Crypto: What is Cryptocurrency?
Cryptocurrency is a form of digital currency that utilizes cryptography to facilitate secure and anonymous transactions across a distributed ledger or blockchain. Cryptocurrency is also known as virtual currency or digital currency, since it exists only in digital form and can be exchanged on the internet. In contrast to traditional forms of payment, such as cash and credit cards, there are no centralized financial institutions or government agencies that manage the issuance and circulation of cryptocurrencies.
Is Crypto Real Money?
A common question is whether or not cryptocurrency can be considered ‘real money’. The answer may not be as cut-and-dry as one might expect.
What Defines Real Money?
Before considering the validity of cryptocurrency as real money, we must first understand what is traditionally considered to be ‘real money’. Generally, in order for something to be considered real money, it must meet the following criteria:
- It must have an accepted form of exchange – Money must be able to be exchanged for goods and services in order to be considered an accepted form of payment.
- It must be a store of value – Money must be able to be saved and exchanged with relative stability in order to be considered a store of value. Otherwise, the value of money could quickly become irrelevant.
- It must be a unit of account – Money must be able to be used as a unit of accounting in order to keep an accurate record of economic activity and transactions.
Does Crypto Meet These Criteria?
By looking at the criteria established to define real money, it appears that cryptocurrency does meet the standards of ‘real money’.
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Crypto is an Accepted Form of Exchange – Crypto is accepted as a form of payment by a growing number of businesses and institutions, both online and offline. Companies such as Microsoft, Overstock, and Subway are all accepting crypto as a form of payment. Additionally, cryptocurrency can be used on certain exchanges to purchase other forms of currency, assets, and other products.
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Crypto is a Store of Value – Though crypto is still a relatively new asset class, it has been able to maintain its value as a store of asset relative to its initial launch. This is attributed to the fact that the number of crypto coins available is finite (21 million in the case of Bitcoin, for example) and there is limited supply available, thus maintaining its value.
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Crypto is a Unit of Account – This is perhaps one of the most significant advantages of cryptocurrency over traditional currency. Crypto transactions are conducted on a publically verifiable ledger or blockchain, which allows for the accurate and transparent tracking of transactions. As a result of this, cryptocurrencies are well suited to be used as a unit of account, just as traditional currencies are.
Tax Implications of Crypto
In addition to considering whether or not crypto can be considered real money, there are also tax implications to consider. The Internal Revenue Service (IRS) has stated that cryptocurrencies are to be treated as property for tax purposes, rather than as real currency. This means that it must be reported and taxed like property whenever it is exchanged for goods or services, or converted into a fiat currency (ie. US Dollars). Failure to report and pay taxes on cryptocurrency could result in hefty fines and penalties.
At the end of the day, whether or not cryptocurrency can be classified as ‘real money’ is ultimately up to each individual to decide. Cryptocurrency is an increasingly accepted form of payment that is being utilized by both individuals and businesses. It meets the criteria of an accepted form of exchange, a store of value, and a unit of account, making it a viable and useful alternative to traditional forms of currency. Crypto is also subject to tax implications, so it is important to understand the requirements and regulations that come along with owning and exchanging crypto. Ultimately, crypto is a viable and increasingly accepted form of currency that has a place in modern finance.