Everyone seems to be talking about “bitcoin” and “cryptocurrencies,” but what are they really talking about? What is a cryptocurrency? Why do people think they are valuable? These are all excellent questions that investors from all over the world are asking.
Cryptocurrencies come in all different names and forms, but each cryptocurrency exists only on the internet; there is no “banknote” like a U.S. Dollar. In fact, cryptocurrencies have no correlation with any governments or countries at all. There are hundreds, if not, thousands of different types of cryptocurrencies. Common types of cryptocurrencies include Bitcoin, Litecoin, Ethereum, EOS, Monero, Dash, and many more. Theoretically, anyone can make their own cryptocurrency, although that doesn’t mean it will automatically have value. What makes a cryptocurrency valuable is the fact that people are willing to purchase it. So, why do people want cryptocurrencies?
Lack of government intervention. Unfortunately, there exists no efficient method to track gains from cryptocurrency transactions, such as the Form W-2 for “salaries and wages” with an employer. In the case of cryptocurrencies, there is no third-party holding people accountable to reporting capital gains from the sale of cryptocurrencies (like a company would hold employees accountable by filing a Form W-2). All gains from cryptocurrencies are essentially on the “honors system,” with gains being voluntarily reported on Form 1040 Schedule D “Capital Gains & Losses.” Although this is not an ethical reason to be drawn to an investment, the ease of ability to lie about tax-reporting is a huge draw to many people.
Stability & Security From Corruption. Cryptocurrencies are not issued by governments, which means that if a person lives in an unstable country or has a negative outlook on the stability of their country, then they may choose to purchase and rely on cryptocurrencies because although governments and civilizations may fail, cryptocurrencies supercede government, and are not dependent upon the state of the government. Cryptocurrencies hold their value even when minted banknotes do not. Many people, even in the U.S., purchase cryptocurrencies because they believe that in the next recession (or downward markets in general), cryptocurrencies will not disappear since there is no direct correlation with government issued bank notes (such as the U.S. Dollar) or U.S. securities. Cryptocurrencies are also immune to corruption such as inflation by the central bank, because no new cryptocurrencies can be issued once the original cryptocurrency has been established, making deflation and manipulation impossible. Once a cryptocurrency has been established, the number of digital coins in existence is set in stone and cannot change.
Future possibilities. When cars were first invented, they were fragile and poorly manufactured. When planes were first invented, it took several years before their capabilities could be honed and jet engines and space ships could fly. When computers were first invented, they were bulky and futile, but now most people carry computers in their pocket with them everyday. Many people hold this view about cryptocurrencies and believe that cryptocurrencies are the future of currency; they simply need to be developed further and honed in.
There is still a lot to learn about cryptocurrencies. Before investing, be sure to consider both the pros and cons as well as your risk tolerance when investing.