Cryptocurrency is growing in popularity. Whilst it’s becoming a familiar term, what does it involve and how does it work?
A cryptocurrency is a digital currency. It’s an alternative form of payment created using encryption algorithms. It is designed to be used online and has grown in popularity since being launched around 15 years ago. Common examples of cryptocurrency are Bitcoin and Ethereum; various cryptocurrencies exist, based on various technologies.
How Does Cryptocurrency Work?
Cryptocurrency makes it possible to transfer value online without the need for a middleman like a bank or payment processor. Transfers can be made globally, near-instantly and at any time, 24/7, for low fees.
No organisation (such as a bank or government) is involved, it is purely a direct transaction between two people achieved via computer networks. This makes cryptocurrency available to anyone who is online.
The security of cryptocurrency transactions is achieved via blockchain technology, with each currency using its own version of blockchain.
Individual units of cryptocurrencies are referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.
The Benefits of Cryptocurrency:
1. Value. Cryptocurrency value is less affected by inflation as central banks are not involved.
2. Security. Blockchain decentralises transactions and is often more secure than traditional payment systems. Once you make an entry on the blockchain, it can’t be changed or erased.
3. Earning potential. Some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking. “Crypto staking is when you lock crypto assets for a set period of time to help support the operation of a blockchain. In return for staking your crypto, you earn more cryptocurrency,” explains Forbes. As with standard currencies, the unit value can increase, offering good investment potential, especially as this is a growing market.
4. Speed. With no intermediaries involved, transfers of cryptocurrency are faster than standard currency and operate 24/7.
Beware of:
1. No protection. There are no consumer protections for those who buy cryptoassets.
2. Scams. The lack of regulation involved with cryptocurrency has resulted in many scams promising exciting financial returns whilst trying to access cryptowallets fraudulently. As blockchain transactions cannot be altered and no regulations are involved, cryptocurrency users are heavily targeted by fraudsters.
3. Tax liability. Whilst the digital currency is not controlled by any government, any financial transactions may be subject to tax legislation, such as income or corporation tax and capital gains tax.
4. Value – yes, ‘value’ can be both rewarding and risky, so it’s on both lists! Cryptocurrency is volatile. It can offer great financial rewards. Equally, it may lose value drastically.
“Cryptocurrency can be an efficient way of processing transactions,” says Felicity Reader, Accounts Senior at re:accounts in Stevenage. “It’s extremely secure and fast however you must be wary of the scams within the sector.”
Before getting involved with cryptocurrency, check how it aligns with your payment processes and how it may affect your tax position. Our team and specialist partners are available to help. Why not discuss this exciting topic over a coffee? Let us know when – we’ll put the kettle on!
