Cryptocurrency Basics

Cryptocurrency is a digital representation of money with a perceived value. According to the IRS, “Cryptocurrency is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.” Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency.* Wikipedia.

Although there is no bank or government control over the value, certain regulations are being placed on it as the anonymity that it affords can lead to money laundering, usage by terrorist groups (see recent article), and scams. Firms must comply with the Bank Secrecy Act and its implementing regulations (“AML rules”). The purpose of the AML rules (Anti-Money Laundering) is to help detect and report suspicious activity including the predicate offenses to money laundering and terrorist financings, such as securities fraud and market manipulation. FINRA reviews a firm’s compliance with AML rules under FINRA Rule 3310, which sets forth minimum standards for a firm’s written AML compliance program.

The information about ownership is sent to servers all over the world in bits and pieces and can be somewhat private. The rub is when you give information out to purchase the cryptocurrency in the first place. You can give a lot of detail, which may speed the purchase up or little detail, which can slow the purchase process down.

Now if you want to know what backs the cryptocurrency and why is it considered an asset in the USA, it is because it is backed up by regular money. Today, you can use it in many places including an interchange with your IRA accounts. Also, the IRS is now requiring tax monies on virtual currency and you will see it mentioned on your tax forms.

How to purchase cryptocurrency

To purchase a cryptocurrency, you can use Fiat Money (paper money), credit cards, bank transfers, and most common forms of payments.

Here is a simplified process:

1. Purchase a Wallet. No not the leather type. A digital wallet called a crypto wallet or e-wallet. A digital wallet is also known as “e-Wallet” refers to an electronic device, online service, or software program that allows one party to make electronic transactions with another party bartering digital currency units for goods and services. Wikipedia. After all, You have to have a private somewhere to store your digital money.
2. You go online to the cryptocurrency exchange or broker of your choice and make a purchase. 
3. You give them the information as to where you wish it to be held and voila! – the crypto coin is transferred to you.

Now, this sounds easy and fluid, but it is not quite that easy. Crypto money does not just float around. It is handled by direct commercial vendors or private sales. If you buy from the normal channels, they put a lot of restrictions on the type of payments they accept–and for good reason.

For example, Lets say  you use

a credit card to purchase your coin or coins, and then you reverse the payment a few days later. Once a cryptocurrency is issued, it can not be removed, which would cause the commercial vendor to take the hit. They get very cranky at this. To use a credit card, you will have to look around to find a vendor that will accept it. The same goes for PayPal and for the same reasons. 

Bank transfers work well and take about one to three days to complete. Most do not like the debit card transfers, though they do transfer from your bank account. 

Bitcoin machines work great and can be found in metro areas and sometimes train stations. You can go online to cryptocurrency broker or exchange services. One place to look is Coinbase.com  You can purchase some of the well-known crypto coins like Bitcoin or Ethereum and then go on other cryptocurrency purchasing sites and trade them for some of the lesser-known (and far cheaper) coins. A few other places you can look into to purchase or trade coin online are Kraken, Gemini, Bittrex, Poloniex, and Livecoin. However, do your research on the coin that you plan to purchase…see how it started and what is backing it. The digital coin market is extremely volatile because it is in its infancy and so very many new ones are popping up on the market. Fortunes can be made or lost if proper research is not done.

What kinds of e-Wallets are available?

There are several types of virtual currency wallets: here are a few.

1. An online wallet. These are usually are attached to an exchange that allows the trader to access and trade or cash out their digital money very easily. However, you are reliant on a third-party to be involved and although they usually use two-factor authentication, the exchange can go out of business and you can lose your funds.*

2. Offline wallets. These are a software wallet used with desktops. They still work very well but are designed specifically for a laptop or desktop. It gives a more independent approach because if an exchange goes down, you still own your coin. Also, if their databases were hacked, your personal info is not available.*

   Offline software wallets, sometimes called desktop wallets, still retain some of the ease of use and access. Some are specifically for use on desktop and laptop PCs, while others have a more mobile focus and are app-exclusive.*

   The significant advantage of this approach is independence. Every exchange in the world can go down, yet you’d still have technical ownership and access to your cryptocurrencies. It also means that you would have to be specifically hacked or attacked to lose access to them. Your identity is protected, with no need to sign up anywhere or provide some form of identification to set up or access your wallet.*

3. Hardware wallets are those who want to have the utmost security for their cryptocurrency investment or plan to deal with a lot of high-value cryptocurrencies.  By storing the private keys for your Bitcoin wallet on a specific piece of hardware that is “cold storage”, not connected to the internet, you can be sure that no one will be able to steal your cryptocurrency. Hackers and malware will find it very difficult to infiltrate your wallet — barring someone taking the device from you, it’s almost impossible to lose access to it.*
4. One last way is to buy a physical coin that represents the digital values. This is a way to quickly and easily transfer a set bitcoin value from one person to another OR store the value of the bitcoin long-term in a secure offline way (this is called Cold Storage, and it’s the most secure type of bitcoin storage unless you are burglarized).

*This information comes from Digital Trends: https://www.digitaltrends.com/computing/best-bitcoin-wallets/

Cryptocurrency can be used as money with some businesses (they usually display a sign on the door or somewhere obvious), through exchanges for fiat money or other cryptocurrencies. Even Amazon (using a third party) accepts payment with cryptocurrency (you must check out which ones). 

Despite the proof of identity requirements, remember exchanges and e-wallets do no protect your assets as a bank, with FDIC protection does. The exchange can go out of business and you won’t have access to your account. This has happened before – Mt. Gox was the most failed exchange. They were hacked due to poor organization and security. Although they were the largest Bitcoin exchange out there at the time (70% of all Bitcoin exchanges), the hackers got away with 744,408 Bitcoins. Coinbase has a very interesting story regarding Mt. Gox if you would like to read it.   https://www.coindesk.com/company/mt-gox

Today, the exchanges and e-wallets are far more secure than in 2014, but you must always check out the companies you are going to work with and always keep an eye on your wallet!

IRS makes sure to get their cut!

The information on this page came from many sources. Blockgeeks.com, http://coin-atm-radar.com, https://www.finra.org/rules-guidance/key-topics/aml, https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies, many cryptocurrency sites, and the Treasury Dept. sites. Although much of the information they share is redundant, you will find it very interesting to visit each of their sites.