Over the last decade, cryptocurrency has gone from an obscure asset to a wildly popular investment before falling significantly amid increasing interest rates. Cryptocurrencies are a form of digital currency secured through cryptography and computer networks. These currencies are not overseen by traditional central institutions, like a government or bank, and transactions are performed while maintaining the semi-anonymity of buyers and sellers.
How cryptocurrencies work can sometimes be complex. Below is an easy-to-follow guide on the most important things to know about digital currencies and new developments in the crypto market.
- Cryptocurrency was born out of the Great Recession, as the concern over central bank powers grew, and users found a way to decentralize money.
- The first cryptocurrency, Bitcoin, was launched in 2009. Its first transaction was used for two Papa John’s pizzas.
- Cryptocurrencies are made possible by a technology called blockchain, which acts as an electronic ledger for anonymous digital transactions.
- Bitcoin began with a value of less than a penny, and at its historical high hit more than $68,000.
- Since its inception, more than 21,000 different cryptocurrencies have evolved and followed in Bitcoin’s footsteps. Ethereum and Tether sit behind Bitcoin in value to round out the top three.
- 26 percent of millennials owned Bitcoin, according to a July 2023 Morning Consult survey, compared to 14 percent of all U.S. adults.
- Global mining for the largest cryptocurrencies is estimated to create between 110 – 170 million metric tons of carbon dioxide emissions per year, according to a White House report.
|Best used for/purpose
|Example of this type
|Represent equity in the underlying asset, usually the stock of an actual company or equity in a property. Terms are recorded on the blockchain. Very similar to owning traditional stocks, with the main difference being registration on a blockchain versus a database or paper certificate as is the case with traditional stock. Voting rights are also issued with these tokens through the blockchain.
|Tesla and PayPal are just two examples of companies that can be bought as regular shares and as tokenized stocks through the blockchain.
|Utility tokens are used to raise funds for new cryptocurrency projects. Utility tokens usually serve a specific purpose for their developer, often to raise capital but can also provide access to products or services. Not considered ownership of an asset like an equity token.
|Basic Attention Token (BAT) is used for payments in publishing systems.Golem (GNT) offers a way for users to rent computing power systems.
|Also called “native” or “built-in” tokens, these tokens are digital forms of currency and have intrinsic value only insofar as the market values them. They do not represent anything, but simply exist as currency.
|Bitcoin (BTC) and Ethereum (ETH) are two of the most well-known intrinsic tokens.
|Asset-backed tokens are the digital equivalent of IOUs. These tokens are backed by an underlying asset, something physical like gold, paper money, art or gemstones. Users can claim the underlying asset from a specific issuer by sending the token to the issuer.
|Any real, physical asset can be tokenized into an asset-backed token. Often, commodities like gold, crude oil and soybeans are used.
- Following the 2008 recession, an individual or group by the name of Satoshi Nakamoto created a white paper to address central bank control of money and the control governments had over citizens’ money.
- In 2009, Bitcoin was created, launching cryptocurrency from academic concept to real-world currency contender.
- Bitcoin was intended to eliminate the control, oversight and fees associated with cash transactions. The legitimacy provided by third-party institutions like banks was supposed to be replaced by cryptographic networks online.
- On Jan. 3, 2009, the first blockchain was launched with the first “block” called the genesis block.
- The first actual transaction with Bitcoin took place on May 22, 2010 when a Florida man negotiated to have two Papa John’s pizzas worth $25 delivered in exchange for 10,000 bitcoins. This established the first actual value of Bitcoin, at 4 bitcoins per penny. Fans have since dubbed this day “Bitcoin Pizza Day.”
- In February 2011, Bitcoin’s price passed the $1 threshold. Not quite 11 years later, Bitcoin hit an all-time high of $68,789 in November 2021.
- Since Bitcoin’s inception, more than 21,000 different cryptocurrencies have been created.
- Bitcoin is the most valuable coin in circulation, with Ethereum and Tether in second and third place, respectively.
- The value of all existing cryptocurrency is around $1.05 trillion, with around $508 billion of that being attributed to Bitcoin (as of Aug. 28, 2023), according to CoinMarketCap.com.
- The global payments revenue is expected to top $3 trillion by 2026, according to a McKinsey report.
- As of Aug. 27, 2023, the size of the Bitcoin blockchain is approximately 507 gigabytes, about 70 percent higher than where it was three years ago.
- About 21 percent of American adults have owned cryptocurrency as of 2022, according to NBC News.
- Vietnam is ranked at the top of Chainalysis’s global crypto adoption index, as of Sept. 2022, followed by the Philippines and Ukraine, to round out the top three.
- Many high adopters are developing markets, such as Ukraine, Kenya and Nigeria, according to Chainalysis.
- In the United States, high-income earners are disproportionately represented among crypto investors, with those making $100,000 or more annually comprising 25 percent of crypto owners but only 15 percent of the general public.
- About 70 percent of cryptocurrency owners are men, but they represent only 48 percent of the general population, according to a report by Morning Consult. Women comprise 30 percent of crypto owners but 52 percent of the general population.
- U.S. crypto ownership by ethnicity, in 2021, according to Morning Consult:
|Ethnicity / Race
|Percent of total crypto ownership
|Percent of U.S. adult population
|Black or African American
|Percent of total crypto ownership
|Percent of U.S. adult population
|Gen Z (born 1997-2012)
|Millennials (born 1981-1996)
|Gen X (born 1965-1980)
|Baby Boomers (born 1946-1964)
Although cryptocurrencies have created a new, alternative method of payment, the production of cryptocurrency has been mired in controversy because of the energy required to produce it.
Bitcoin and other cryptocurrencies are “mined” on decentralized computer networks that act much like a large ledger. This ledger tracks each transaction of cryptocurrency, and computers throughout the network verify and process each transaction through a blockchain database.
Think of it like a long receipt that records every transaction in a cryptocurrency. As transactions are processed and verified, new bitcoins are created, or mined. Mining is the process of adding another entry onto the receipt, or another block to the chain.
This process requires high-powered and sophisticated computers – and a lot of electricity. Citing the Cambridge Bitcoin Electricity Consumption Index, Columbia University says that Bitcoin alone used an estimated 136 terawatt-hours of electricity annualized as of August 2023 – more than Ukraine and Pakistan.
Bitcoin mining consumes so much electricity that it accounts for 0.61 percent of the entire world’s electricity consumption as of August 2023, according to the Cambridge index. Mining for Bitcoin alone is estimated to create 68.8 million metric tons of carbon dioxide emissions per year, comparable to those created by Singapore, according to the Cambridge index.
Other key facts show the environmental impact of cryptocurrency:
- If Bitcoin were a country, it would be in the top 40 energy users worldwide, according to Digiconomist.
- One Bitcoin transaction’s carbon footprint is equivalent to more than 762,000 Visa transactions, according to Digiconomist.
- Bitcoin emissions alone could increase average global temperature above 2°C, according to research in the journal Nature Climate Change.
- It is even estimated that Bitcoin mining consumes the same amount of electricity as all the data centers in the world, according to research in the journal Joule.
When cryptocurrencies were first created, it was nearly impossible for government tax agencies to track them. The hallmark of blockchain transactions is anonymity, meaning one could not prove the identity of the buyer or the seller.
In 2014, the IRS stated that cryptocurrency was to be treated as property for federal income tax purposes. Although the agency itself has not released official estimates yet, an analysis from Barclays Bank figures that the IRS loses an estimated $50 billion per year from taxes that should be paid on cryptocurrency assets.
Buying and holding cryptocurrency is not considered a taxable event. You can buy and hold the crypto for as long as you want, though you do have to disclose that on your tax return, but once you decide to sell (or realize the gain or loss) you will need to report the amount of profit or loss from the sale.
The popularity of cryptocurrency has grown in recent years as access to crypto has become easier. The asset is still incredibly volatile, and in 2022 rising interest rates caused selloffs in Bitcoin, as skittish investors offloaded speculative assets. Bitcoin has recovered somewhat in 2023, but is still well off its all-time high.
The volatility of major cryptocurrencies such as Bitcoin makes them difficult, if not impossible, to use as currencies. Major currencies need to be mostly stable in order to act as a medium of exchange. So the ideas that cryptocurrencies can be both trading vehicles for profit and functional currencies to transact are at odds with each other.
Governments around the world, including the United States, have also started to analyze how to regulate cryptocurrency. On March 9, 2022, U.S. President Joe Biden signed an executive order calling for a broad review of digital assets, including cryptocurrencies. Federal agencies are reviewing digital currencies and assessing the risk they pose to overall financial stability, among other considerations.
The difficulties of tax reporting and the controversy surrounding crypto have resulted in the digital asset being entirely banned in ten countries: Algeria, Bolivia, Bangladesh, Dominican Republic, Ghana, Nepal, North Macedonia, Qatar, Saudi Arabia and Vanuatu. China, which used to account for the majority of the world’s Bitcoin mining, has now outlawed cryptocurrencies altogether as well.
So far, El Salvador and the Central African Republic accept crypto as legal tender, although both countries have had significant problems with its implementation.
Cryptocurrency, although available as a method of payment for some companies scattered throughout the world, has not made the official leap as a widely available currency. Several major companies already accept cryptocurrency as a form of currency or payment, but the list is relatively limited:
- AT&T offers customers a payment option through BitPay.
- Microsoft allows Bitcoin to pay for Xbox store credits.
- Overstock.com allows payment on its website with Bitcoin and other cryptos.
- Game streaming platform Twitch accepts Bitcoin and Bitcoin Cash as payment.
- AMC theaters allow moviegoers to purchase tickets with Bitcoin and other cryptos.
- The Dallas Mavericks allow the use of Bitcoin for purchasing game tickets and merchandise through the team’s website.
However, many other companies have introduced the ability to pay with cryptocurrency but then rescinded it when customers failed to actually use it.
You can get into serious trouble with the IRS if you don’t declare all your income and pay taxes on it, including stiff financial penalties and potential criminal penalties such as prison time. You may need to respond to a couple items on your annual tax return, depending on your activities.
For all taxpayers, the IRS asks you whether you’ve transacted in cryptocurrency each year on your Form 1040 tax form. So if you’ve bought or sold cryptocurrency during the tax year, you’ll need to declare that on your taxes – or risk lying on your return.
In addition, if you’ve turned a profit on your crypto trades, you’ll need to report that capital gain and pay taxes on it. Alternatively, if you’ve lost money on your trades, you can claim a loss as well as a tax break.
Cryptocurrency’s volatile nature, the fact that it is not based on a hard asset or cash flow of an underlying entity and the controversy surrounding its climate impact make it a very speculative investment. Even a more established coin like Bitcoin is risky. All cryptocurrencies are fairly new, and it is difficult to compare asset-backed investments like stocks to digital currencies that are backed purely by investor sentiment.
Beginners should only make crypto a small part (less than 5 percent) of a diversified portfolio that includes stocks and other established wealth-building assets. Investors need to understand exactly how cryptocurrency works – and here’s what else you need to know.
Crypto mining is the process of creating new coins on a given blockchain such as Bitcoin’s. Computers operating these decentralized blockchain networks solve complex mathematical problems to try to earn bitcoins. These high-powered computers compete with one another to solve the problems in the hope that they are rewarded with the bitcoins up for grabs.
Mining is extremely energy-intensive and creates significant carbon emissions, among other negatives. Here are further details into how it all works.
Traders can buy cryptocurrency at many places nowadays, including traditional payment apps such as PayPal and Venmo, investing apps such as Robinhood and Webull, crypto exchanges such as Coinbase as well as a few traditional brokerages such as Interactive Brokers.
If you’re looking to buy crypto, here are some of the top exchanges and apps to consider.
— Georgina Tzanetos wrote a previous version of this story.