anti-fraud legislation.
The BSA is nearly a 50-year old piece of legislation, drafted to eliminate money fraud issues associated with wire transfer infrastructure. Though, this legislation doesn’t account for the nuances associated with distributed ledger technology.
For this reason, CipherTrace hosted the conference to help VASPs and cryptocurrency users better understand a regulation that will be enforced in less than a year that is riddled with issues surrounding the loss of user privacy.
Voices at the Travel Rule Conference
Conference organizers invited a breadth of stakeholders who might be impacted by the new FATF guidelines, from regulators to privacy-oriented developers. Stakeholders in attendance included privacy coin advocates, developers, financial institutions, cryptocurrency exchanges, regulators, government entities, law enforcement, and money transmitters.
Eliahu Assif, the chief security officer at eToro, discussed how the centralized exchange aims to be compliance-friendly by offering a complete audit trail and reconciliation process. From the perspective of the exchange, the new FATF regulations mean they must be able to identify each customer, both the individual and their wallet.
Lee Brown, Department of Homeland Security investigator, discussed the first time he and his team came across Bitcoin and how criminal enterprises have used the cryptocurrency. While Brown explained the criminal activity conducted on the Bitcoin network, he didn’t demonize cryptocurrency. He stated:
“Bitcoin is a new way to exploit money, just like Western Union, and wire transfers,” while simultaneously acknowledging “cash is probably the most anonymous.”
On the other side of the coin, the conference hosts carved space for a panel comprised of privacy advocates and representatives from Dash, Zcash, and Monero, as well as a Bitcoin core dev. The panelists agreed that using money or cryptocurrency for illicit purposes is indeed a bad thing and must be mitigated. However, the panelists also urged that privacy coins should be seen for their spectrum of use-cases. Each cryptocurrency should be evaluated on a case-by-case basis rather than outright outlawing all privacy coins, the panel concluded.
To encapsulate the perspectives of all parties, offer cryptocurrency users the option of privacy, and give VASPs a working protocol, CipherTrace also hosted a hackathon. The goal was to design an industry-wide standard that meets the regulatory needs for VASPs while protecting the personally identifying information of users.
To address the needs of the FATF guidelines, CipherTrace took a proactive approach with the development of is open-source protocol, TRISA. TRISA is an open-source, peer-to-peer protocol that aims to comply with FATF guidelines at a minimal cost to participants while offering an entity high-performance transaction processing.
The hackathon encouraged developers to expand upon the TRISA protocol to include the ability to verify the originator and receiver of a transaction to ensure they are not blacklisted criminals (without sharing their private information among the sending and receiving parties).
Over the two days, five teams of developers dug into the TRISA whitepaper and designed solutions that comply with FATF guidelines while ensuring the privacy of the customer. Solutions included:
Creating multiple wallets to send amount less than the $1,000 threshold in the FATF guidelines
Utilizing a token that can be sent with a transaction that verifies each user has provided the required KYC/AML information
Integrating filters to identify fan-in / fan-out patterns, time-delays of large transactions, or non-VASP addresses that serve as a middleman A Chrome extension that integrates KYC/AML information in the transaction while also making the ledger more readable (i.e., domain names for addresses instead of alphanumeric hashes)
The integration of cryptographic protocols – bullet proofs and bit commitment – into the TRISA protocol
Of the five teams, two had integrated their projects with the TRISA source code.
Come June 2020, all 37 countries of the G20 need to comply with the regulations outlined in the FATF guidelines. While the enacted regulations were initially designed to address fraudulent activity conducted via wire transfers, the lack of a modernized solution will impede on the privacy of users who use services on VASPs, such as exchanges.
CipherTrace intends for TRISA to deliver a privacy-preserving solution for the processes that FATF guidelines will soon mandate for all VASPs. Upon the conclusion of the Cryptocurrency Travel Rule Compliance Conference and Hackathon, one thing was apparent. The industry might not be ready to meet the requirements of the FATF guidelines by the Summer of 2020. However, a user’s personal information will be shared among VASPs, whether the user’s privacy is protected or not.
Cryptocurrency users must remain vigilante. Exchanges are in a tough position between satisfying regulators, protecting private information, and gaining business through fewer customer checks. Ultimately, it’s up to the user to protect themselves.
Chinese President Xi Jinping said Thursday that the time has come for the country to harness the true potential of blockchain technology.
Xi made that remark yesterday during his speech at a Politburo meeting of the Communist Party of China’s (CCP’s) Central Committee.
The President also noted that China should focus on helping accelerate the growth of the still-nascent-but-promising technology — which, he added, could set the stage for future innovations accompanied by a new wave of industrial transformation.
China Has the Infrastructure for Leading Blockchain Development
President Xi was addressing the 18th collective study of the Politbureau where he said that blockchain technology has a wide range of use cases in China, ranging from business and finance to poverty alleviation and better healthcare.
Specifically, Xi mentioned that blockchain technology will help the “real economy” by solving long-standing issues such as the difficulties SMEs typically face in securing loans, the risk of fraud, and bad loans that banks all over the country regularly deal with.
Apart from that, Xi also urged the blockchain community in China to leverage the technology for boosting people’s livelihood, improving the quality of education and employment, making pension schemes more efficient, ensuring food safety, and promoting public welfare.
“We must take blockchain as an important breakthrough for independent innovation of core technologies,”
The Chinese President, who also doubles up as the General Secretary of the CCP, said that China is equipped with the right blend of infrastructure and the technological know-how to take a lead role in the development of blockchain technology.
To go along that course, the country has to spearhead the efforts to accelerate the standardization of blockchain research. This, according to him, could give China a perfect shot at setting rules and conventions globally.
Worth noting here is that China is ever so close to releasing a Yuan-backed national cryptocurrency, which its central bank believes will add more to the ongoing efforts to digitize the economy.
‘New Space Race’
Meanwhile, unapologetic Bitcoin bull and Morgan Creek Digital Assets co-founder, Anthony Pompliano reacted to President Xi’s speech by suggesting that the quest for supremacy in blockchain tech marks the beginning of a new space race, albeit on the digital frontiers.
The cryptocurrency craze has become the talk of this year. More and more people are finding the Blockchain technology exciting and profitable. As the technology is new, even the traders or investors are apparently new to this space. In order to assist the enthusiasts in this burgeoning crypto industry, we have created an easy-to-understand cryptocurrency strategy guide, which helps traders from committing any trading mistakes.
First, we shall discuss the daily cryptocurrency trading tips, and then we can discuss the common mistakes by the investors.
Top 8 Cryptocurrency Trading Strategies
So, what are the ultimate crypto trading strategies for Beginners & Pros?
Learn as much as possible Google can help power all sorts of knowledge regarding cryptocurrencies and Blockchain-related applications. So, learn more about these topics. First of all, learn about all the crypto jargons like HODL and dynamics like “pump and dump”. Youtube has several Blockchain and cryptocurrency-related material, which you can go through to build on your crypto knowledge. This is the foremost and one of the best crypto strategies to trade cryptocurrencies.
Follow crypto leaders and crypto news
Follow the tweets by the important people in the crypto world. Pay special attention to the crypto markets news. Positive news has a huge impact on the demand for a cryptocurrency. It also means to avoid the negative press which acts as FUD which is short for Fear, Uncertainty, and Doubt. You can follow the latest crypto market news and insights as well.
Analyse about the coin you’re planning to invest Ask yourself these four questions before finally giving into:
Which market is the coin disrupting, for eg virtual payments, cloud storage, etc?
What is the technology behind the currency? Is it easy to use, accessible and scalable)
Research about the minds behind the creation of the coin, know its market potential, read about it more and more from sources like CoinMarketCap.
Last, but not the least what is the acceptance ratio of that coin. What is it that distinguishes this coin from its peers, i.e, what is the USP?
Advice: Beware of the FOMO factor. Do not invest because you feel like you are missing on the opportunity. This is the top cryptocurrency trading strategy.
1, Install a price ticker
A price ticker will alert you whenever the price fluctuates. So, it’s better to install on your phone. Depending on the price, you can make wise investment decisions. Actually, it is not the price which should be the sole factor to watch out before investing. You should always observe the market capitalization as that is an eminent factor. This is one of the common day to day altcoin trading strategy (crypto trading strategy). One of the best crypto to day trade is EOS.
2, Trading bots
If you are not able to understand the difficult technology behind Blockchain technology, you should start using a trading bot with API enabled will help do the trading for you. This is one of the best cryptocurrency trading system for amateur traders.
HODL in the crypto world means holding onto your cryptocurrencies when things are not going as planned. HODL is not a typo after it appeared in the Bitcoin talk forum by a member named Gamkyubi in 2013 under the thread “I am hodling”. (Crypto trading tips 2019)
Let’s talk about the mistakes which can lead to a great loss:
4, Crypto Trading Mistakes
Chasing pump and dump schemes
Pump and dump is a scheme that boosts the price through recommendations based on false, misleading or greatly exaggerated statements. So, it’s better to not fall in these traps.
5, Not diversifying your portfolio to protect your investment
The most effective strategy for minimizing risk is diversification. A well-diversified portfolio consists of different types of securities from diverse industries, with varying degrees of risk. While diversification can’t guarantee against a loss, it is the most important component to helping you reach your long-range financial goals, while minimizing your risk.
Never let FOMO ( Fear Of Missing Out ) control your emotions. Try to feel and think logically to shatter the dreams of high returns. When you notice the market going up, try to avoid feeling like investing in the hopes of it going higher.
Not protecting your accounts with 2-factor authentication
Two-factor authentication, or 2FA, adds an extra layer of security to your account.
When logging into your account, in addition to your email and password you’ll enter a code generated by an authentication app on your smartphone. This secures the account.
7, Falling for phishing scams and email account scams or airdrop scams
Falling for an email scam is something that can happen to anyone. It’s a frightening concept and one that frequently results in undiluted panic. Also known as a phishing scam, it involves using email and fraudulent websites to steal sensitive information such as passwords, credit card numbers, account data, addresses, and more.
With the increasing popularity of cryptocurrency airdrops, it is no surprise that there are also many scams out there.
8, Losing your private keys
This may be the greatest mistake in the crypto community to date. If you’re unfamiliar with what your “private keys” are, or what types of wallets you should be using, Losing private keys will waste all your money as you can’t do anything if you have forgotten the password. These are the cryptocurrencies tricks which should help you become an informed investor. It will save you from making whimsical decisions. At the same time, never ever dare to commit any of the crypto mistakes mentioned above, especially the last point.
The U.S. Internal Revenue Service (IRS) has published its first guidance in five years for calculating taxes owed on cryptocurrency holdings.
Industry members have been eagerly awaiting the update since May 2019, when IRS Commissioner Charles Rettig said the agency was working on providing fresh guidance. The agency’s 2014 guidance left many questions unanswered, and the crypto market has grown more complex in the years since.
As expected, the guidance notice released Wednesday addresses: the tax liabilities created by cryptocurrency forks; the acceptable methods for valuing cryptocurrency received as income; and how to calculate taxable gains when selling cryptocurrencies.
Drew Hinkes, a lawyer with Carlton Fields and the general counsel to Athena Blockchain, told CoinDesk that “from the tax collector’s standpoint, this is the right answer,” though Certified Public Accountant Kirk Phillips said he was surprised that the guidance basically only addressed forks.
Resolving a long-standing question, the guidance says new cryptocurrencies created from a fork of an existing blockchain should be treated as “an ordinary income equal to the fair market value of the new cryptocurrency when it is received.”
In other words, tax liabilities will apply when the new cryptocurrencies are recorded on a blockchain – if a taxpayer actually has control over the coins and can spend them.
The document reads:
“If your cryptocurrency went through a hard fork, but you did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, you don’t have taxable income.”
James Mastracchio, a partner at Eversheds Sutherland, told CoinDesk that this applies when there is a distinctly different cryptocurrency as a result of the hard fork.
The IRS language might create more confusion, said Jerry Brito, executive director at Coin Center.
“While the new guidance offers some much-needed clarity on certain questions related to calculating basis, gains, and losses, it seems confused about the nature of hard forks and airdrops,” Brito told CoinDesk, adding:
“One unfortunate consequence of this guidance is that third parties can now create tax reporting obligations for you by simply forking a network whose coins you own, or foisting on you an unwanted airdrop.”
Individuals would be assessed income when they receive the asset, Hinkes said.
“Receipt is defined by ‘dominion and control’ … so it’s ability to transfer, sell, exchange or dispose of the asset according to this guidance,” he said. “The fear is that someone maliciously airdrops and tags you with a giant liability. But [this] fear is a bit oversold because you would only be liable for new income based on the fair market value of the asset when received, and most forks don’t start out with a high valuation.”
Phillips said it was possible that an individual with an ethereum wallet, for example, could receive an ERC-20 token from an airdrop without realizing it. Depending on how the token’s value fluctuates, this may result in them having to pay income tax on an asset that was worth more when they received it than when they sell the asset.
“This can happen when coins hit a high water mark of price discovery right after the airdrop event and the heavy selling could sink the price to a level from which is never recovers,” he said.
The issue has grown more salient in recent years, as fights over protocol changes caused rifts in various crypto communities, leading to splinter currencies like ethereum classic and bitcoin cash.
Holders of the original bitcoin and ethereum could automatically claim a like amount of the new coins, raising the question of whether and under what conditions they would owe taxes on the windfall.
Now crypto holders and their accountants have a roadmap.
The new IRS document also offers long-awaited clarification on how taxpayers can determine the cost basis, or fair market value of coins received as income, such as from mining or the sale of goods and services.
Cost basis should be calculated by summing up all the money spent to acquire the crypto, “including fees, commissions and other acquisition costs in U.S. dollars.”
A third key issue addressed by the new IRS guidance is how to determine the cost basis of each unit of cryptocurrency that is disposed of in a taxable transaction (such as a sale).
This is an issue because someone might buy bitcoin in multiple transactions over a span of years; when they sold some of it, it was unclear which purchase price to use for calculating taxable gains.
The value of the crypto purchased on an exchange is determined by the amount the exchange sold it for in U.S. dollars. The income basis, in this case, will include commissions, fees and other costs of the purchase.
If the crypto is bought on a peer-to-peer exchange or a DEX, it is possible to use a crypto price index to determine the fair market value. In the words of IRS, this can be “a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.”
When selling crypto, taxpayers can identify the coins they are disposing of, “either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units” in a single account or address, the IRS wrote.
This information, the document states, must show:
“(1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”
The new guidance allows for “first-in, first-out” accounting or specifically identifying when the cryptocurrencies being sold were acquired, Mastracchio said.
“Let’s say I bought my first unit at $5,000 and my second unit at $2,000 and then I sold one of my units. I can identify the unit or I can use ‘first-in, first-out,’” he said. “From a tax planning perspective, you may want to be specific about which unit you sold or you may want to use first-in, first-out because sometimes you want a capital gain and sometimes you might want a loss.”
In a disappointment to crypto users who like to spend their coins on everyday purchases like cups of coffee, the IRS specifically said it would not create an exemption for transactions below a certain threshold.
Paying somebody for service will result in a capital gain or loss, which should be calculated as “the difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged.”
Purchases of goods and services were deemed taxable when the IRS issued its original guidance in 2014, which said that digital currencies were to be treated as property rather than currency for tax purposes. This discouraged casual spending and made tax season burdensome for users who wanted to diligently report their obligations.Credit https://Coindesk.com
Cryptocurrencies, or virtual currencies, are digital means of exchange created and used by private individuals or groups. Because most cryptocurrencies aren’t regulated by national governments, they’re considered alternative currencies – mediums of financial exchange that exist outside the bounds of state monetary policy.
Bitcoin is the preeminent cryptocurrency and first to be used widely. However, hundreds of cryptocurrencies exist, and more spring into being every month.
What Is Cryptocurrency?
Cryptocurrencies use cryptographic protocols, or extremely complex code systems that encrypt sensitive data transfers, to secure their units of exchange. Cryptocurrency developers build these protocols on advanced mathematics and computer engineering principles that render them virtually impossible to break, and thus to duplicate or counterfeit the protected currencies. These protocols also mask the identities of cryptocurrency users, making transactions and fund flows difficult to attribute to specific individuals or groups.
Cryptocurrencies are also marked by decentralized control. Cryptocurrencies’ supply and value are controlled by the activities of their users and highly complex protocols built into their governing codes, not the conscious decisions of central banks or other regulatory authorities. In particular, the activities of miners – cryptocurrency users who leverage vast amounts of computing power to record transactions, receiving newly created cryptocurrency units and transaction fees paid by other users in return – are critical to currencies’ stability and smooth function.
Exchange With Fiat Currencies
Importantly, cryptocurrencies can be exchanged for fiat currencies in special online markets, meaning each has a variable exchange rate with major world currencies (such as the U.S. dollar, British pound, European euro, and Japanese yen). Cryptocurrency exchanges are somewhat vulnerable to hacking and represent the most common venue for digital currency theft by hackers and cybercriminals.
Most, but not all, cryptocurrencies are characterized by finite supply. Their source codes contain instructions outlining the precise number of units that can and will ever exist. Over time, it becomes more difficult for miners to produce cryptocurrency units, until the upper limit is reached and new currency ceases to be minted altogether. Cryptocurrencies’ finite supply makes them inherently deflationary, more akin to gold and other precious metals – of which there are finite supplies – than fiat currencies, which central banks can, in theory, produce unlimited supplies of.
Benefits and Drawbacks
Due to their political independence and essentially impenetrable data security, cryptocurrency users enjoy benefits not available to users of traditional fiat currencies, such as the U.S. dollar, and the financial systems that those currencies support. For instance, whereas a government can easily freeze or even seize a bank account located in its jurisdiction, it’s very difficult for it to do the same with funds held in cryptocurrency – even if the holder is a citizen or legal resident.
On the other hand, cryptocurrencies come with a host of risks and drawbacks, such as illiquidity and value volatility, that don’t affect many fiat currencies. Additionally, cryptocurrencies are frequently used to facilitate gray and black market transactions, so many countries view them with distrust or outright animosity. And while some proponents tout cryptocurrencies as potentially lucrative alternative investments, few (if any) serious financial professionals view them as suitable for anything other than pure speculation.
How Cryptocurrencies Work
The source codes and technical controls that support and secure cryptocurrencies are highly complex. However, laypeople are more than capable of understanding the basic concepts and becoming informed cryptocurrency users.
Functionally, most cryptocurrencies are variations on Bitcoin, the first widely used cryptocurrency. Like traditional currencies, cryptocurrencies’ express value in units – for instance, you can say “I have 2.5 Bitcoin,” just as you’d say, “I have $2.50.”
Several concepts govern cryptocurrencies’ values, security, and integrity.
A cryptocurrency’s blockchain (sometimes written “block chain”) is the master ledger that records and stores all prior transactions and activity, validating ownership of all units of the currency at any given point in time. As the record of a cryptocurrency’s entire transaction history to date, a blockchain has a finite length – containing a finite number of transactions – that increases over time.
Identical copies of the blockchain are stored in every node of the cryptocurrency’s software network – the network of decentralized server farms, run by computer-savvy individuals or groups of individuals known as miners, that continually record and authenticate cryptocurrency transactions.
A cryptocurrency transaction technically isn’t finalized until it’s added to the blockchain, which usually occurs within minutes. Once the transaction is finalized, it’s usually irreversible. Unlike traditional payment processors, such as PayPal and credit cards, most cryptocurrencies have no built-in refund or chargeback functions, though some newer cryptocurrencies have rudimentary refund features.
During the lag time between the transaction’s initiation and finalization, the units aren’t available for use by either party. Instead, they’re held in a sort of escrow – limbo, for all intents and purposes. The blockchain thus prevents double-spending, or the manipulation of cryptocurrency code to allow the same currency units to be duplicated and sent to multiple recipients.
Every cryptocurrency holder has a private key that authenticates their identity and allows them to exchange units. Users can make up their own private keys, which are formatted as whole numbers between 1 and 78 digits long, or use a random number generator to create one. Once they have a key, they can obtain and spend cryptocurrency. Without the key, the holder can’t spend or convert their cryptocurrency – rendering their holdings worthless unless and until the key is recovered.
While this is a critical security feature that reduces theft and unauthorized use, it’s also draconian. Losing your private key is the digital equivalent of throwing a wad of cash into a trash incinerator. While you can create another private key and start accumulating cryptocurrency again, you can’t recover the holdings protected by your old, lost key. Savvy cryptocurrency users are therefore maniacally protective of their private keys, typically storing them in multiple digital (though generally not Internet-connected, for security purposes) and analog (i.e., paper) locations.
Cryptocurrency users have “wallets” with unique information that confirms them as the temporary owners of their units. Whereas private keys confirm the authenticity of a cryptocurrency transaction, wallets lessen the risk of theft for units that aren’t being used. Wallets used by cryptocurrency exchanges are somewhat vulnerable to hacking. For instance, Japan-based Bitcoin exchange Mt. Gox shut down and declared bankruptcy a few years back after hackers systematically relieved it of more than $450 million in Bitcoin exchanged over its servers.
Wallets can be stored on the cloud, an internal hard drive, or an external storage device. Regardless of how a wallet is stored, at least one backup is strongly recommended. Note that backing up a wallet doesn’t duplicate the actual cryptocurrency units, merely the record of their existence and current ownership.
Miners serve as record-keepers for cryptocurrency communities, and indirect arbiters of the currencies’ value. Using vast amounts of computing power, often manifested in private server farms owned by mining collectives comprised of dozens of individuals, miners use highly technical methods to verify the completeness, accuracy, and security of currencies’ block chains. The scope of the operation is not unlike the search for new prime numbers, which also requires tremendous amounts of computing power.
Miners’ work periodically creates new copies of the blockchain, adding recent, previously unverified transactions that aren’t included in any previous blockchain copy – effectively completing those transactions. Each addition is known as a block. Blocks consist of all transactions executed since the last new copy of the blockchain was created.
The term “miners” relates to the fact that miners’ work literally creates wealth in the form of brand-new cryptocurrency units. In fact, every newly created blockchain copy comes with a two-part monetary reward: a fixed number of newly minted (“mined”) cryptocurrency units, and a variable number of existing units collected from optional transaction fees (typically less than 1% of the transaction value) paid by buyers.
Worth noting: Once upon a time, cryptocurrency mining was a potentially lucrative side business for those with the resources to invest in power- and hardware-intensive mining operations. Today, it’s impractical for hobbyists without thousands of dollars to invest in professional-grade mining equipment. If your aim is simply to supplement your regular income, plenty of freelance gigs offer better returns.
Though transaction fees don’t accrue to sellers, miners are permitted to prioritize fee-loaded transactions ahead of fee-free transactions when creating new blockchains, even if the fee-free transactions came first in time. This gives sellers an incentive to charge transaction fees, since they get paid faster by doing so, and so it’s fairly common for transactions to come with fees. While it’s theoretically possible for a new blockchain copy’s previously unverified transactions to be entirely fee-free, this almost never happens in practice.
Through instructions in their source codes, cryptocurrencies automatically adjust to the amount of mining power working to create new blockchain copies – copies become more difficult to create as mining power increases, and easier to create as mining power decreases. The goal is to keep the average interval between new blockchain creations steady at a predetermined level. Bitcoin’s is 10 minutes, for instance.
Although mining periodically produces new cryptocurrency units, most cryptocurrencies are designed to have a finite supply – a key guarantor of value. Generally, this means that miners receive fewer new units per new blockchain as time goes on. Eventually, miners will only receive transaction fees for their work, though this has yet to happen in practice and may not for some time. If current trends continue, observers predict that the last Bitcoin unit will be mined sometime in the mid-22nd century, for instance – not exactly around the corner.
Finite-supply cryptocurrencies are thus more similar to precious metals, like gold, than to fiat currencies – of which, theoretically, unlimited supplies exist.
Many lesser-used cryptocurrencies can only be exchanged through private, peer-to-peer transfers, meaning they’re not very liquid and are hard to value relative to other currencies – both crypto- and fiat.
More popular cryptocurrencies, such as Bitcoin and Ripple, trade on special secondary exchanges similar to forex exchanges for fiat currencies. (The now-defunct Mt. Gox is one example.) These platforms allow holders to exchange their cryptocurrency holdings for major fiat currencies, such as the U.S. dollar and euro, and other cryptocurrencies (including less-popular currencies). In return for their services, they take a small cut of each transaction’s value – usually less than 1%.
Cryptocurrency exchanges play a valuable role in creating liquid markets for popular cryptocurrencies and setting their value relative to traditional currencies. However, exchange pricing can still be extremely volatile. Bitcoin’s U.S. dollar exchange rate fell by more than 50% in the wake of Mt. Gox’s collapse, then increased roughly tenfold during 2017 as cryptocurrency demand exploded. You can even trade cryptocurrency derivatives on certain crypto exchanges, according to this article from Benzinga.
History of Cryptocurrency
Cryptocurrency existed as a theoretical construct long before the first digital alternative currencies debuted. Early cryptocurrency proponents shared the goal of applying cutting-edge mathematical and computer science principles to solve what they perceived as practical and political shortcomings of “traditional” fiat currencies.
Cryptocurrency’s technical foundations date back to the early 1980s, when an American cryptographer named David Chaum invented a “blinding” algorithm that remains central to modern web-based encryption. The algorithm allowed for secure, unalterable information exchanges between parties, laying the groundwork for future electronic currency transfers. This was known as “blinded money.”
By the late 1980s, Chaum enlisted a handful of other cryptocurrency enthusiasts in an attempt to commercialize the concept of blinded money. After relocating to the Netherlands, he founded DigiCash, a for-profit company that produced units of currency based on the blinding algorithm. Unlike Bitcoin and most other modern cryptocurrenncies, DigiCash’s control wasn’t decentralized. Chaum’s company had a monopoly on supply control, similar to central banks’ monopoly on fiat currencies.
DigiCash initially dealt directly with individuals, but the Netherlands’ central bank cried foul and quashed this idea. Faced with an ultimatum, DigiCash agreed to sell only to licensed banks, seriously curtailing its market potential. Microsoft later approached DigiCash about a potentially lucrative partnership that would have permitted early Windows users to make purchases in its currency, but the two companies couldn’t agree on terms, and DigiCash went belly-up in the late 1990s.
Around the same time, an accomplished software engineer named Wei Dai published a white paper on b-money, a virtual currency architecture that included many of the basic components of modern cryptocurrencies, such as complex anonymity protections and decentralization. However, b-money was never deployed as a means of exchange.
Shortly thereafter, a Chaum associate named Nick Szabo developed and released a cryptocurrency called Bit Gold, which was notable for using the blockchain system that underpins most modern cryptocurrencies. Like DigiCash, Bit Gold never gained popular traction and is no longer used as a means of exchange.
Pre-Bitcoin Virtual Currencies
After DigiCash, much of the research and investment in electronic financial transactions shifted to more conventional, though digital, intermediaries, such as PayPal (itself a harbinger of mobile payment technologies that have exploded in popularity over the past 10 years). A handful of DigiCash imitators, such as Russia’s WebMoney, sprang up in other parts of the world.
In the United States, the most notable virtual currency of the late 1990s and 2000s was known as e-gold. e-gold was created and controlled by a Florida-based company of the same name. e-gold, the company, basically functioned as a digital gold buyer. Its customers, or users, sent their old jewelry, trinkets, and coins to e-gold’s warehouse, receiving digital “e-gold” – units of currency denominated in ounces of gold. e-gold users could then trade their holdings with other users, cash out for physical gold, or exchange their e-gold for U.S. dollars.
At its peak in the mid-2000s, e-gold had millions of active accounts and processed billions of dollars in transactions annually. Unfortunately, e-gold’s relatively lax security protocols made it a popular target for hackers and phishing scammers, leaving its users vulnerable to financial loss. And by the mid-2000s, much of e-gold’s transaction activity was legally dubious – its laid-back legal compliance policies made it attractive to money laundering operations and small-scale Ponzi schemes. The platform faced growing legal pressure during the mid- and late-2000s, and finally ceased to operate in 2009.
Bitcoin and the Modern Cryptocurrency Boom
Bitcoin is widely regarded as the first modern cryptocurrency – the first publicly used means of exchange to combine decentralized control, user anonymity, record-keeping via a blockchain, and built-in scarcity. It was first outlined in a 2008 white paper published by Satoshi Nakamoto, a pseudonymous person or group.
In early 2009, Nakamoto released Bitcoin to the public, and a group of enthusiastic supporters began exchanging and mining the currency. By late 2010, the first of what would eventually be dozens of similar cryptocurrencies – including popular alternatives like Litecoin – began appearing. The first public Bitcoin exchanges appeared around this time as well.
In late 2012, WordPress became the first major merchant to accept payment in Bitcoin. Others, including Newegg.com (an online electronics retailer), Expedia, and Microsoft, followed. Dozens of merchants now view the world’s most popular cryptocurrency as a legitimate payment method. And new cryptocurrency applications take root with impressive frequency – Cryptomaniaks has a great look at the fast-growing world of cryptocurrency sports betting sites here, to take just one example.
Though few cryptocurrencies other than Bitcoin are widely accepted for merchant payments, increasingly active exchanges allow holders to exchange them for Bitcoin or fiat currencies – providing critical liquidity and flexibility.
Advantages of Cryptocurrency
1. Built-in Scarcity May Support Value
Most cryptocurrencies are hardwired for scarcity – the source code specifies how many units can ever exist. In this way, cryptocurrencies are more like precious metals than fiat currencies. Like precious metals, they may offer inflation protection unavailable to fiat currency users.
2. Loosening of Government Currency Monopolies
Cryptocurrencies offer a reliable means of exchange outside the direct control of national banks, such as the U.S. Federal Reserve and European Central Bank. This is particularly attractive to people who worry that quantitative easing (central banks’ “printing money” by purchasing government bonds) and other forms of loose monetary policy, such as near-zero inter-bank lending rates, will lead to long-term economic instability.
In the long run, many economists and political scientists expect world governments to co-opt cryptocurrency, or at least to incorporate aspects of cryptocurrency (such as built-in scarcity and authentication protocols) into fiat currencies. This could potentially satisfy some cryptocurrency proponents’ worries about the inflationary nature of fiat currencies and the inherent insecurity of physical cash.
3. Self-Interested, Self-Policing Communities
Mining is a built-in quality control and policing mechanism for cryptocurrencies. Because they’re paid for their efforts, miners have a financial stake in keeping accurate, up-to-date transaction records – thereby securing the integrity of the system and the value of the currency.
4. Robust Privacy Protections
Privacy and anonymity were chief concerns for early cryptocurrency proponents, and remain so today. Many cryptocurrency users employ pseudonyms unconnected to any information, accounts, or stored data that could identify them. Though it’s possible for sophisticated community members to deduce users’ identities, newer cryptocurrencies (post-Bitcoin) have additional protections that make it much more difficult.
5. Harder for Governments to Exact Financial Retribution
When citizens in repressive countries run afoul of their governments, said governments can easily freeze or seize their domestic bank accounts, or reverse transactions made in local currency. This is of particular concern in autocratic countries such as China and Russia, where wealthy individuals who run afoul of the ruling party frequently find themselves facing serious financial and legal troubles of dubious provenance.
Unlike central bank-backed fiat currencies, cryptocurrencies are virtually immune from authoritarian caprice. Cryptocurrency funds and transaction records are stored in numerous locations around the world, rendering state control – even assuming international cooperation – highly impractical. It’s a bit of an oversimplification, but using cryptocurrency is a bit like having access to a theoretically unlimited number of offshore bank accounts.
Decentralization is problematic for governments accustomed to employing financial leverage (or outright bullying) to keep troublesome elites in check. In late 2017, CoinTelegraph reported on a multinational cryptocurrency initiative spearheaded by the Russian government. If successful, the initiative would have two salutary outcomes for those involved: weakening the U.S. dollar’s dominance as the world’s de facto means of exchange, and affording participating governments tighter control over increasingly voluminous and valuable cryptocurrency supplies.
6. Generally Cheaper Than Traditional Electronic Transactions
The concepts of blockchains, private keys, and wallets effectively solve the double-spending problem, ensuring that new cryptocurrencies aren’t abused by tech-savvy crooks capable of duplicating digital funds. Cryptocurrencies’ security features also eliminate the need for a third-party payment processor – such as Visa or PayPal – to authenticate and verify every electronic financial transaction.
In turn, this eliminates the need for mandatory transaction fees to support those payment processors’ work – since miners, the cryptocurrency equivalent of payment processors, earn new currency units for their work in addition to optional transaction fees. Cryptocurrency transaction fees are generally less than 1% of the transaction value, versus 1.5% to 3% for credit card payment processors and PayPal.
7. Fewer Barriers and Costs to International Transactions
Cryptocurrencies don’t treat international transactions any differently than domestic transactions. Transactions are either free or come with a nominal transaction fee, no matter where the sender and recipient are located. This is a huge advantage relative to international transactions involving fiat currency, which almost always have some special fees that don’t apply to domestic transactions – such as international credit card or ATM fees. And direct international money transfers can be very expensive, with fees sometimes exceeding 10% or 15% of the transferred amount.
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Cons of Cryptocurrency
1. Lack of Regulation Facilitates Black Market Activity
Probably the biggest drawback and regulatory concern around cryptocurrency is its ability to facilitate illicit activity. Many gray and black market online transactions are denominated in Bitcoin and other cryptocurrencies. For instance, the infamous dark web marketplace Silk Road used Bitcoin to facilitate illegal drug purchases and other illicit activities before being shut down in 2014. Cryptocurrencies are also increasingly popular tools for money laundering – funneling illicitly obtained money through a “clean” intermediary to conceal its source.
The same strengths that make cryptocurrencies difficult for governments to seize and track allow criminals to operate with relative ease – though, it should be noted, the founder of Silk Road is now behind bars, thanks to a years-long DEA investigation.
2. Potential for Tax Evasion in Some Jurisdictions
Since cryptocurrencies aren’t regulated by national governments and usually exist outside their direct control, they naturally attract tax evaders. Many small employers pay employees in bitcoin and other cryptocurrencies to avoid liability for payroll taxes and help their workers avoid income tax liability, while online sellers often accept cryptocurrencies to avoid sales and income tax liability.
According to the IRS, the U.S. government applies the same taxation guidelines to all cryptocurrency payments by and to U.S. persons and businesses. However, many countries don’t have such policies in place. And the inherent anonymity of cryptocurrency makes some tax law violations, particularly those involving pseudonymous online sellers (as opposed to an employer who puts an employee’s real name on a W-2 indicating their bitcoin earnings for the tax year), difficult to track.
3. Potential for Financial Loss Due to Data Loss
Early cryptocurrency proponents believed that, if properly secured, digital alternative currencies promised to support a decisive shift away from physical cash, which they viewed as imperfect and inherently risky. Assuming a virtually uncrackable source code, impenetrable authentication protocols (keys) and adequate hacking defenses (which Mt. Gox lacked), it’s safer to store money in the cloud or even a physical data storage device than in a back pocket or purse.
However, this assumes that cryptocurrency users take proper precautions to avoid data loss. For instance, users who store their private keys on single physical storage devices suffer irreversible financial harm when the device is lost or stolen. Even users who store their data with a single cloud service can face loss if the server is physically damaged or disconnected from the global Internet (a possibility for servers located in countries with tight Internet controls, such as China).
4. Potential for High Price Volatility and Manipulation
Many cryptocurrencies have relatively few outstanding units concentrated in a handful of individuals’ (often the currencies’ creators and close associates) hands. These holders effectively control these currencies’ supplies, making them susceptible to wild value swings and outright manipulation – similar to thinly traded penny stocks. However, even widely traded cryptocurrencies are subject to price volatility: Bitcoin’s value doubled several times in 2017, then halved during the first few weeks of 2018.
5. Often Can’t Be Exchanged for Fiat Currency
Generally, only the most popular cryptocurrencies – those with the highest market capitalization, in dollar terms – have dedicated online exchanges that permit direct exchange for fiat currency. The rest don’t have dedicated online exchanges, and thus can’t be directly exchanged for fiat currencies. Instead, users have to convert them into more commonly used cryptocurrencies, such as Bitcoin, before fiat currency conversion. By increasing exchange transactions’ cost, this suppresses demand for, and thus the value of, some lesser-used cryptocurrencies.
6. Limited to No Facility for Chargebacks or Refunds
Although cryptocurrency miners serve as quasi-intermediaries for cryptocurrency transactions, they’re not responsible for arbitrating disputes between transacting parties. In fact, the concept of such an arbitrator violates the decentralizing impulse at the heart of modern cryptocurrency philosophy. This means that you have no one to appeal to if you’re cheated in a cryptocurrency transaction – for instance, paying upfront for an item you never receive. Though some newer cryptocurrencies attempt to address the chargeback/refund issue, solutions remain incomplete and largely unproven.
By contrast, traditional payment processors and credit card networks such as Visa, MasterCard, and PayPal often step in to resolve buyer-seller disputes. Their refund, or chargeback, policies are specifically designed to prevent seller fraud.
7. Adverse Environmental Impacts of Cryptocurrency Mining
Cryptocurrency mining is very energy-intensive. The biggest culprit is Bitcoin, the world’s most popular cryptocurrency. According to estimates cited by Ars Technica, Bitcoin mining consumes more electricity than the entire country of Denmark – though, as some of the world’s largest Bitcoin mines are located in coal-laden countries like China, without that progressive Scandinavian state’s minute carbon footprint.
Though they’re quick to throw cold water on the most alarmist claims, cryptocurrency experts acknowledge that mining presents a serious environmental threat at current rates of growth. Ars Technica identifies three possible short- to medium-term solutions:
Reducing the price of Bitcoin to render mining less lucrative, a move that would likely require concerted interference into what’s thus far been a laissez-faire market Cutting the mining reward faster than the currently scheduled rate (halving every four years)
Switching to a less power-hungry algorithm, a controversial prospect among mining incumbents
Over the longer term, the best solution is to power cryptocurrency mines with low- or no-carbon energy sources, perhaps with attendant incentives to relocate mines to low-carbon states like Costa Rica and the Netherlands.
Cryptocurrency usage has exploded since Bitcoin’s release. Though exact active currency numbers fluctuate and individual currencies’ values are highly volatile, the overall market value of all active cryptocurrencies is generally trending upward. At any given time, hundreds of cryptocurrencies trade actively.
The cryptocurrencies described here are marked by stable adoption, robust user activity, and relatively high market capitalization (greater than $10 million, in most cases, though valuations are of course subject to change):
Bitcoin is the world’s most widely used cryptocurrency, and is generally credited with bringing the movement into the mainstream. Its market cap and individual unit value consistently dwarf (by a factor of 10 or more) that of the next most popular cryptocurrency. Bitcoin has a programmed supply limit of 21 million Bitcoin.
Bitcoin is increasingly viewed as a legitimate means of exchange. Many well-known companies accept Bitcoin payments, though most partner with an exchange to convert Bitcoin into U.S. dollars before receiving their funds.
Released in 2011, Litecoin uses the same basic structure as Bitcoin. Key differences include a higher programmed supply limit (84 million units) and a shorter target blockchain creation time (two-and-a-half minutes). The encryption algorithm is slightly different as well. Litecoin is often the second- or third-most popular cryptocurrency by market capitalization.
Released in 2012, Ripple is noted for a “consensus ledger” system that dramatically speeds up transaction confirmation and blockchain creation times – there’s no formal target time, but the average is every few seconds. Ripple is also more easily converted than other cryptocurrencies, with an in-house currency exchange that can convert Ripple units into U.S. dollars, yen, euros, and other common currencies.
However, critics have noted that Ripple’s network and code are more susceptible to manipulation by sophisticated hackers and may not offer the same anonymity protections as Bitcoin-derived cryptocurrencies.
Launched in 2015, Ethereum makes some noteworthy improvements on Bitcoin’s basic architecture. In particular, it utilizes “smart contracts” that enforce the performance of a given transaction, compel parties not to renege on their agreements, and contain mechanisms for refunds should one party violate the agreement. Though “smart contracts” represent an important move toward addressing the lack of chargebacks and refunds in cryptocurrencies, it remains to be seen whether they’re enough to solve the problem completely.
Dogecoin, denoted by its immediately recognizable Shiba Inu mascot, is a variation on Litecoin. It has a shorter blockchain creation time (one minute) and a vastly greater number of coins in circulation – the creators’ target of 100 billion units mined by July 2015 was met, and there’s a supply limit of 5.2 billion units mined every year thereafter, with no known supply limit. Dogecoin is thus notable as an experiment in “inflationary cryptocurrency,” and experts are watching it closely to see how its long-term value trajectory differs from that of other cryptocurrencies.
Coinye, a semi-defunct cryptocurrency, is worth mentioning solely for its bizarre backstory.
Coinye was developed under the original moniker “Coinye West” in 2013, and identified by an unmistakable likeness of hip-hop superstar Kanye West. Shortly before Coinye’s release, in early 2014, West’s legal team caught wind of the currency’s existence and sent its creators a cease-and-desist letter.
To avoid legal action, the creators dropped “West” from the name, changed the logo to a “half man, half fish hybrid” that resembles West (a biting reference to a “South Park” episode that pokes fun at West’s massive ego), and released Coinye as planned. Given the hype and ironic humor around its release, the currency attracted a cult following among cryptocurrency enthusiasts. Undaunted, West’s legal team filed suit, compelling the creators to sell their holdings and shut down Coinye’s website.
Though Coinye’s peer-to-peer network remains active and it’s still technically possible to mine the currency, person-to-person transfers and mining activity have collapsed to the point that Coinye is basically worthless.
Cryptocurrency is an exciting concept with the power to fundamentally alter global finance for the better. But while it’s based on sound, democratic principles, cryptocurrency remains a technological and practical work in progress. For the foreseeable future, nation-states’ near-monopoly on currency production and monetary policy appears secure.
In the meantime, cryptocurrency users (and nonusers intrigued by cryptocurrency’s promise) need to remain ever-mindful of the concept’s practical limitations. Any claims that a particular cryptocurrency confers total anonymity or immunity from legal accountability are worthy of deep skepticism, as are claims that individual cryptocurrencies represent foolproof investment opportunities or inflation hedges. After all, gold is often touted as the ultimate inflation hedge, yet it’s still subject to wild volatility – more so than many first-world fiat currencies.