Unraveling the Mystery of Cryptocurrency: What Accountants Need to Know

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DeFi, blockchain, decentralized, crypto, Bitcoin…these are just a few of the terms that you may have heard people discussing lately. The term “crypto” in cryptocurrency refers to cryptography, which is the study of secure information and encryption. It is easy to see why cryptocurrency may seem a bit perplexing to many accountants. 

So, what is cryptocurrency?

Cryptocurrency is a type of digital currency that is not regulated by a centralized body. This is why it is often referred to as a “DeFi” or “decentralized” form of currency. The U.S. dollar, on the other hand, is a centralized currency, meaning its value is determined by a governing authority. 

Many people treat cryptocurrency as an investment, much like stocks or bonds, because the crypto market trades 24/7. However, there is still a lot of skepticism around cryptocurrency, since it is not managed by a governing body or third party. To buy crypto without regret, it is important to do in-depth research to understand the pros and cons of different coins. Businesses and consumers are struggling to keep up with this demand. 

What is the relationship between cryptocurrency and blockchain?

If you have done any research on crypto, then you may have heard the term “blockchain”. While the concept of blockchain may seem complicated at first, it is not as difficult to understand as you may think. Blockchain is essentially a ledger of transactions, similar to an electronic check registry. This registry is duplicated across networks of thousands of computers, or nodes. These nodes communicate with the associated blockchain by validating, confirming, securing and writing blocks to the chain. 

Let’s use an example. An individual requests a cryptocurrency transaction within their network through their phone or laptop. When this transaction is made, the request is broadcast to all computers that are running the blockchain. As part of the process, the credentials of the person making the request are verified. Once the verification is complete, a block is written and added to the blockchain. 

This may not seem very secure, but there are protocols in place to ensure that each transaction is safe. Each cryptocurrency transaction is validated using a method called “proof of work”. It is also important to note that each type of cryptocurrency has its own blockchain. Therefore, Bitcoin, Dogecoin, and Ethereum all have their own individual blockchains. 

What are the uses of cryptocurrency?

The future of crypto is still unknown. Some people believe that it will continue to be a peer-to-peer payment system that can be used to pay friends or family, much like Venmo is used today. Others think that it could be used to replace transactions like wires, which often become time consuming and difficult. Currently, a popular use of cryptocurrency is earning interest, much the way you would invest in other sources. The idea is that the demand for cryptocurrency will increase, and therefore its value will increase as well. Right now, there are more than 19,000 different cryptocurrencies being traded. 

It is important for your clients to be aware of the financial implications of owning cryptocurrency. As far as the IRS is concerned, crypto is still considered a taxable property. If a client buys Bitcoin, for example, and it loses value, they can sell it and recognize the loss at tax time. For example, if your client has crypto on their balance sheet and they purchase a million dollars worth, but the value drops to half a million, they must take a writedown. However, if the price increases by a dollar, the opposite is not necessarily true. There are unrealized losses, but no unrealized gains.  

Recently, the Financial Accounting Standards Board released a project to determine how to classify cryptocurrency. The Securities and Exchange Commission also sent out a bulletin stating that they want certain crypto companies to start carrying cryptocurrency on their balance sheets and offset it with a liability. As of right now, there is still not much guidance in the accounting industry about how to classify cryptocurrency. 

What are the different types of cryptocurrency?

The total market cap for the cryptocurrency industry is just under $1.3 trillion. Bitcoin and Ethereum make up the largest portion of this industry. Bitcoin, like many other cryptocurrencies, was created as a peer-to-peer currency that does not need a centralized authority to be used. 

Another type of cryptocurrency is called stablecoin. This coin is tied to the value of another currency, such as the U.S. dollar or another crypto. Stablecoin is more stable than Bitcoin or Dogecoin because its value does not fluctuate as much over time. Stablecoins are often used to convert cryptocurrencies such as Bitcoin to U.S. dollars. 

There is also something called central bank digital currency. This is a currency that is issued by a government or a central bank. While it has some benefits, such as reducing counterfeiting and money laundering, there is still resistance to this form of currency. Many people are worried that it could lead to an invasion of privacy since it would make tracking easier. 

Another innovation in the cryptocurrency world is cryptocurrency applications, which are cryptocurrencies that run on existing blockchains. Crip is an example of a gaming cryptocurrency that operates on the Ethereum blockchain. It is similar to having applications on your phone that run on Apple’s operating system. Cryptocurrency applications do not have their own blockchains and run on the blockchains of other cryptocurrencies to provide a service. 

In gaming, there are already hundreds of games that run on the blockchain. Most of these use a “play-to-earn” model. As you play the game, you earn tokens associated with the game. This is similar to using a credit card to get airline miles. The metaverse is one example of a cryptocurrency application. 

What is the future of crypto?

The lack of regulation in the crypto industry has led to some bad actors, which has caused people to be suspicious. While the U.S. government has not stepped in yet to make regulations, many people believe that regulations will be put in place soon. 

As more and more stories emerge of people losing money through cryptocurrency, governments are focusing on how to reduce risk and establish rules. Cryptocurrency is not backed by organizations like the Federal Deposit Insurance Corporation, so this is a major concern for individuals and governments alike. 

Even with the suspicion and uncertainty surrounding this industry, there are still many retailers looking into accepting cryptocurrency. I suggest that businesses consider the volatility of the market when making this decision. There are third-party platforms that accept crypto, so it is possible to pay a fee and have cryptocurrency payments converted to your country’s currency. Although it is not certain

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