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The Basics of Cryptocurrency and What You Should Know Before You Start Using it.


From the beginning of time, currency has been evolving. Before the term "money" was even a thought, people would barter until about 5,000 years ago, the Mesopotamians developed the Shekel. These gold and silver coins were thought to be the first known form of currency. Well, oh boy, image what the Mesopotamians would think if they could see us now, discussing cryptocurrency, a digital currency.


Many people will cringe at the thought of learning something new, but as the world turns, it grows, and the more we can grow with the world by learning about the changes, the better equipped we will all be to handle it. Therefore, please allow us to provide insight into what cryptocurrency is and how to use it, while allowing you to explore it further.



WHAT IS CRYPTOCURRENCY?

Cryptocurrency is a digital currency that is secured by cryptography and able to be used electronically. Just like cash, cryptocurrency can be used for everyday purchases or as an investment, but they are not backed by the government. There are different types of cryptocurrencies just as there are different fiats such as dollars, euros, and the yen. (to name a few) New cryptocurrencies are continuously being created; however, a few of the more popular cryptocurrencies are Ethereum, Bitcoin, and Tether. When researching the various cryptocurrencies available, you will find that crypto is divided into tokens and coins, even though many of the coins share the same blockchain as some tokens. (Click here for further information regarding the differences between coins and tokens.)



JUST WHAT IS A BLOCKCHAIN?

A simplified explanation of a blockchain is a digital, shared, and public online ledger that keeps a tamper-resistant record of transactions and who owns what. This way, there is transparency within the network. For a more detailed explanation of blockchain and how it works, click here.



HOW CAN I START USING CRYPTOCURRENCY?

First and foremost, to be able to start using cryptocurrencies, you will need a cryptocurrency wallet. The purpose of your crypto wallet is to store encryption keys confirming your identity, which will link to your cryptocurrency. You can find 3 variations of a cryptocurrency wallet:


  • An Exchange Wallet: If purchasing cryptocurrency through an exchange, it is automatically put into an E-wallet hosted by the exchange. Meaning the exchange has control of your encryption keys.

  • A Hot Wallet: With this wallet, you hold your own encryption keys and is software connected and downloaded from the internet, which is stored on your computer or mobile device.

  • A Cold Wallet: With this wallet, you also hold your own encryption keys; however, it is offline with a physical device (such as a USB drive or hard drive) and is not connected to the internet.


Once you have set up your wallet, each user will have a private and public key. The public key will be available for others to send you money. The private key is how you access your cryptocurrency to obtain funds and start buying, selling, and spending your cryptocurrency.



WHAT TO KNOW BEFORE YOU START

After you've done your research and feel knowledgeable enough to venture in and ready to go, you may want to put on the brakes for a moment and become aware of some security measures everyone should look out for when taking that jump into the crypto world.

We have provided a few things to be aware of below:


  • Take care of your crypto wallet! Remember that your crypto wallet is also where your cryptocurrency is. There have been jaw-clinching stories of people misplacing or, even worse, throwing away hard drives and flash drives with their keys on them!

  • Be aware of hackers! If a hacker were to steal your hot or cold wallet's private keys, they could take out everything in your account, leaving you with nothing left to claim. Unfortunately, there are people in this world that are capable of doing this and do this.

  • There are unique tax implications! The current US tax code requires you to report transactions involving crypto, such as when you sell it for a profit or exchange it for receiving a good or service. Make sure you read up and stay on top of what the government requires here.

  • Cryptocurrency is not federally regulated! Remember, cryptocurrency is digital money that is not controlled by any government or bank. Therefore, the rules and regulatory landscape for cryptocurrency in the United States are still evolving and can vary from state to state. While some may view this as more of an opportunity, this also means there are no clear rules for how people can protect themselves when using cryptocurrencies and that any rules and evolving laws for using and owning crypto can be complex.


Take away

The government is still figuring out how to handle this form of digital currency; therefore, new rules could be implemented sometime in the future. So, stay consistent in your research to stay aware. It's important to remember that since cryptocurrency is relatively new, it can be a precarious form of investment, so it's wise to seek counsel from your financial advisor before proceeding.



Nikkei Credit Union does not provide tax, legal or financial advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or financial advice. You should consult your own tax, legal and financial advisors before engaging in any transaction.


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