Coins in the Crypto Economy
Cryptocurrency, also known as crypto, is currently the hottest topic in tech and finance. This introduction explains some of the most important things to know about cryptocurrencies. Here is a brief introduction to the different types of coins that are available in the crypto economy.
Bitcoin (BTC) is a cryptocurrency that was created back in 2009 by an unknown person using the alias Satoshi Nakamoto. Unlike fiat currency, transactions can be made directly with the help of banks. Bitcoin was the first of the cryptocurrencies to gain mainstream attention and has become a source of wealth for many investors as the price of a Bitcoin skyrocketed from the equivalent of just a few cents per Bitcoin in U.S. dollars to $19,783.06 in 2017.
Ethereum is an open-source, public, blockchain-based distributed computing platform and operating system featuring smart contract functionality. The main difference between the Ethereum platform and cryptocurrency is that it is an environment, not just a currency. Ethereum is different from Bitcoin because it runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.
However, the cryptocurrency that is tracked on the Ethereum blockchain is actually called Ether (ETH). Unfortunately, Ethereum is synonymous with the name ‘Ether’, which creates unnecessary confusion. Given that the Ethereum blockchain can be used to build decentralized apps (Dapps), many developers have opted to launch various Ethereum tokens via crowd sales, or “Initial Coin Offerings (ICOs),” to support their Dapp projects.
An altcoin refers to cryptocurrency other than Bitcoin. Generally, they are presented as better substitutes to Bitcoin designed to address the inefficiencies of Bitcoin, such as transaction processing time, privacy, and more. Popular altcoins include Litecoin (LTC), Ether (ETH), Zcash (ZEC), Dash (DASH), Ripple (XRP), and Monero (XMR).
A Meta Coin is a coin that is launched on top of a blockchain, as a meta layer. Popular metacoin platforms include Bitcoin, Ethereum, Peercoin, Primecoin, Dash, and Ripple.
Colored Coins are tokens that are designed to represent real-world assets. They are an application of Bitcoin’s blockchain. Colored Coins provide a way of issuing and transferring any assets on the Bitcoin blockchain. They can be used to prove ownership of assets such as real estate, cars, precious metals, stocks, bonds, commodities, and even currencies and more.
How Do Cryptocurrencies Get Value?
Cryptocurrencies get their value in the same way that most things get their value. There are two main factors:
- Supply & Demand. The more demand there is and the less supply, the more value cryptocurrencies have. Given that almost all cryptocurrencies are issued in finite amounts, there is only so many that can be owned adding to their value.
- Trust. For cryptocurrencies, the trust comes from the credibility of the developers of the coin or the long-term viability of service provided by the Dapp (for Ethereum tokens).
How Coins Are Acquired and Sold
Cryptocurrency can be acquired via the following methods:
Crypto mining. Cryptocurrency mining involves solving math problems for which the miner is rewarded with a fraction of a coin. It can be done by purchasing special hardware, commonly known as a mining rig, that will give you the computing power needed to mine at high enough rates for the process to be profitable.
Cryptocurrency exchanges. These are the most common places where people buy and trade cryptocurrency. Exchanges allow you to buy and sell your crypto, using fiat. Like traditional stock exchanges, cryptocurrency exchanges involve liquidity, spread, fees, and purchase and withdrawal limits. Out of these Coinbase is one of the most recognized exchanges as a place to trade Bitcoin, Ethereum, and Litecoin.
Airdrop. An airdrop is where a developer or company doing an ICO gives away free coins to people that sign up for the airdrop. These airdrops happen on specific dates. Recipients have the open to hold their free coins for later use or trade exchange for another cryptocurrency.
Payments. If you sell a product or service to a buyer, you can acquire cryptocurrency by accepting it as payment in exchange for the goods or services delivered.
To sell cryptocurrency, you can then convert it to another cryptocurrency or fiat currency via an exchange or sell it directly to a buyer on a site like localbitcoins.com, which is a service that facilitates over-the-counter trading of local currency for bitcoins.
How Cryptocurrency is Taxed
In many countries, cryptocurrencies are unrelated. However, governments have increasingly become concerned about taxation and their lack of control over the currencies.
In the United States, the IRS has opted to treat cryptocurrency as property. In 2014, the IRS issued a bulletin that provides a general overview on how cryptocurrency transactions should be reported. To summarize, every cryptocurrency transaction generates a taxable capital gain or loss that must be reported.
In 2015, the IRS reported that only 802 people compiled in filing their own cryptocurrency gains or losses on their taxes. As a result, the IRS has stepped up its efforts to track down taxpayers who evade taxes on cryptocurrency transactions.
In February, the IRS announced that it has assembled a new team of 10 investigators and has been partnering with a company called Chainalysis to track cryptocurrency addresses in order to help build cases for tax evasion.
On Nov. 29, a judge in San Francisco ruled that Coinbase must turn over information on accounts with at least $20,000. She cited IRS data that only 800 to 900 U.S. taxpayers reported Bitcoin gains on their returns from 2013 through 2015.