Cryptocurrency has garnered a lot of attention in recent years, with its value skyrocketing and plummeting in a volatile market. But what exactly is cryptocurrency and how does it work in the United States? In this guide, experts like Kavan Choksi will break down the basics of cryptocurrency and its current state in the US.
What is Cryptocurrency?
At its core, cryptocurrency is a digital asset that uses cryptography for security and operates on a decentralized network. It allows for peer-to-peer transactions without the need for a central authority, such as a bank. Cryptocurrencies are primarily used as a medium of exchange, similar to traditional currencies like the US dollar.
There are thousands of different cryptocurrencies in existence, but the most well-known is Bitcoin. Other popular cryptocurrencies include Ethereum, Litecoin, and Dogecoin.
How Does Cryptocurrency Work?
Cryptocurrencies operate on a decentralized network known as the blockchain. The blockchain is a public, distributed ledger that records all transactions made with a particular cryptocurrency. Each transaction is added to the blockchain as a “block,” which is then connected to the previous block in a chain. This creates a permanent record of all transactions, making it difficult to alter or forge.
Cryptocurrencies are created through a process called “mining.” Miners use powerful computers to solve complex mathematical equations, which helps to secure the blockchain and verify transactions. In return for their efforts, miners are rewarded with a small amount of the cryptocurrency.
Regulation of Cryptocurrency in the US
The regulation of cryptocurrency in the US is a complex and evolving issue. In 2013, the US Internal Revenue Service (IRS) issued guidance stating that virtual currencies, including cryptocurrencies, should be treated as property for tax purposes. This means that capital gains tax applies to any profits made from buying and selling cryptocurrency.
In 2017, the US Securities and Exchange Commission (SEC) announced that it would treat certain initial coin offerings (ICOs) as securities, which means they must follow the same rules as traditional securities offerings. However, the SEC has taken a hands-off approach to many cryptocurrencies, stating that they do not qualify as securities.
The US Commodity Futures Trading Commission (CFTC) has also weighed in on cryptocurrency, stating that Bitcoin and other cryptocurrencies are commodities and fall under its jurisdiction.
In 2020, the Office of the Comptroller of the Currency (OCC) issued guidance stating that national banks and federal savings associations can provide custody services for cryptocurrencies. This decision was seen as a major step forward for the mainstream adoption of cryptocurrency in the US.
Pros and Cons of Cryptocurrency
Like any financial asset, there are both pros and cons to investing in cryptocurrency.
Pros:
- Decentralized: As mentioned earlier, one of the major benefits of cryptocurrency is that it operates on a decentralized network, which means it is not controlled by any central authority, such as a government or bank.
- Anonymity: Cryptocurrencies allow for anonymous transactions, which can be attractive to those who value their privacy.
Cons:
- Volatility: Cryptocurrency is known for its volatility, with its value fluctuating wildly. This can make it a risky investment, as it is not uncommon for the value of a cryptocurrency to drop significantly overnight.
- Lack of regulation: While regulation of cryptocurrency is increasing, it is still relatively unregulated in many countries. This can make it difficult for investors to protect themselves against fraud or other criminal activity.
It’s wise for investors to do their research before investing in any type of cryptocurrency so that they can make informed decisions about their investments. With a better understanding of how cryptocurrency works, you’ll be well on your way towards making sound investment choices.