Cryptocurrency Definition

Cryptocurrency, commonly referred to as crypto, is virtual currency using secure cryptography — a protected, coded information transmission method. Crypto is also a payment system type. However, unlike traditional systems, it doesn’t rely on banks and isn’t regulated by a central monetary authority. Instead, it runs on blockchain technology.

Crypto, as a concept, was introduced in1998. By 2009, Bitcoin, the first and most well-known cryptocurrency, became a reality.

Today, there are thousands of cryptocurrencies available worldwide. Many countries like the United States consider them financial assets and some consider them tradeable investments.

Cryptocurrencies are relatively new and elusive to most people. They’re not as straightforward as using traditional, government-issued currency, which can be intimidating to some. In addition to being used for payments and some purchases, crypto can be an investment option if used correctly.

Learn more about how cryptocurrency works and how it differs from fiat currency.

There are different types of cryptocurrencies on the market, based on how they function and are built. When talking about cryptos, people typically think of a virtual currency they can use for payments. While this may be true for some cryptos, others don’t function like fiat currencies.

Additionally, some may not rely on the same blockchain technology that supports Bitcoin, depending on the type of crypto. Explore the main types of crypto in the table below.

There are two forms of cryptocurrency: coins and tokens. Many use coins and tokens interchangeably. However, they’re not the same.

Coins and tokens are found in blockchain networks. The difference lies in whether the crypto has a blockchain or not.

Coins have underlying blockchains. They function like digital money and are used for payments. Meanwhile, tokens operate using other blockchains. They are digital assets that can be bought, sold, traded and stored.

Understanding the difference between these forms of crypto can help have a better grasp of what cryptocurrency is and how crypto markets run. It will also give you an idea of what type of crypto is suitable for your needs and goals.

Change and development are part of technology. Crypto is no exception. Through the years, it has experienced changes. Given that it’s still a relatively new technology, a lot stands to change in the future. Changes can be categorized into hard forks and soft forks in the cryptocurrency world.

Even though cryptocurrency is a new technology, markets are seeing an increase. Currently, there are more than 19,000 cryptos in existence. Some of these are considered dead — they’ve been abandoned, are scams, insufficiently funded or have low liquidity. There are more than 10,000 active cryptos.

With thousands of cryptocurrencies in the market, finding the right one for you can be a bit challenging. The following breakdown highlights some of the most popular cryptos to help you learn more about your options.

Cryptocurrency market capitalization (market cap) determines how big certain digital currency is. It can help in comparing cryptos in the market. Checking the market cap can help investors and aspiring investors decide where to invest.

In total, the current market cap is $1.26 trillion. Bitcoin remains the top-ranking in terms of market cap with Ethereum typically coming in second.

In 2017, the world saw significant interest in crypto. But the market cap of cryptos was already worth billions of dollars before the boom. That said, it crashed in the succeeding years. For instance, in 2018, crypto experienced an 80% plunge.

The recent crypto market cap increase shows signs of recovery. However, the high volatility and consistent change of crypto are likely to continue.

The constant change in the crypto market cap demonstrates how its growth can be unpredictable.

Let us take BTC as an example.

In May 2013, the crypto’s market cap reached $1.25 billion. It continued to grow from there. It significantly increased in December 2017 to $326.50 billion. A huge dip occurred in February 2018 as the BTC market cap only totaled $198.39 billion.

The next peak was in April 2021 at $1.15 trillion. A month after that, crypto fell to $648.06 billion. Another peak came in November 2021 at a $1.20 trillion market cap. In January 2022, BTC fell again to $878.95 billion. Fluctuations continued and the BTC is currently at $581.46 billion.

The case of BTC isn’t unique. Overall, cryptocurrencies have seen growth in market cap, price and popularity over the past decades since their inception. However, they have also experienced fluctuations. Crashes have been observed, with some years recording significant decreases.

Cryptocurrency has been a buzzword recently. As more people become aware of it, more individuals are interested in it as an investment option. Additionally, many see its decentralized nature as an advantage, since cryptos do not rely on central banks and governments.

Individual investors are not the only ones who find cryptocurrencies appealing — it’s been expanding into more common use. Many mainstream companies have adopted the use of crypto. These range from financial institutions to retailers. Supply chain management is even using it.

The legality of cryptocurrencies depends on the country. For instance, BTC is legal in at least 11 states and territories. These include the U.S., Canada, the European Union (EU), the United Kingdom, Japan, Australia, El Salvador and Spain. In some countries, it’s legal to use bitcoin but restricted, while others have completely banned its use.

Regulation and taxation are also on a per-country basis. For instance, the U.S. Securities and Exchange Commission (SEC) regulates the issuance and resale of digital assets or tokens that constitutes security. Security, in this case, refers to investment contracts.

Regulation uncertainty is one of the drawbacks experienced with cryptos. However, many governments recognize the need to regulate digital currencies and assets.

In the U.S., regulation of digital tokens is a moving target. In March 2022, the White House released an Executive Order on Ensuring Responsible Development of Digital Assets. President Biden reiterated the need for a policy governing digital assets to protect consumers, investors and businesses in the country. The crypto regulation discussions continue.

The use of cryptos is legal in the U.S. However, they’re not considered legal tenders. Companies can conduct crypto transactions. Interested businesses may need to find a payments partner and learn how to convert payments into cash.

In Canada, cryptos are legal but aren’t considered legal tender. That means individual businesses can accept crypto payments at their own risk. However, the Canadian Securities Administration (CSA) doesn’t take it as a form of tax payment.

While cryptos are widely considered legal across the EU, regulation varies per member-state. According to EU laws, cryptos and digital assets are considered qualified financial instruments. Financial institutions, such as banks and investment firms, can offer services or hold crypto assets. Cryptos are not legal tenders in the EU.

Whether cryptos are taxed or not will depend on where you live. The best way to determine how much you need to pay for crypto tax is to review the country’s regulations. For instance, cryptos are tax-free in Germany, Belarus, El Salvador, Singapore, Malaysia, Malta, Cayman Islands, Puerto Rico and Switzerland.

In the U.S., the IRS treats virtual currency as property. The general rules for property transactions apply to federal tax. Transactions involving crypto are taxable because cryptocurrencies aren’t accepted as legal tender in the country.

For instance, by paying an employee in virtual currency, the employer must report the wages using a W-2. The said wages are subjected to federal income tax withholding and payroll taxes.

Canada and the United Kingdom (U.K.) are other examples of countries where cryptos are taxable. Canada considers cryptos as digital assets. That means holding cryptos isn’t taxable. However, the sale of these assets is subject to taxes.

Similarly, any act that would lead to earning capital gain like selling, trading, exchanging or gifting of cryptos requires the payment of taxes. That said, only 50% of the capital gain is taxable.

The U.K. treats cryptos as capital assets. That means the disposal of cryptos, such as selling, exchanging or paying goods or giving away tokens, would lead to taxes. The country’s tax rate on crypto depends on the taxpayer’s overall taxable income.

Cryptocurrencies can create a diverse investment portfolio. Whether one should invest in crypto depends on an individual’s situation, needs and goals. Overall, an investor should aim for a balanced investment portfolio.

Before diving in, make sure you weigh the pros and cons. Below is a simple comparison of well-known benefits and risks to help you get started. You can also compare multiple cryptocurrencies available in the market to see which one is suitable for your needs.

Knowing what cryptocurrency is can help you make well-informed investment decisions. MoneyGeek answers some of the frequently asked questions (FAQs) about cryptocurrencies and how they work.

While cryptocurrency provides a new opportunity to grow one’s investment portfolio, it may not be for everyone. Explore the following resources to help you increase your financial knowledge base and make informed decisions.

Financial Management

• Financial Literacy Handbook: Financial literacy can help you make well-informed financial decisions. Expand your knowledge about basic money principles and financial management techniques.
• Financial Planning: Achieving financial success and happiness requires proper financial planning. Learn about budgeting and retirement planning.
• Financial Steps for Each Decade of Your Life: Financial needs may change as you grow older. Learn financial steps you can take depending on your age.
• Should You Invest in Cryptocurrencies or the Stock Market?: Discover tips for maintaining a steady income after retirement and learn money management strategies.

Investing

• Saving and Investing: The best time to prepare for retirement is now. Get tips on how you can start saving and investing to achieve financial security.