Crypto's Place: Investment Sector Explored

Cryptocurrency is a digital currency that is not issued or backed by any central authority, such as a government or bank. It is designed to work as a medium of exchange through a computer network. Cryptocurrencies are generally based on blockchain technology, a distributed ledger technology that serves as a public financial transaction database.

The first cryptocurrency, Bitcoin, was created in 2009 and has since grown into a massive industry, with a peak market value of $3 trillion in fall 2021. Today, there are more than 20,000 different cryptocurrencies on the market, and the sector is gaining mainstream adoption.

Investing in cryptocurrencies can be risky due to their volatile nature, but there are also opportunities for high returns. The revenue that crypto service providers derive from blockchain technology has grown explosively, and some established companies are now offering crypto-related services to their customers.

Crypto as a medium of exchange

Cryptocurrencies such as Bitcoin are digital currencies that are not backed by real assets or securities. They are traded between consenting parties without a broker and are tracked on digital ledgers.

Bitcoin is defined as digital money within a decentralised peer-to-peer payment network. It is a hybrid between fiat currency and commodity currency without intrinsic value and independent of any government or monetary authority.

Bitcoin is the most widely used cryptocurrency and can be used to buy goods and services or traded for profit. It is also used as a medium of exchange. As the world's first censorship-resistant money, Bitcoin excels as a medium of exchange in otherwise harsh legal environments, where authoritarian governments use the financial system to oppress their citizens. Protestors in Hong Kong, Belarus, and Nigeria have all used Bitcoin to protect themselves and their privacy after local governments froze bank accounts and seized donations to their causes.

However, one of the most common criticisms of Bitcoin is that you cannot spend it everywhere. Bitcoin has not yet been adopted as a widespread medium of exchange. In more politically stable regions, Bitcoin has not gained traction as a medium of exchange, with critics claiming that this indicates failure. This conclusion is short-sighted, as the same factors that have slowed Bitcoin's adoption as a medium of exchange ultimately make it a successful form of money.

Bitcoin is a monetary network, akin to a decentralised central bank, rather than a payment processor. Its adoption should not be measured by its use for commercial payments, but rather by the number of users, the demand to send Bitcoin transactions, and the Bitcoin price.

Bitcoin is also barely a decade old, and unseating well-established monies such as the US dollar does not happen quickly. Additionally, according to Gresham's Law, "bad money drives out good". In an economy with two monies, the bad money will be used in circulation, and the good money will be held as savings. As Bitcoin is a "hard money" whose value rises over time, people would rather spend fiat money, which loses value over time.

Despite these challenges, Bitcoin already operates as a medium of exchange across the world, and its success as a medium of exchange is not predicated on its use as a method of payment for daily transactions.

Crypto's legal status

The legal status of cryptocurrencies varies from country to country. In some countries, such as Japan, cryptocurrencies are recognised as legal tender, while in others, such as China, they are banned. In the US, for example, cryptocurrencies are not considered legal tender, but they are legal to use and trade. Cryptocurrency exchanges are also legal in the US and fall under the regulatory scope of the Bank Secrecy Act (BSA).

The European Union has passed no specific legislation relative to the status of bitcoin as a currency, but has stated that VAT/GST is not applicable to the conversion between traditional (fiat) currency and bitcoin. In the UK, which is no longer a member of the EU, cryptocurrencies are not considered legal tender, and exchanges have registration requirements.

In other countries, the legal status of cryptocurrencies is unclear. In India, for example, cryptocurrencies are not considered legal tender, and the status of exchanges remains uncertain as new regulations are being considered.

The lack of a consistent legal approach to cryptocurrencies around the world makes it difficult to determine their legal status. However, as the use of cryptocurrencies increases, more countries are introducing regulations to govern their use.

Crypto's tax implications

Cryptocurrencies are considered digital assets by the IRS and are taxed similarly to stocks, bonds, and other capital assets. The tax implications of cryptos depend on how you acquired and used them. Here are the key points regarding cryptos' tax implications:

Taxable Events

• Selling crypto for cash: If you sell your crypto for a higher price than you paid, you will owe taxes on the capital gains.
• Converting one crypto to another: Exchanging one cryptocurrency for another is considered a sale and is therefore taxable.
• Spending crypto on goods and services: Using crypto to make purchases is treated similarly to selling it, and you will owe capital gains taxes.
• Getting paid in crypto: If you receive crypto as compensation from an employer, it will be taxed according to your income tax bracket.
• Mining or staking crypto: Any crypto earned through mining or staking activities is generally taxed based on its fair market value when received.

Non-Taxable Events

• Buying and holding crypto: Simply purchasing and owning crypto is not a taxable event. Taxes are typically incurred when you sell or dispose of the crypto.
• Receiving crypto as a gift: You generally won't incur taxes on crypto received as a gift until you sell or engage in another taxable activity.
• Transferring crypto between wallets: Moving crypto between your own wallets or accounts is not a taxable event, as long as you transfer the original cost basis as well.

Tax Calculations

• Cost basis: To calculate your gains or losses, you need to know your cost basis, which is usually the amount you paid for the crypto. For crypto acquired through mining or staking, the cost basis is the fair market value when received.
• Short-term vs. long-term capital gains: The tax rates depend on how long you held the crypto before selling. Short-term gains (holding for 365 days or less) are taxed at higher ordinary income rates, while long-term gains (holding for more than a year) are taxed at lower capital gains rates.
• Capital losses: If you sell crypto at a loss, you can use those losses to offset other capital gains and potentially reduce your overall tax liability. The maximum amount of capital losses you can declare each year is $3,000.

Crypto mining

To start mining cryptocurrencies, individuals need computers with specialised software and hardware capable of solving complex mathematical equations. In the early days of crypto, mining could be done using a simple CPU chip on a home computer. However, as the difficulty level of mining has increased over time, more advanced hardware such as GPUs or ASICs is now required. Additionally, miners need a reliable internet connection and must be members of an online crypto mining pool.

Different methods of crypto mining exist, including CPU mining, GPU mining, and ASIC mining. Each method varies in terms of computational power, energy consumption, and cost. The increasing difficulty of mining has led to the emergence of cloud mining, where individual miners can rent mining rigs from major corporations and dedicated crypto-mining facilities.

The profitability of crypto mining depends on several factors, including the hash rate, electric power consumption, overall costs, and the difficulty level of the cryptocurrency being mined. It is important to consider the electricity consumption and cooling costs associated with mining, as the process can be extremely energy-intensive.

The legality of crypto mining varies across jurisdictions, with some countries embracing it while others remaining uncertain or banning it altogether. In the United States, the IRS has provided guidance on the tax implications of crypto mining, treating rewards from mining activities as income.

Crypto's environmental impact

Cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. It is also referred to as "crypto".

Crypto has a large environmental impact. Some crypto networks use as much energy as small countries to maintain a blockchain. Crypto mining requires large amounts of energy—more than is used by some small countries. The energy used for crypto mining is typically procured from burning fossil fuels.

According to a report by the White House, cryptocurrency mining accounts for 140 million metric tons of CO2 per year released into the atmosphere, or 0.3% of all global greenhouse gas emissions. This amount is greater than the emissions produced by many individual countries, including Argentina and the Netherlands.

Crypto mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. The largest country for Bitcoin mining is the United States, which accounts for more than one-third of Bitcoin mining activities.

The environmental impact of crypto is a significant concern, especially given the world's need to reduce its carbon footprint.

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