How are transactions with cryptocurrency carried out, what varieties are there and what can and cannot be done with crypto in USA.
What is a cryptocurrency
Cryptocurrency is an asset that is not issued by the Central Bank or other regulator of the country’s money circulation. It has no material expression, it is created using cryptographic algorithms and functions digitally. Crypto can be created by companies, organizations and even individuals.
Important! Cryptocurrency, in simple words, is an asset that circulates only in digital form and is used mainly for investment and accumulation, and not as a universal medium of exchange.
Cryptocurrency first became known in 2008. Then a person or a group of authors under the pseudonym Satoshi Nakamoto published the article “Bitcoin: a digital peer-to-peer cash system”, which describes a fully decentralized electronic cash system. The first cryptocurrency, bitcoin, appeared in 2009 and is believed to have been created by Nakamoto.
In some countries, cryptocurrency is legalized. In Russia, the attitude towards cryptocurrency among regulatory authorities varies. The Bank of Russia sees great risks to financial stability in the circulation of cryptocurrencies and is in favor of its ban. The Ministry of Finance and the government believe that cryptocurrency can circulate in the country, but clear regulation is needed. Discussions about the place of cryptocurrency in Russia are still ongoing.
How does a cryptocurrency differ from ordinary money such as the ruble and the dollar
The key difference between a cryptocurrency and a ruble or dollar is that it does not have a centralized body that will issue (put into circulation) money. That is, neither banks nor government agencies can influence the transactions that participants in the system make. All organizational activities are carried out collectively by the participants in the network; no one participant has control over it.
Cryptocurrency has some of the properties of traditional fiat money (a standard means of payment in national currencies): it can act as a store of value. However, it cannot act as a substitute for traditional money.
What is blockchain
Cryptocurrency is based on the blockchain system (literally – a chain of blocks) – encryption and data storage technology (registry), which are distributed over many computers connected to a common network.
Blockchain is a database that stores all transactions made, and each new block contains data about the previous block. Each block contains a limited number of transactions. In the process of creating blocks, complex algorithms are used that require a lot of computing power. Therefore, it is considered extremely difficult to introduce false data into the blockchain. That is why the technology is well suited for maintaining a register of transactions, for example, payment transactions. In the case of cryptocurrencies, information about the movement of funds is recorded in blocks: what amounts were transferred, from which wallet to which.
There is an opinion that cryptocurrencies can be divided into two categories: coins (coins) and tokens. Coins include bitcoins and altcoins, tokens include the tokens themselves and their NFT subspecies, that is, non-fungible tokens. There is also a category of stablecoins, which are technically tokens, but are used and perceived as coins.
The first emerging cryptocurrency, which occupies a separate place in the crypto market due to its capitalization and influence.
All cryptocurrencies that appeared after bitcoin. These are cryptocurrencies with their own blockchain. The first altcoins Litecoin and Namecoin appeared in 2011. The developers of altcoins sought to overcome a number of problems inherent in bitcoin. Therefore, altcoins are similar to bitcoin: they have the source code of bitcoin, but it is modified. Due to this, altcoin developers can speed up transactions, optimize mining.
These are assets that can be used, in particular, as evidence of the right to a share in the assets or income of a certain business, that is, as an analogue of securities. Tokens are issued by the company in order to raise capital for projects. Tokens do not have their own blockchain like cryptocurrencies.
Literally, this means “non-fungible tokens”. This is a type of token, which differs in that each instance is unique, it cannot be replaced or exchanged for another token. Although initially the tokens were created as fungible assets. NFTs represent ownership of unique assets, such as works of art, but they are only entries in a virtual ledger and do not, in and of themselves, confer any rights.
These are tokens, the value of which is tied to physical assets, such as the dollar, oil, gold, and gas. Unlike bitcoin and altcoins, the value of stablecoins is relatively stable. Stablecoin price fluctuations are lower than those of cryptocurrencies.
How a cryptocurrency is created
Cryptocurrencies are created in the process of mining (extraction). This is a solution of complex mathematical problems on powerful computers, during which a large amount of electricity is spent. As a result of mining, a cryptomonet appears – a cryptographic hash code that cannot be faked due to its long and complex mathematical writing. As a result of mathematical operations, new cryptocurrency blocks are formed. For these calculations, miners (miners) receive a reward. Now mining is often more expensive than trading assets on exchanges, but this will require knowledge and experience.
Advantages and disadvantages of cryptocurrency
The creator of bitcoin considers the main advantage of cryptocurrencies over traditional fiat money to be the absence of an intermediary in the form of a state or a bank when making a transaction between two parties. Also, the advantages include the fact that the entire system is built on cryptography, and not on trust in a particular state or commercial institution. At the same time, the governments of many countries are ambivalent about cryptocurrency, as they see it as a threat to the financial stability of the existing monetary system.
Benefits of Cryptocurrency
- Anonymity (it is impossible to track the recipient and sender of money, only numbers of crypto wallets are known).
- An open code that allows anyone to mine virtual coins.
- Independence from the regulator.
- It is not subject to inflation, as it is produced in a limited volume and cannot be increased.
Disadvantages of Cryptocurrency
- The risk of a complete ban by government authorities.
- Unable to cancel payment.
- High volatility, which can lead to a complete loss of invested funds.
- The risk of complete loss of access to assets in case of loss of the password to the wallet.
- Lack of guarantees and insurances.
- Lack of clear legal regulation.
Storage and use of cryptocurrency in USA
Although the buyer and seller of cryptocurrencies may be physically located in Russia, crypto trading usually takes place on virtual platforms registered abroad, which means that transactions do not formally take place in Russia, Roman Nekrasov, co-founder of the ENCRY Foundation, explains. “The user performs such operations at his own peril and risk,” he adds.
If a person wants to remain in the legal field, then when selling a cryptocurrency, he needs to pay a tax. The Ministry of Finance explained the procedure and grounds for paying the tax in its letters. “Now most users prefer not to declare their transactions in any way, especially since they take place in the virtual space,” says Nekrasov.
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For individuals, there are currently no restrictions on the purchase and sale of cryptocurrencies, adds Stanislav Pankov. At the same time, it is important to record all the facts of buying and selling cryptocurrency, because it is necessary to report annually to the tax service for the income of an individual, the expert notes. To do this, it is necessary to submit a declaration every year in the form of 3-NDFL (approved tax report on the income of an individual). Taxpayers must complete and submit to the Federal Tax Service such a certificate indicating the income received in the previous year, Pankov notes. “When buying cryptocurrencies, it is necessary to strictly record all the facts of the transfer of funds to exchangers that sell cryptocurrencies, and confirm the legality of the origin of funds. If an investor buys cryptocurrencies for money that, for example, receives in the form of an official salary to their bank account, then it will be easy to confirm their origin. If these are purchases for cash, then the origin must be explained, otherwise such an investor may be suspected of laundering money through cryptocurrencies, ”he explains. Such cases do happen, the expert warns.
“To trade cryptocurrency, you need to open your crypto wallet. This will take two to three minutes. You need to download a mobile application, install it on your smartphone, open and create a wallet. It is very important to carefully store private keys, which are something like the secret password of the wallet user, they should not be shown to anyone, ”says Pankov.
Existing cryptocurrencies: list
There are several thousand cryptocurrencies in the world. Here is a list of the 10 largest cryptocurrencies by capitalization*:
USD Coin (USDC)
Binance USD (BUSD)
How you can earn on cryptocurrency
To begin with, an investor should understand what level of risk tolerance he is willing to accept, says Nekrasov of the ENCRY Foundation. Then he should decide on what horizon he will invest: a year, five, ten years, how much he can risk, because cryptocurrencies are high-risk assets, he warns. “In general, the approach to investing in cryptocurrencies is not much different from drawing up an investment strategy when buying shares,” the expert explains.
It is also worth remembering that the dynamics of the crypto market largely depends on macroeconomic factors. “The crypto market is highly correlated with the US and Asian stock markets, so it’s better not to expect the NASDAQ and S&P500 to fall, and the cryptocurrency to grow exclusively,” the expert says.
According to Pankov from TTM Academy, it is worth investing in your knowledge first of all. “Otherwise, due to a lack of experience and financial literacy, as well as a lack of understanding of the operation of cryptocurrency technologies and the basics of security, you can quickly lose all or most of your capital,” he warns. Also on the cryptocurrency market there is a huge number of scammers and hackers who come up with new ways to steal money from inexperienced users. “Definitely, you should think about getting an education in order to be able to act in a balanced way in the crypto market. After that, you can register on the crypto exchange and make the first purchases.