Cryptocurrency: what to know about digital currency


Investors around the world have noticed the rapid rise in the price of Bitcoin – as well as some dramatic declines – since its launch just over a decade ago.

Buying and selling cryptocurrencies can feel like trading in a kind of digital Wild West. There are fortunes to be made, but also crooks and thieves willing to take advantage of the unprepared.

But as the world enters its second decade with crypto, mainstream financial services and mainstream businesses have been examining how they can access it, and regulators have taken note as well. As the market continues to evolve, here are five things to know about cryptocurrency:

How it works

Cryptocurrencies are based on a technology called blockchain, which is an open database of every transaction that verifies the security of transactions.

For Bitcoin, each “block” contains many transactions, and they are added to the blockchain by computers performing complex mathematical equations, a process called “mining.” The miners then receive Bitcoin as a transaction fee for the service.

The amount of Bitcoin rewarded to miners halves for every 210,000 confirmed blocks, and there is a maximum amount of potential Bitcoin: 21 million. The possibility of creating Bitcoin will end in 2140, when the supply reaches this limit.

A collection of Bitcoin tokens (virtual currency) is shown in this photo illustration taken on December 8, 2017. REUTERS / Benoit Tessier / Illustration (Reuters)

Other cryptocurrencies are linked to other systems. Some are even tied to physical assets like gold. Besides Bitcoin, popular cryptocurrencies include Ethereum, Litecoin, Bitcoin Cash, and XRP.

People store their cryptocurrencies in a “wallet,” an application that contains the mathematical signature proving ownership of the currency.

Cryptocurrencies can be bought and sold on the stock exchange. The most popular include Coinbase, Binance, and Gemini. Intercontinental Exchange Inc., the owner of the New York Stock Exchange, has announced plans to launch a crypto exchange called Bakkt.

Story

The first – and to date – the most popular cryptocurrency, Bitcoin, went live on January 3, 2009. It was created by someone by the name of Satoshi Nakamoto, who can actually be multiple people using a pseudonym. The first 50 Bitcoin were mined that day.

Bitcoinmarket.com, the first Bitcoin exchange, opened in March 2010. Others quickly followed.

On May 22, 2010, a man paid 10,000 Bitcoins to someone who ordered two pizzas from Papa John’s. As Bitcoin’s market value skyrocketed later, that Bitcoin would be worth millions of dollars.

Namecoin, the first alternative cryptocurrency – called ‘altcoin’ – was launched on April 18, 2011.

A customer feeds cash into a Bitcoin ATM located at Flat 128, a store in the West Village of New York, the United States, on August 22, 2014. REUTERS / Brendan McDermid / File Photo

The market price of Bitcoin first hit $ 10,000 per coin on November 28, 2017. It peaked less than a month later at its all-time high of $ 19,783.21.

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In June 2019, Facebook announced its intention to launch a cryptocurrency called Libra.

What is it worth?

The price of cryptocurrencies can fluctuate widely. The price of Bitcoin has already fallen by around $ 1,000 in a single day.

Bitcoin remains the most valuable cryptocurrency and has the highest market capitalization – calculated by the number of currencies currently available and the price. The price of other cryptocurrencies ranges from a few hundred dollars per “coin” to a fraction of a cent.

Exchanges like Coinbase keep track of the prices of various cryptocurrencies and provide a platform to trade them.

Cryptocurrency Market Statistics. Photograph of a computer screen. (iStock)

Is it legal?

The short answer is yes. “But illegal activity can still be linked to crypto.

The IRS has treated cryptocurrencies as property for tax purposes since 2014. The US Commodity Futures Trading Commission defines virtual currencies as commodities. The Securities and Exchange Commission has said offers and sales of digital assets are subject to federal law.

In April 2019, the SEC released its framework on digital currencies that fall under the category of “security”.

The SEC recently announced several cases of cryptocurrency litigation:

  • In May, authorities launched a civil action against a Californian who they said disguised a pyramid scheme behind digital assets.
  • Prosecutors accused the CEO of a cryptocurrency company of fraudulently distributing shares in order to meet the criteria for listing on the Nasdaq.
  • A Russia-based website that claimed to provide independent evaluations of initial coin offerings has been settled with the SEC after officials said the site actually received payments from the groups whose coins it rated.
  • The SEC filed charges in August against a Dallas-based company and its founders it accused of defrauding millions of investors with unregistered offers on an unregistered exchange.
  • In September, officials sued another company and its founder for allegedly selling millions of dollars in parts in an unregistered bid.

Burning problems

Cryptocurrencies are a rapidly evolving field.

One exchange, Mt. Gox, was closed after “losing” hundreds of thousands of Bitcoin and going bankrupt. In May, the Binance exchange said hackers had stolen thousands of Bitcoin worth millions of dollars.

Some lawmakers are eager to add additional regulations, just as more traditional companies – like Facebook with its Libra – seek to enter the market.

The face of Facebook CEO Mark Zuckerberg is seen in a fake “Zuck Buck” pictured on a screen as David Marcus, CEO of Facebook’s digital wallet service Calibra, in the foreground, is interviewed by Rep. Brad Sherman, D-Calif., During a House Financial Services C (PA)

Federal Reserve Chairman Jerome Powell said in early September that Libra will need to be kept high.

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“Libra should be subject to the highest regulatory standards and supervisory expectations,” he said.