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Cryptocurrency has experienced a remarkable transformation over the past decade, evolving from an obscure asset to a highly popular investment opportunity. However, it has also faced significant challenges, particularly with the recent decline in value due to increasing interest rates. Despite these ups and downs, cryptocurrencies continue to be an intriguing form of digital currency secured through cryptography and computer networks. Unlike traditional currencies, they are not overseen by central institutions like governments or banks, and transactions offer a degree of anonymity for buyers and sellers.
Understanding how cryptocurrencies work can be complex, but this guide aims to provide a clear and concise overview of the most important aspects of digital currencies and the latest developments in the crypto market.
Learn about Cryptocurrency
Dollar Coin
Cryptocurrency emerged in response to concerns about central bank powers during the Great Recession, as users sought to decentralize money. The first cryptocurrency, Bitcoin, was launched in 2009, with its first transaction involving the purchase of two Papa John’s pizzas. Cryptocurrencies rely on blockchain technology, acting as an electronic ledger for anonymous digital transactions.
Bitcoin initially had a value of less than a penny, but it reached a historical high of over $68,000. Since then, over 21,000 different cryptocurrencies have emerged, with Ethereum and Tether following Bitcoin as the second and third most valuable cryptocurrencies, respectively. A July 2023 Morning Consult survey revealed that 26 percent of millennials owned Bitcoin, compared to 14 percent of all U.S. adults.
However, the mining of major cryptocurrencies has raised concerns about carbon dioxide emissions, with estimates suggesting that global mining contributes between 110 and 170 million metric tons of CO2 emissions per year.
Types of Cryptocurrency
Cryptocurrencies come in various forms, each serving different purposes. Here are some of the main types:
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Equity Tokens: These tokens represent equity in underlying assets such as company stocks or property. Terms and voting rights are recorded on the blockchain. Examples include Tesla and PayPal, which can be bought as regular shares or as tokenized stocks on the blockchain.
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Utility Tokens: Utility tokens are used to raise funds for new cryptocurrency projects and often serve a specific purpose for their developers, such as accessing products or services. Examples include Basic Attention Token (BAT) for payments in publishing systems and Golem (GNT) for renting computing power systems.
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Intrinsic Tokens: Also known as “native” or “built-in” tokens, these tokens are digital currencies with intrinsic value determined by the market. They do not represent anything but exist solely as currency. Bitcoin (BTC) and Ethereum (ETH) are popular examples.
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Asset-backed Tokens: These tokens are backed by physical assets like gold, paper money, art, or gemstones. Users can claim the underlying asset by sending the token to the issuer. Commodities such as gold, crude oil, and soybeans are commonly tokenized into asset-backed tokens.
Rise and Fall of the Crypto Market
The birth of cryptocurrency can be traced back to the aftermath of the 2008 recession, when an individual or group named Satoshi Nakamoto published a white paper addressing concerns about central bank control and government oversight of money. In 2009, Bitcoin was launched, marking the transition of cryptocurrency from an academic concept to a real-world contender.
Bitcoin aimed to eliminate the control, oversight, and fees associated with cash transactions, replacing them with cryptographic networks online. On January 3, 2009, the first blockchain was launched, known as the genesis block. The first recorded Bitcoin transaction occurred on May 22, 2010, when a Florida man exchanged 10,000 bitcoins for two Papa John’s pizzas, establishing the first value of Bitcoin at 4 bitcoins per penny. This event is now celebrated as “Bitcoin Pizza Day.”
Bitcoin’s price surpassed the $1 threshold in February 2011 and reached an all-time high of $68,789 in November 2021. Since Bitcoin’s inception, over 21,000 different cryptocurrencies have been created, with Bitcoin, Ethereum, and Tether being the most valuable. As of August 28, 2023, the total value of all existing cryptocurrencies is around $1.05 trillion, with Bitcoin accounting for approximately $508 billion.
The global payments revenue is projected to exceed $3 trillion by 2026, according to a McKinsey report. The size of the Bitcoin blockchain has also expanded, reaching approximately 507 gigabytes as of August 27, 2023, a 70 percent increase compared to three years ago.
Cryptocurrency Statistics: Investors and Demographics
As of 2022, about 21 percent of American adults owned cryptocurrency, according to NBC News. Vietnam ranked first in Chainalysis’s global crypto adoption index, followed by the Philippines and Ukraine. Developing markets, including Ukraine, Kenya, and Nigeria, have seen high levels of cryptocurrency adoption.
In the United States, high-income earners are overrepresented among crypto investors, with those earning $100,000 or more annually accounting for 25 percent of crypto owners but only 15 percent of the general population. Approximately 70 percent of cryptocurrency owners are men, although they make up only 48 percent of the population. Women represent 30 percent of crypto owners but 52 percent of the general population.
The breakdown of U.S. crypto ownership by ethnicity in 2021, according to Morning Consult, is as follows:
- White: 62% of total crypto ownership, 69% of the U.S. adult population
- Hispanic: 24% of total crypto ownership, 16% of the U.S. adult population
- Black or African American: 8% of total crypto ownership, 10% of the U.S. adult population
- Asian: 6% of total crypto ownership, 5% of the U.S. adult population
Based on generation, crypto ownership percentages in the U.S. in 2021 were as follows:
- Gen Z (born 1997-2012): 13% of total crypto ownership, 11% of the U.S. adult population
- Millennials (born 1981-1996): 57% of total crypto ownership, 30% of the U.S. adult population
- Gen X (born 1965-1980): 20% of total crypto ownership, 27% of the U.S. adult population
- Baby Boomers (born 1946-1964): 10% of total crypto ownership, 32% of the U.S. adult population
Cryptocurrency’s Environmental Impact
While cryptocurrencies have introduced a new method of payment, their production has sparked controversy due to the significant energy consumption involved. Bitcoin and other cryptocurrencies are “mined” on decentralized computer networks that function as large ledgers, tracking each transaction and verifying them through blockchain databases.
Mining requires high-powered computers and consumes substantial amounts of electricity. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin alone consumed an estimated 136 terawatt-hours of electricity annually as of August 2023, surpassing the energy usage of countries like Ukraine and Pakistan.
Bitcoin mining accounts for 0.61 percent of the world’s total electricity consumption, and it generates 68.8 million metric tons of carbon dioxide emissions each year, equivalent to the emissions of Singapore. Additionally, a single Bitcoin transaction has a carbon footprint larger than 762,000 Visa transactions, and Bitcoin emissions could contribute to a global temperature increase above 2°C.
It is even estimated that Bitcoin mining consumes the same amount of electricity as all the data centers worldwide, highlighting the environmental impact of cryptocurrency production.
Crypto Taxes and Economic Statistics
Initially, it was challenging for tax agencies to track cryptocurrency transactions due to their anonymity. In 2014, the IRS declared that cryptocurrency should be treated as property for federal income tax purposes. Although the IRS has not released official estimates, Barclays Bank has calculated that the agency loses around $50 billion in taxes each year due to unreported cryptocurrency assets.
Buying and holding cryptocurrency is not a taxable event, but selling it or realizing gains and losses triggers tax reporting requirements. If you sell your cryptocurrency and make a profit, you must report the amount of profit or loss from the sale and pay taxes accordingly.
Is Crypto the Future of Money?
Cryptocurrency has gained popularity in recent years, thanks to increased accessibility. However, its volatility, lack of stability, and controversies surrounding its environmental impact make it a highly speculative investment. Major currencies need stability to serve as reliable mediums of exchange, which cryptocurrencies struggle to provide due to their fluctuating values.
Governments worldwide, including the United States, are exploring ways to regulate cryptocurrency. President Joe Biden signed an executive order in March 2022 calling for a comprehensive review of digital assets, including cryptocurrencies. Federal agencies are examining digital currencies’ potential risks to financial stability and considering appropriate regulations.
As of now, ten countries have banned cryptocurrency entirely, including Algeria, Bolivia, Bangladesh, the Dominican Republic, Ghana, Nepal, North Macedonia, Qatar, Saudi Arabia, and Vanuatu. China, which previously dominated Bitcoin mining, has also outlawed cryptocurrencies. On the other hand, El Salvador and the Central African Republic have accepted crypto as legal tender, but both countries have faced challenges in implementing it.
Although some companies accept cryptocurrency as a form of payment, it has not yet become widely available as a currency. Several major companies, including AT&T, Microsoft, Overstock.com, Twitch, AMC Theaters, and the Dallas Mavericks, have integrated cryptocurrency into their payment systems. However, many companies have introduced and later rescinded the ability to pay with cryptocurrency due to low customer adoption rates.
Cryptocurrency FAQ
What happens if you don’t report cryptocurrency on taxes?
Failure to report cryptocurrency transactions and pay taxes on them can result in serious consequences, including financial penalties and potential criminal charges, such as imprisonment. The IRS requires taxpayers to disclose cryptocurrency transactions on their annual tax returns. If you have bought or sold cryptocurrency during the tax year, you must declare it on your taxes, as failure to do so would constitute tax evasion.
Additionally, if you have made a profit from cryptocurrency trades, you are required to report that capital gain and pay taxes on it. Conversely, if you have incurred losses, you can claim them for a tax break.
How do beginners invest in cryptocurrency?
Cryptocurrency investment is highly speculative and volatile, making it risky for beginners. It is crucial to understand how cryptocurrency works before investing. Beginners should only allocate a small portion (less than 5 percent) of their investment portfolio to cryptocurrencies, while focusing on diversification with other assets like stocks.
What is cryptocurrency mining?
Cryptocurrency mining involves the creation of new coins on a blockchain network. Miners use high-powered computers to solve complex mathematical problems, and in return, they are rewarded with new coins. However, mining is energy-intensive and contributes to carbon emissions.
Where to buy cryptocurrency?
Cryptocurrency can be purchased from various platforms, including traditional payment apps like PayPal and Venmo, investing apps like Robinhood and Webull, dedicated crypto exchanges like Coinbase, and select traditional brokerages. It is important to research and choose a reputable platform that meets your needs.
In conclusion, cryptocurrency investment opportunities in 2023 are influenced by factors such as market volatility, environmental concerns, and government regulations. While cryptocurrencies offer the potential for significant returns, they also present risks and challenges. Investors should approach cryptocurrency investment with caution and consider diversifying their portfolios with more stable assets.
