Cryptocurrency – chances are you’ve heard of it. But what is it? How does it work? Who is using it and for what? Simply put, cryptocurrency is a sort of online currency that can be exchanged for goods and services. Most cryptocurrency needs to be purchased with real currency, but its value is not equivalent to dollars, euros, etc. Instead, the value of different types of cryptocurrency fluctuate in value, based upon the market and other factors.
Why would people use cryptocurrency? A large part of the appeal of cryptocurrency is that it is difficult to track. Cryptocurrency works by using a blockchain. A blockchain is a list of “blocks,” or data, linked together to form a sort of ledger, which is largely decentralized. There are no physical coins or paper dollars involved; instead, cryptocurrency is held either completely online in an online “wallet,” or on a particular computer or USB drive.
Unlike a credit card payment, cryptocurrency payments are typically not reversable. This makes them a popular vehicle for scammers. Scammers will ask individuals to pay for goods or services with cryptocurrency, then never deliver the goods or services, leaving the buyer with no recourse to recoup their funds. Once owned, cryptocurrency can be sold for real cash.
How does one value cryptocurrency? The value of different cryptocurrencies are dictated by the market – over 6,000 different types of them are currently traded publicly. Their value is notoriously unstable. A cryptocurrency that is worth thousands of dollars one day can end up virtually worthless the next. One good example of this is Bitcoin. The dollar-value of one Bitcoin in February 2011 was approximately $1.00. By December 2013, that value was up to $1,000.00, but by the end of 2015, it was only worth half that. In 2017, the value really started to increase, peaking at over $19,000.00 for a single Bitcoin in December 2017. Currently, one Bitcoin is worth approximately $10,000.00.
Generally, an individual will need some sort of online “wallet” to hold cryptocurrencies, but they can also be held (and hidden) on a personal computer. Coinbase is one of the more popular online “wallets” in which an individual can keep and trade cryptocurrency.
While most of the well-known forms of cryptocurrencies, like Bitcoin, can be purchased with U.S. dollars, some other types of cryptocurrency can only be purchased with other forms of cryptocurrency. It is, therefore, easy to see how it can be difficult to track. There are security concerns with cryptocurrency as well. If someone can gain access to the blockchain, transactions performed with cryptocurrency may be accessible, including digital wallet addresses. There are reports of hackers being able to access an individual’s cryptocurrency wallets and “mine” them for cryptocurrency, essentially stealing them, in a way that makes it highly unlikely they will be caught.
In the earlier days of cryptocurrency, it was often associated with the purchase of illegal weapons, drugs, and other illicit products and services on the dark web. While several cryptocurrency companies have attempted to gain legitimacy, certain companies have landed themselves in hot water. For example, recently the top executives of BitMEX are facing charges for violating anti-money laundering rules contained in the Bank Secrecy Act. These violations can result in prison time.
In one recent, and rare, instance wherein perpetrators of such “mining” actually may have been caught, two Russian nationals were charged by the U.S. Justice Department for a $16.8 million money laundering campaign involving cryptocurrencies. Allegedly, the men were able to find login credentials for cryptocurrency owners and stole several million dollars’ worth of cryptocurrency, then laundered the stolen funds in an attempt to try to make them look as though they were legitimately obtained.
In India, law enforcement is investigating what they believe may have been an investment scheme wherein individuals allegedly lured investors by offering a 20-30% return on cryptocurrency, then claiming that the value of the cryptocurrency fell and that they could not pay out the returns to the investors.
Unlike most cash deposits into a major bank, cryptocurrency is not insured by the United State government. While they are not insured, however, cryptocurrency has also traditionally been difficult for the government to track. Some recent legislative changes, however, seek to change that.
News broke recently that the Internal Revenue Service plans to alter their standard 1040 tax return form next year with the question, “At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency?” While this question did appear on the 2019 tax form, apparently it appeared on a part of the return that all filers had to answer – it will now be much more prominent, on the first page of the return.
While it may seem counter-intuitive that individuals who purchase cryptocurrency in order to avoid it being tracked will report it to the government, there is some precedent to suggest that it may help. In 2009, the IRS added a question about offshore financial accounts which has since helped the IRS bring in more than $12 billion in taxes that may otherwise have been avoided.
Whatever individuals or the U.S. government may feel about cryptocurrency, it appears it is here to stay and that its popularity is increasing. The Atari Group – a company who makes video games – recently announced it will begin publicly selling its own form of cryptocurrency soon for online gaming purposes. “Crypto casinos” are popping up online, and gambling using cryptocurrency is becoming increasingly popular.
What can individuals do to protect themselves in an increasingly virtual world? First, individuals considering investing in cryptocurrency should understand that return is not guaranteed. Values fluctuate constantly, and an individual should certainly not invest a life savings into something so volatile. Individuals should also research the type of cryptocurrency they may be considering purchasing to ensure that it is legitimate and well-reviewed.
Like most other investments, diversity is important. Investing in several different types of cryptocurrencies can result in better returns. Finally, anyone considering investing in cryptocurrency needs to ensure that they have a secure computer, email account, and storage for their cryptocurrency. As mentioned, due to the decentralized nature of cryptocurrency, often stolen coins cannot be recovered. Cryptocurrency can be stored in a “cold” wallet, which is offline, or a “hot” wallet, which is online. While a “cold” wallet can be more secure because it is offline, if a person keeps cryptocurrency, for example, on a flash drive, and then loses that flash drive, there may not be a way to recover the lost cryptocurrency.