Cryptocurrency is a digital payment system that exists virtually. It does not have any central issuing or regulating authority. In other words, cryptocurrency does not rely on banks to verify transactions. Thus, it is largely based on a decentralised structure that records transactions and issues new units. Cryptocurrencies exist as pure digital entries in an online database describing specific transactions.
An advanced coding is involved in its data storage and transmission between wallets and ledgers. Crypto got its name from the technology ‘encryption’ that is used in its transaction verification and security. Encryption algorithms convert human legible plain text to cipher-text, an incomprehensible text. Thus, a complex cryptographic key is agreed upon by the sender and recipient to make it unreadable by third party hackers.
Process- purchase and transaction
A safe purchase of cryptocurrency involves three steps- platform selection, funding and order.
Traditional brokers are online dealers who offer several ways to buy and sell cryptocurrency as well as other assets like ETFs, bonds and stocks. They come with a very few crypto features but they are affordable. Cryptocurrency exchanges on the other hand offer several varieties of cryptocurrencies, wallet storage, interest bearing account options etc. Fees are based on assets.
Most of the cryptocurrencies allow users to purchase using fiat, a government issued currency like euros, pounds or dollars using credit or debit cards. Crypto purchases with credit cards are observed risky. Some platforms consider Automated Clearing House (ACH) transfers and wire transfers. Time taken for the deposit clearance varies for different methods.
You can place an order, buy or sell via broker’s web or mobile platform. Payment services like PayPal, Cash App and Venmo allow you to buy, sell and hold cryptocurrencies. Investment options like bitcoin trusts, mutual funds, stocks and exchange traded funds that use blockchain technology also help invest in Crypto.
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Top 5 cryptocurrencies for 2022
Many of us know that there are thousands of cryptocurrencies including Bitcoin and Ethereum. Here are some of the affordable yet profitable cryptocurrencies that you may consider investing in 2022.
Thanks to Elon Musk, Dogecoin has risen to prominence recently as one of the cheapest cryptocurrency to purchase in 2022. Investment analysts consider this to be a viable and profitable option. With a rewarding return of more than 8000% in 2021, this cryptocurrency is at its market capitalisation of a whopping $80 billion.
Cardano (ADA): $1.44
Charles Hoskinson, the co-founder of Ethereum developed Cardano. Due to its unique selling points such as scalability, inter-operability and sustainability; Cardano is one of the most popular cryptocurrencies. This currency has a very low transaction fees and has a latest update that offers an ability to build smart contracts on its network.
With its two main services- delivering and utilising liquidity, this Ethereum based DApp enables consumers to trade Ethereum tokens via liquidity pools. Hayden Adams, an ex-mechanical engineer at Siemens founded Uniswamp in late 2018. The Uniswap coin gains fame as the first ever decentralised exchange to enable margin and leverage trading. Market analysts expect a tremendous growth for it in future.
Charlie Lee first released Litecoin as a decentralized money in 2011. It is a peer to peer cryptocurrency similar to Bitcoin developed using Tenebrix and Fairbrix codes and script mining techniques. The block time of Litecoin is faster than that of Bitcoin. It takes about 2.5 mins of block time, with a growing exchange rate and a market cap of US $8.7 billion as in January 2022.
This 2019 released open source cryptocurrency comes with high speed transactions at a low cost. High performance public blockchain architecture is its specialty. With a reliable transaction flow throughout the network with proof of stake, proof of history, a sequence of computation and a ledger with a verifiable passage of time; Solana has attained a great position with a current market cap $42B.
Tax on Cryptocurrency
Netherlands imposes a wealth tax while the other commonwealth countries impose capital gains tax. A capital gain is the difference between selling price of bitcoin- the disposal price when crypto is sold and the cost basis- the track of price that you paid. In the beginning of the tax year, a presumed interest is imposed on the value of all assets minus all liabilities. This interest is a flat 31% as in 2021.
Germany is known as a ‘Crypto tax haven’ due to the private sales resulting in tax benefits. Hence, Germany issues a tax exemption for private sales up to 600 Euros. In the United Kingdom, individuals who hold crypto assets as personal investment are mostly subjected to capital gains tax.
In Canada, you can use cryptocurrency to buy goods and services from stores that accept digital currencies. If your income comes from your business, everything is taxed. It is interesting to know that here, capital gains are not taxed half of the time.
In United states of America, all taxpayers have to declare their virtual currency transactions if any. The federal tax varies from 0% to 38%. All gains and losses from a crypto asset held for less than a year are taxed at the highest marginal tax rate applicable to your income. If the tenure is higher than a year, then the appropriate tax rate is significantly lower.
Hot wallets refer to storage that uses online software to protect the private keys or passcodes to your assets. Cold wallets or Hardware wallets depend on offline electronic appliances to safely guard your private keys. Unlike hot wallets, cold wallets charge fees.
Uses and safe investment strategy
You can buy tech products, luxury goods, cars and insurance with cryptocurrencies. By researching exchanges, knowing how to store your cryptocurrency, diversifying your investments and preparing yourself for volatility. Despite its boom, Crypto is highly speculative involving a lot of challenges. If you plan to participate in Crypto investment, please conduct your research and then invest conservatively.
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