There has been a lot of hype going on with cryptocurrencies ever since they appeared in 2009. Without a physical representation and a partial legitimacy – the controversial cryptographic puzzles are slowly becoming a common form of payment and a potential investment opportunity for its users.
What is a cryptocurrency?
A cryptocurrency is a virtual currency which works as a medium of exchange. To secure and verify the transactions, as well as control the creation of new units of a cryptocurrency – it uses a complex process called cryptography, hence the name of the digital coins. Cryptography turns legible information into an undecipherable code to track purchases & transfers, making the digital currencies almost impossible to counterfeit.
The cryptocurrency market is decentralized; however, the network uses the blockchain technology – meaning that all transactions ever made are kept in a public ledger that allows computers to check the validity of every future transaction. Some of the most popular and widely-traded cryptocurrencies are Bitcoin (the first cryptocurrency), Ethereum, Ripple, Bitcoin Cash, NEM, Litecoin, NEO, IOTA, Dash, and Monero.
Cryptocurrency Trading & Arbitrage
The process of trading cryptocurrencies is no different than the one of Forex trading, the key difference being that instead of exchanging fiat currencies, like the USD of EUR; you exchange virtual currencies, such as Bitcoin or Litecoin. The most common way to do it is through an online broker that gives you access to this asset category.
Cryptocurrency arbitrage is a practice that implies using price differences in markets to your advantage if predicted correctly. These price differences usually occur because bigger exchanges tend to be more volatile than the others. An exchange with more trading volume can control the price of the entire market, while a smaller one will then follow. This small lag creates the arbitrage.
The day-to-day use of cryptocurrencies
A few years ago, the idea of using digital currencies with no physical form to purchase goods would’ve sounded ridiculous. Now, you can use them as a form of payment for apps, hotels, flights – or even in small local shops or restaurants. They have continuously been considered an investment opportunity too, mainly due to their innovative nature1. The price of Bitcoin according to Cryptovest surpassed the $7,000 barrier for two times now2, once in 2017 and the second time in August 2018.
If none of the above options sound like something you are tempted to try – you should know that you can also mine cryptocurrencies! nowadays a performant personal computer isn’t enough – you can invest in an industrial-grade mining hardware. This is due to the fact that there can only be a total of 21 million coins3 in circulation and the networks are more crowded than they were before.
Cryptocurrency Tax Laws in the U.S. and Europe
If you manage to create investment opportunities from trading cryptocurrencies, depending on the jurisdiction you live in, you might need to include it in your tax report. The IRS published a first report on how cryptocurrency taxes work in 20144, but barely now investors are starting to report their earnings correctly5 . Briefly, U.S. investors need to report all operations and pay taxes when they sell, trade, or use cryptocurrencies; as well as when they make capital gains and losses.
Several countries from Europe have adopted different cryptocurrency tax laws as well6. For instance, in the United Kingdom, every British citizen has a tax-free allowance of £11,300/year, meaning that investors can liquidate their cryptocurrencies under that value each year, without having to pay any taxes. Germany’s tax law follows the same pattern, only that the tax-free allowance is of €800.
The Future of Cryptocurrencies – What will 2019 bring?
A study according to Bloomberg7 called Crypto Asset Market Coverage Initiation: Trading & Custody projected that the cryptocurrency trading volume will grow by 50% in 2019, while overtaking the U.S. Corporate Debt trading volume in 2018 and comprising about 10% of U.S. Equity trading volume. The study also suggests that the 50% growth will provide an overall Compound Annual Growth Rate (CAGR) of 9% through 2028 and that Bitcoin continues to be a pivotal cryptocurrency.
Moreover, according to InvestingHAven.com8 there are suggestions that numerous signals indicated 2019 will be the year in which institutional money will finally enter the cryptocurrency market, but so far – no changes have been made regarding this matter. The cryptocurrency market continues to be volatile and filled with investing opportunities. “Bitcoin is a remarkable cryptographic achievement. The ability to create something which is not duplicable in the digital world has enormous value. Lots of people will build businesses on top of that.” said Eric Schmidt9, executive chairman of Google according to NewsBTC.
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- Justin Banon, “The nature of the crypto technological revolution:”, Jun, 16, 2018, hackernoon.com, https://hackernoon.com/the-nature-of-the-crypto-technological-revolution-4eb883c54d56
- Christine Masters, “Bitcoin (BTC) Exceeds $7,000 for First Time in Three Weeks”, Aug, 29, 2018, cryptovest.com, https://cryptovest.com/news/bitcoin-btc-exceeds-7000-for-first-time-in-three-weeks/
- Nathan Reiff, “What Happens to Bitcoin After All 21 Million are Mined? “, Feb, 14, 2019, investopedia.com, https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/
- Christina Comben, “What you need to know about cryptocurrency taxes in the US”, Mar, 20, 2019,finance.yahoo.com, https://finance.yahoo.com/news/know-cryptocurrency-taxes-us-090029943.html
- The Internal Revenue Service, “IRS reminds taxpayers to report virtual currency transactions”, Mar, 23, 2018, https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-transactions
- Policy Department for Economic, Scientific and Quality of Life Policies Authors: Prof. Dr. Robby HOUBEN, Alexander SNYERS, “Cryptocurrencies and blockchainLegal context and implications for financial crime, money laundering and tax evasion”, Jul, 2018, http://www.europarl.europa.eu/cmsdata/150761/TAX3%20Study%20on%20cryptocurrencies%20and%20blockchain.pdf
- Sherwin Dowla, Michael Hodapp, “CRYPTO ASSET MARKET COVERAGE INITIATION:TRADING& CUSTODY”, Sep, 18. 2018, research.bloomberg.com, https://research.bloomberg.com/pub/res/d3h2iTlKWIa4FTLKGJsUn3mis5g
- Taki Tsaklanos, “5 Must-Read Cryptocurrency Predictions For 2019”, Feb, 2019, investinghaven.com, https://investinghaven.com/crypto-blockchain/5-must-read-cryptocurrency-predictions-2019/
- Jayanand Sagar, “Google Chairman Eric Schmidt: Bitcoin Architecture an Amazing Advancement”, Mar, 2014, newsbtc.com, https://www.newsbtc.com/2014/03/16/google-chairman-eric-schmidt-bitcoin-architecture-amazing-advancement/