Cryptocurrency

How Does Cryptocurrency Work?

Before any crypto can be transacted, users need to set up a digital wallet. A digital wallet does not actually hold any currency, but instead provides the address and information needed to facilitate the transaction. Most digital wallets will include both private and public keys that add to the security of the transaction.

After the digital wallet is established, users will go to a cryptocurrency exchange to make purchases or sales. When a purchase or sale is agreed on, the crypto will move from your digital wallet to that of the other party. The transaction only occurs after the encrypted private key has flowed through the blockchain.

The entire crypto process, from start to finish, is hosted through software. There are no physical crypto trading locations or help desks. This has added to the popularity of crypto, especially during the pandemic when users were pushed into a digital world.

What are the Different Types of Crypto?

Crypto can generally be classified as two things: coins and tokens. Coins are built on their own blockchain and are used to exchange value between two parties without physical assets. Bitcoin is an example of a coin. However, tokens have different uses besides being a currency. They are considered a programmable asset that can be utilized to create and execute smart contracts. Tokens are created on the existing blockchain of a coin. One of the most common types of tokens is NFTs.

Non-fungible tokens are a digital asset that is based on a physical piece of property, such as artwork, tweets, and other possessions. Instead of transferring ownership of the physical product, owners are auctioning different ownership percentages off. For example, The Merge, which was an art piece by Pak, sold for $91.8 million, but there wasn’t just one buyer. Instead, 29,983 different individuals now own a percentage of the NFT.

What is Cryptocurrency Used For?

The use of crypto is expanding into different areas, from payments for services to replacing the functional currency. The most common use of crypto is for payment. These payments can be made for a variety of things, from goods and services to intangible property. Crypto results in quick payments at a low transaction cost.

Additionally, many businesses are beginning to offer crypto as a payment option to reduce fees from processing companies. Crypto appeals to a wider customer base, such as investors and consumers skeptical of the market. This makes it a fundamental component of running a future-proof business.

In the case of NFTs, crypto is used to transfer ownership possession of tangible and intangible goods. It would be nearly impossible to have multiple owners of a piece of artwork without crypto. After all, you can’t cut apart the picture and mail each owner their share. Crypto is changing the way assets are bought and sold.

Why is Cryptocurrency Popular?

There are many reasons why crypto is moving to the forefront of investment decisions. For one, companies are constantly developing and refining crypto. There are new blockchain technology and cryptos hitting the market every week. In addition, many retailers are now offering crypto payments, including wealth management companies and financial institutions.

Another reason why crypto has gained popularity over the last decade is because it is an attractive investment. In the early days, Bitcoin was trading for just $1 per share. Now you can expect to pay over $17,000 per share. Investors have seen significant returns, with the industry projecting future growth.

Additionally, many people believe that crypto is the future currency as the world continues to adopt digital technology. Businesses in every industry have begun implementing blockchain to increase efficiency, security, and productivity. As blockchain and crypto become more widespread, more businesses will continue to accept and adopt digital currency.

How Do Regulatory Bodies Define Cryptocurrency?

Regulatory bodies have taken an interest in overseeing crypto transactions in the past few years. This is because there were no clear regulations surrounding how crypto must be reported on tax returns and financial statements. The IRS defines crypto as a convertible virtual currency, assigning it a classification similar to investments.

When crypto is sold for a gain or loss, the items are reported as a capital gain or loss. This results in capital gain taxation in addition to ordinary income taxes, applying to both individuals and businesses that engage in these transactions. Moreover, the IRS defines that crypto received in exchange for services may also be subject to self-employment taxes. This makes it important to consider the tax implications of crypto for both business and shareholder reporting.

What are the Advantages of Using Cryptocurrency?

There are quite a few advantages of using crypto in your financial service business. The first benefit is speed. Cryptocurrency transactions can be completed in under a few minutes. Once the recipient confirms the funds, it works like cash, eliminating the need to wait days for clear times. This can reduce the bottleneck of clearing transactions your financial service business has to deal with. Additionally, customers can remit quicker payments to your business, improving cash flow.

Another benefit is lower fees. In the past few years, many businesses have tried to combat rising transaction prices by offering their own credit or debit cards. However, most consumers are hesitant to open a new account, despite the benefits. When you offer crypto as a payment option, you are lowering the fees your business incurs since there is no financial institution that facilities the transaction. This increases your profitability.

Crypto also appeals to consumers who don’t like to go to a physical brick-and-mortar financial institution or office. Most banks require an ID to make high dollar transactions. However, with crypto, everything is verified on the back end, allowing customers to effectively manage their finances without taking trips to a physical location.

Furthermore, crypto is more secure than holding cash or using a debit or credit card. In order to access the digital wallet, a hacker would need your private key. This is incredibly difficult to secure, leading to more security throughout the transaction. In addition, crypto transactions can be anonymous, further protecting the identity of the sender and recipient. One of the primary concerns of your financial service business is the protection of your customer’s sensitive information. By utilizing crypto, you can promote security throughout operations.

What are the Disadvantages of Cryptocurrency?

Despite the growing list of advantages, there are disadvantages that need to be considered. Since crypto is relatively new, there is no insurance on transactions. Although this presents a great opportunity for insurance agents to pioneer a new revenue stream, it causes implications for businesses that want to implement this feature.

There is also no way to dispute transactions like a cardholder would with their credit card company. If you accidentally send funds to the wrong recipient, there’s no way to reverse the transaction from your end. This can create additional problems for financial institutions as consumers may be quick to blame your business for mistakes.

Since private keys prioritize security, it can be difficult to recover lost keys. Once again, the consumer may turn to your financial service business for help. There is little your business can do, making it important for your customers to back up their private keys in multiple places.

Crypto is also plagued with high volatility. Even though investment demand continues to drive up the market cap, there is no guarantee that these trends will continue. This makes it important for financial service businesses to evaluate the implementation cost and projected demand. If you find that only 5% of customers will use the new features, is it worth implementing? Or are there better ways you can serve a wider customer base?