Digital currencies are becoming more common, but it is still quite unknown what they are and how they work. Let’s try to clarify, in a simple way and in five points, their fundamental characteristics.
- A little history of cryptocurrencies
We have to go back to the early eighties of the last century to find the first steps in the idea of a virtual currency protected by cryptography by the hands of David Chaum: the creation of eCash. The final push came in 2008, when the document that developed Bitcoin was published by the mysterious Satoshi Nakamoto.
With Bitcoin, the first units of which were put into circulation on January 3, 2009, it is considered that cryptocurrencies were definitely born. Its creators described it as “a peer-to-peer cash system”, with no regulation or control by governments or institutions.
- How do cryptocurrencies work?
Encryption, for security reasons, is based on blockchain technology, a data storage structure following algorithms, almost impossible to counterfeit, open to all users, that works like an electronic register book of Bitcoin and other cryptocurrencies.
In this way a digital currency is created without physical form, but the ownership, the integrity of the transactions, and the control of the creation of new units can be assured. This gives cryptocurrencies the guarantee to be used as money for everyone: to trade, to buy, or to save them.
Legal tender money is under the guarantee of the states, their governments, and the financial institutions, which create and regulate it. This is the basis of the trust that makes citizens use them, as well as making them essential. Cryptocurrencies, on the other hand, do not depend on or are regulated by any administration. In this way, their value is born of the trust placed in them by their users, of the law of supply and demand.
However, cryptocurrencies seek to achieve this necessary trust with the user, for example, by replicating the essential characteristics of money: being fungible or exchangeable; being divisible into units; being storable and transportable; and having a controlled and limited flow of creation or supply.
The market that is being created by their users, then, is what marks their acceptance and, in return, their value. What we have known so far is that, from the beginning, when only a few experts or technology enthusiasts acquired them, the interest in having cryptocurrencies has experienced a very high growth, to the point of exchanging a Bitcoin for €40,000.
- What are cryptocurrencies for?
As you have deduced, investment has become one of the great motivations for owning cryptocurrencies. Specialised exchanges that work 24 hours a day, 365 days a year, buying and selling them non-stop, have even been created. Investors are attracted to these markets by the expectation of profits. But you have to be careful and be willing to accept the risk of high volatility of cryptocurrencies: their price rises and falls by thousands of euros very easily.
Cryptocurrencies can also be used to make purchases, as long as the seller accepts this means of payment. It is not yet possible to say that it is a widespread option, but more and more companies are allowing it and opening gateways to be paid for services or products in cryptocurrencies. Fast payments, in fact, are another of the uses and benefits of digital currencies, as transfers around the world are immediate.
- Buying and saving cryptocurrencies
We have already said that investing in cryptocurrencies is currently highly speculative and risky. The most profitable ones, such as Bitcoin or Ethereum, are also considered the highest risk. However, anyone can have them if they buy them, accept them for a fee, or even create or decrypt new ones.
The most common is that the latter option, creation or decryption, is left in the hands of large IT teams dedicated to it, often controlled by economic groups, in what is known as mining cryptocurrencies: generating them by deciphering the algorithm or mathematical problem under which they hide.
Individuals can access them more easily through purchase platforms or financial intermediaries, as well as from ATMs that have been created exclusively to offer and exchange cryptocurrencies, and that are already present in commercial areas, for example. There are also digital applications such as Coinbase or Binance.
Once purchased, they are assigned a unique and personal password, which should be kept in a safe place and not lost, because it is all the guarantee you have of the possession of the cryptocurrencies. This is why there are digital wallets, a software or application where it is possible to store cryptocurrencies.
- The regulation of cryptocurrencies
In 2015, the European Union (EU) established the same validity of the Euro for Bitcoin and other similar cryptocurrencies as a means of payment, in response to the increase of its presence and related investments.
However, let’s remember that cryptocurrencies are born free from the regulation and control of administrations and that, consequently, they see them with some reluctance and consider them as a very speculative and unsuitable asset, if not for the expert investor. When you decide to buy cryptocurrencies, you must know that there are no traditional regulation and supervision services that guarantee their custody.
Finally, remember that the Spanish State obliges to include in the income tax return any expenses or income derived from transactions of purchase and sale with cryptocurrencies. In addition, in October 2020 the Draft Law on Measures to Prevent and Fight Tax Fraud was published, introducing the obligation to provide information on the balances and holders of cryptocurrencies and purchase transactions, collections, payments, and transfers, among other transactions.