What is Cryptocurrency?
Cryptocurrency is a decentralized, virtual currency, meaning it cannot be physically held and is transferred digitally via a blockchain. Transactions are verified by users, eliminating the need for third-party payment processors like PayPal or banks, ensuring secure and anonymous transactions.
Legitimacy
While some people consider cryptocurrency as real money because it can be used for exchanging goods, services, or other currencies, it is not currently recognized as real money by the federal reserve or U.S. banks. However, there have been discussions among U.S. banks about recognizing bitcoin as a legitimate asset class.
Crypto and Taxes
The IRS classifies crypto as a property or digital asset, meaning capital gains taxes apply when exchanging crypto at a profit. Most crypto transactions are not taxed until converted into U.S. dollars, exchanged for another currency, or used for a purchase. However, the government may tax cryptocurrency as income under certain circumstances, such as receiving crypto as payment or through mining or staking activities.
Differences Between Crypto and U.S. Fiat Money
Cryptocurrency was created as an alternative to fiat currency and has significant differences. It is not backed by any assets like gold or silver, nor by any government or institution. It is intangible, and its value is more volatile compared to fiat currency. While some cryptocurrencies have specific use cases, many are valued based on the investment they receive.
Similarities Between Crypto and U.S. Fiat Money
Both crypto and U.S. dollars can be used for exchanging goods and services, and in some cases, crypto income is taxed similarly to cash income. Both can also be invested with the hope of value growth in the future.
Does Crypto Turn Into Real Money?
While cryptocurrency may or may not be recognized as a legitimate currency by the U.S. government in the future, it can be converted into U.S. dollars by selling it — either privately on the blockchain or through a crypto exchange — just as you can sell stocks or bonds.
Is Crypto Money Safe?
Cryptocurrency is highly volatile and risky. The U.S. dollar remains relatively stable over time due to the Federal Reserve's control over the money supply. No such protections exist with crypto, as evidenced by the crypto winter, which saw a 65% year-over-year value loss between December 2021 and December 2022. Cryptocurrencies cannot be counterfeited due to the blockchain technology they operate on, but crypto accounts can be hacked, resulting in fund loss. It is recommended to store crypto offline in a cold wallet for maximum protection. Additionally, while U.S. bank accounts are protected up to $250,000 by the Federal Deposit Insurance Corporation, crypto is not protected by the U.S. government. It is essential to ensure that the crypto exchange used has insurance against fraud.
Final Note
As cryptocurrency grows in popularity and adoption, it may be used more frequently for purchases. Currently, it is not recognized as real currency by the U.S. government, but it can be used similarly to U.S. fiat money in many circumstances.
