Should You Use Libra? – Understanding the True Intentions behind Facebook’s Cryptocurrency

Facebook Libra

Facebook has made it official, confirming suspicions about a blockchain project they’ve been working on for more than a year. Libra is Facebook’s next step to becoming a dominant force in FinTech sector.

Crypto-users saw this as a nod to cryptocurrency as an established payment option, but for some, it’s just a way to lure people away from traditional banks and payment services.

One Currency for Everyone

Throughout history world currencies has been associated with the most powerful countries like the British pound sterling and the US dollar. Whoever has control of the globally accepted currency has the potential of affecting the world’s economy.

Facebook’s announcement cannot be taken lightly. With roughly 30% of the world’s population currently on Facebook, it’s not hard to see why Libra can cause massive disruption in the financial sector. Crypto users estimated to be around 25 million pales in comparison to the sheer volume of would-be Libra users including the unbanked and the underserved.

This could lead to the rise of a “supercurrency” where only one currency exists for cashless, online, and cross-border transactions. As technology improves and more people gain access to free internet, digital currency and cashless transactions will become the norm, and fiat currency as we know it will cease to exist.

How Libra Works in a Nutshell

We’ve seen some attempts to create a borderless currency in the late 20th century like the gold-backed dollar, or more recently cryptocurrencies like Bitcoin and Ethereum. Facebook decides to do things differently.

Libra aims to be the first borderless currency with the stability of state-backed fiat and the security features of blockchain technology. It’s a stable coin like Tether and TrueUSD, but with some level of decentralization that employs validator nodes (a total of 100 nodes) to process transactions. There are currently 28 which includes Visa, Mastercard, Coinbase, Paypal, Ebay, and Facebook.

Libra will also address the problem of slow transaction throughputs encountered by decentralized currencies like Bitcoin and Ethereum. Whereas Bitcoin could only make seven transactions per second (TPS), Libra can process up to a thousand. That’s five times faster than PayPal, although much slower compared to Visa’s 1700 to 4000 TPS. Still, Libra is a significant improvement to many large cap cryptocurrencies in terms of transaction speed.

Unlike most coins listed on Coinmarketcap, Libra isn’t meant to be traded but is a way to store wealth outside of banks and financial institutions and making cashless transactions. Facebook, along with Libra’s founding members will put together a “Libra reserve” where all of people’s money will be pooled together creating an immense repository of all the world’s currencies. It’s like Facebook having its own “superbank.” This can have severe consequences on traditional banking and, if successful, could lead to closures.

Calibra – Facebook’s Wallet &Payment Processor

Facebook will have its own wallet and payment processing app known as “Calibra” which is distinct from the social media platform and the messaging app. Hence, all transactions made by users on the app are not mingled with user activity on social media. Facebook assures data will be stored anonymously for research purposes and will not be used to market goods and services to people on social media. Thus, if you buy a new pair of sports shoes with Libra through your Calibra wallet, you won’t be bombarded with ads of sports items on social media. Whatever shows up on your newsfeed still depends on your browsing activity.

This, in a way, prevents another Cambridge Analytica type of situation where tech giants and corporations could take advantage of user information for their own good. Meanwhile, this would encourage a lot of businesses to advertise on Facebook as more people get attracted to the idea of using instant,cashless, borderless transactions much cheaper than traditional bank transfers and payment services. Question is, can we trust Facebook with our money and spending habits?

A Friend or Foe of the Government

By allowing Facebook to gain access to the financial sector, governments can achieve what it failed to do with permission-less, decentralized, censorship-resistant currencies like Bitcoin, Ethereum, or the untraceable privacy coin like Monero. Unlike Bitcoin, Libra is a “permissioned” coin in which validator nodes (the founding members of Libra Association), have been selected based on a given criteria. These are usually multinational companies with at least $10 million staked on the Libra project.

This puts every node under the radar, and governments could very easily knock on their doors and make demands of them. Think of what this could mean to your privacy. Would it be worth the risk in exchange for a much cheaper and faster way to use money? For the 1.7 billion unbanked, and the rest of the world’s population suffering from high fees, it is a much better alternative to being denied from or being constantly ripped off with fees that are considered discriminatory. They just want to use money the way it supposed to work.

On the other hand, Facebook Libra could turn into a “mono-bank” where all of the world’s currency is sucked into. Facebook can turn the table on traditional financial institutions by depriving them of customers on the payments side. Furthermore, if Facebook succeeds in holding the majority of people’s wealth in Libra reserve, banks will slowly lose their ability as informed lenders while Libra gains the upper hand by becoming a lender itself.

Conclusion

Facebook is playing the long game in its bid to become the most dominant force in cashless, borderless transactions and online advertising. This is a crucial moment which will decide the fate of many traditional financial institutions. They can either make concessions or slug it out to the bitter end. But ultimately, it will depend on us, users, from all countries across the globe whether Facebook’s vision of putting us all under one currency will come to fruition.

Decentralization Is the Way Forward for Cryptocurrency Mining – Here’s Why

Cryptocurrency mining – the power behind our decentralized currencies – has reached a fork in the road of its young life. Giga Watt filed for bankruptcy in late November this year, Genesis Mining is facing hard times, and Bitmain’s future is in limbo.

But despite massive depreciation, and miners leaving the cryptocurrency space en masse, it’s not all doom and gloom for cryptocurrency as a whole. Institutional investors are coming into the crypto space, and the recent decline in mining could be good for persistent miners, mining farms and pools worldwide.

 

How Centralized Mining Failed

If there’s one lesson for miners to learn from in this bear market, it is keeping down the cost of mining, with emphasis on efficiency over scaling up. Over the course of the year, mining has been increasingly unprofitable even for some enterprise miners. There are a number of compounding factors for the dry spell such as:

  • recent decline in the cryptocurrency market
  • strict regulations and increased power rates for cryptocurrency mining
  • rapid increase in mining difficulty – faster than market demand and cryptocurrency adoption
  • cost of outlays in running the business increase with size (e.g. bigger facilities, cooling systems, power consumption, hiring more employees for maintenance and upkeep)

Diminishing returns over a period of time (e.g., Bitcoin rewards halve every four years) coupled with volatility in the cryptocurrency markets makes it very risky for miners to scale up beyond a certain threshold. In many cases, mining profitability is only as good as the market conditions. The recent turn of events with the price of cryptocurrency, and the equivalent of approximately 1.3 million Antminer S9 units turning off as of late proves how large-scale miners have become so dependent on cryptocurrency markets in terms of mining profitability.

The arms race towards bigger mining facilities and acquiring more efficient but expensive mining hardware also tends to backfire for some mining businesses who are now struggling to pay off their debts. State regulations have also put a lot of strain to the mining industry by imposing higher rates for cryptocurrency mining. This, along with rapid increase in network hash rate/difficulty, and a long drawn-out bear market spells disaster for many businesses in the cryptocurrency mining industry, particularly those who have overspent with expectation of higher returns through market demand and cryptocurrency adoption.

Enterprise-level miners might have increased their mining power with a large share of the network hash rate which might have previously worked but because of the way proof-of-work cryptocurrencies such as Bitcoin are built large-scale miners are running into difficulties. Miners are finding with increased network hash rate there will come a point where mining and maintenance costs start to eat up their gains unless they find access to abundant or much cheaper energy source as soon as possible, or if cryptocurrency continues to gain widespread adoption. (Imagine if every miner in the world does the same thing and Bitcoin suddenly drops to $1,000. How long can these enterprise miners hold on until Bitcoin goes back up again to $20,000 or until mining difficulty drops significantly lower?)

Lastly, centralized mining puts a lot of strain to the power grid that governments won’t have much of a choice but impose exorbitant rates for mining operations in order to “force” miners to slow down, or run the risk of overloading the grid, severely affecting all other industries in the country. The only option for large-scale miners at this point is scaling down and help redistribute hash power to the cryptocurrency network, e.g. shipping their mining rigs to places with abundant and more affordable energy source. (In Venezuela, it only costs $531 to mine Bitcoin).

 

Why Decentralized Mining Is Crucial for the Cryptocurrency Space

More secure compared to centralized mining. Centralization of mining power misses the whole point of having a decentralized cryptocurrency such as Bitcoin. Cryptocurrency mining was never meant to be a centralized endeavor, but a shared obligation to secure the network where one’s willingness to share computing power to mine transactions and prevent double spend attacks is rewarded with cryptocurrency. Centralization creates weaknesses to an inherently secure decentralized network by establishing a single point of failure and opens up the possibility of double spends and censoring transactions. (This inevitably results in weaker adoption and/or the cryptocurrency’s demise.)

Distributes risks and rewards to miners. Higher hash rates do make a difference who gets the mining reward. But at the end of the day, it all boils down to probability. Suppose every miner in the world mines at exactly the same hash rate. The way Bitcoin’s algorithm was designed meant that there is no particular way to tell who will be the first to find the next hash since they would all be making random guesses at a given rate. Higher hash rates increases the likelihood of being the first to make the right guess, but so is the risk (power consumption = money lost). A better alternative to mining centralization is by using mining pools or by having small mining farms spread out to places where cost of running the mining the business is much cheaper.

 Distributes power consumption. With less centralization in mining power, miners will be able to utilize cheaper electricity instead of relying solely on the power grid. It would also encourage miners to be more creative and explore ways to make cryptocurrency mining a lot greener, or, as mentioned earlier, find places with abundant supply of energy source (e.g. hydroelectric, geothermal, solar, etc.)

 

Final Thoughts

The 2018 bear market has been an eye-opener for all of us, not only in terms of volatility and value of cryptocurrency, but also the dangers and consequences of going beyond what is intended for in cryptocurrency mining – decentralized and cost-effective. Bitcoin was just as secure back when people mined them in their PCs and laptops as it is today with more powerful ASIC miners and GPUs. It’s just a matter of perspective. Hopefully, this year has brought us some important lessons to help us with our journey in cryptocurrency for the year 2019.

Should You Be Worried About The State of Cryptocurrency?

Markets crash every so often, whether it’s stock, commodity, or cryptocurrency. Just recently, Amazon stock has lost 25% of its value in a span of 3 months. Nearly 40% of Facebook’s share value has been wiped out since July; Google lost 19%. Apple is down by 26% since October. By and large, 2018 has been particularly bearish, not just for cryptocurrencies, but tech stocks as well – quite the opposite of what we’ve seen last year.

 

“What Goes Up Must Come Down” 

Market cycles are normal with any type of investment vehicle. The price crash on both cryptocurrency and stock in Q4 strongly suggests that we are indeed going through a market downturn or a bear market. In other words, the fact that both cryptocurrency and investment funds are down suggests there isn’t anything wrong with cryptocurrency but instead it’s just a natural market fluctuation.

Bitcoin, has lost around 75% of its market price from its all-time high of $19,309 in December 2017. Speculation for Bitcoin’s price is considered as one of the main reasons for the run-up resulting in a price crash after further gains became unattainable.

 

Making the Most from a Price Crash

Market volatile in cryptocurrency is something experienced traders and investors have all been accustomed to. Truth is, what we’re seeing right now with Bitcoin and other cryptocurrencies is just one of the many examples of a price downturn in recent years. Here are some ways we can get by in a cryptocurrency bear market. As always, please note that this is not investment advice and is written solely for informative purposes.

HODL. Hodling is another one of those internet sensations that came about because of the immediacy of Twitter. For the unaware, it is essentially a “buy and hold” strategy used by cryptocurrency users and investors. Hodling can take a lot of patience, and mental resolve, with an almost stoical attitude towards cryptocurrency investment. In other words, they’re not into crypto just for the short-term gain, but look forward to using it more as it slowly reaches worldwide adoption.

Dollar Cost Averaging (DCA). Regarded as one of the most conservative and safer approach to cryptocurrency investing, which allows investors to accumulate crypto-assets over time. Similar to hodling, DCA requires discipline, and the ability to stick to the plan regardless of price actions in the market. It usually involves a fixed amount spread over a period of weeks or months. DCA can be considered as a “contrarian” approach to investing because investors can have more during a bear market and buy less during a bull market – the opposite of what most people tend to do which is giving in to fear of missing out (FOMO) and herd mentality.

Entry and Exit Strategies. A lot of cryptocurrency traders have an exit strategy such as placing stop loss orders below their entry points in order to minimize potential losses. Here’s an example of how an entry and exit strategy can be used during a bear market. Unfortunately, there is no guarantee that investors would be able to recoup their losses since it would all depend on future price actions. We’ll be using Bitcoin in this particular scenario.

From this hypothetical situation, it is entirely possible for traders and investors to recoup or even take some profit off of the bear market. However, it’s also possible for Bitcoin markets to go much deeper, exacerbating one’s losses and making it more difficult to recover. We don’t recommend this method unless you truly understand the cryptocurrency market and are quite familiar working with exchanges. Also, please bear in mind that selling cryptocurrencies for profit is a taxable event under state laws regarding cryptocurrencies.

Educate Yourself about Cryptocurrency. Spending some time learning about this emerging technology could be one of your most valuable investments in this day and age. Cryptocurrency will continue to evolve and will be more accessible to millions of users in years to come. Read books about cryptocurrency, enroll in blockchain and cryptocurrency courses, and steer clear from get-rich-quick schemes and cryptocurrency scams. Having a better grasp of cryptocurrency and its underlying technology (blockchain) helps clear out all the noise and drama surrounding cryptocurrency and allows you to make wise investment decisions.

 

 

**Please note that this is not investment advice and should no way be treated as such. It is for informational purposes only. Before you make any trade or investment you should consult a licensed financial advisor who is familiar with your current situation.

Implications of Cryptocurrency Adoption to the Economy

Currency has gone through many forms and different stages of development. Throughout history, people have always been looking for a better means to store wealth in the most secure way possible. Cryptocurrency promises to be a much better alternative to fiat or gold by unlocking its true potential as a decentralized form of money.

What are the implications of adopting a singular currency on the world’s economy, and will it solve our problems with the current financial system?

 

Gold as a Standard of Value

In theory, anything can be used as money, from cowry shells, to salt (“salarium,” where we got the word “salary”). Whereas in the past, people used to barter with grain, livestock, jewelry, nowadays, we use paper, stamped coins, and electronic data. Gold and silver turned out as the most predominant form of money for thousands of years because they possess certain qualities which make them ideal as a measure of value.

Cryptocurrencies like Bitcoin makes an allusion to these precious metals because it mirrors some important qualities of its real-world counterpart (in fact, this could be the inspiration behind Bitcoin’s gold-inspired logo). We’ll learn why such reference is essential in understanding cryptocurrency’s role on the future of finance and its implications to the world economy.

 

The First Decentralized Currency

Gold has for millenniums been accepted as money, even before the adoption of state-backed fiat currencies. Anyone can turn in their gold to any bank in exchange for gold certificates or banknotes, and it will be counted as money. Under this system, gold was considered as a “decentralized” form of money.

In its early days, banks were mostly self-regulated and are bound by the fact that they cannot issue more than is redeemable without facing the risk of a bank run. However, everything changed after so many banks got into trouble issuing more money than it could pay for. They adopted a “Keynesian” approach to their monetary policy, thus ending the reign of the gold standard, and giving rise to quantitative easing, fractional reserve banking, and currencies which were nothing more than public debts and glorified IOUs.

The concept of a “decentralized currency” was put on the backburner for decades, until 2008-2009 when the world’s economy and the whole financial system came crashing down, and a mysterious author rekindled the world’s interest in a decentralized form of money – cryptocurrency. It’s no surprise that Bitcoin bears a striking similarity to gold, some even calling it as “digital gold,” for sharing the same features which make it suitable as a measure of value and store of wealth.

 

 

The Real Cost of Inflation

One of the earliest records of inflation can be traced back to 3rd century Rome when government spending went far beyond its means and began increasing its money supply with silver coins of lesser quality. This offered a false sense of security and prosperity as the government stretched its resources thin in waging wars and funding its pet projects. People soon realized that their silver coins were nothing but cheap imitations, as prices of commodities soared by 1000% across the Roman Empire.

Western and European countries committed the same error by inflating currencies through deficit spending in order to fund the war effort. Belligerents on both sides took a heavy toll on their own economy and their own people. Price levels and interest rates have gone up after the war, and millions of people have lost their jobs as many industries came to a grinding halt.

By then, the only plausible way to cure inflation is to create more of it. But after growing concerns about the value of the U.S. dollar, countries started to redeem their dollar holdings in gold. Deficit spending, balance of payments, and the run on gold eventually led to the collapse of the Bretton-Woods system, and all industrialized countries started using “floating currencies.”

The long-term effects of inflation led many people to find ways to secure their own wealth against the uncertainty of the current financial system.

 

The Need to Re-establish a Standard of Value

The gold standard made it possible for countries to maintain a more stable economy because it restrained governments from inflating the money supply and made it easier to keep track of prices of goods and services. It served as a reliable tool where one’s currency can be measured against, making it a real store of wealth as opposed to state-backed fiat which could lose all of its value overnight.

Nowadays, we have cryptocurrency which is being used as a medium of exchange, store of value, and platforms for decentralized applications. Some of the positive effects of re-establishing a standard of value on our currencies include:

Stabilize pricing. Having a standard of value on our currencies like gold or cryptocurrency makes it easier to see the relationship between money supply and the country’s real GDP. In a highly industrialized country, increased productivity meant prices will fall relative to the money supply (deflationary). Some analysts believe a deflationary currency (Bitcoin and other similar cryptocurrencies) is bad for the economy and should be avoided because it slows down borrowing and buying activity. Inflation, on the other hand, will induce consumerism since people would have more to spend. But nominal GDP (not the real GDP) arising from inflation, amongst other factors, doesn’t necessarily mean the economy is much better. It just meant everything is getting more expensive than it used to. Left unchecked, it can actually lead to situations mentioned earlier.

 Simplify trades and exchange rates. Trading goods and services with other countries can cause trading imbalances due to the fact that all currencies are “floating currencies”, except in few countries where the value of currencies is pegged to the US dollar. Since exchange rates of floating currencies are in a constant flux, it would be difficult to determine the price of certain commodity is at a certain point in time. By establishing a standard of value to all of our currencies, we might be able to make international trades and exchanges rates much easier and straightforward.

 Minimize deficit spending. One of the biggest problems in our current financial system is that it gives too much freedom for governments to spend more than they reasonably should. Quantitative easing and fractional reserve banking encourages more spending and borrowing, but only a fraction of it might actually go to productive endeavours, thereby pushing countries even deeper into debt. By adopting a system of checks and balances in the production of money, governments will be more accountable on how they chose to spend their resources.

 

 

Gold or Cryptocurrency?

 

Many people are advocating the return to the gold standard because it makes them feel safer, more secure, and gives them the ability to store wealth and manage their own resources as they see fit. But in this digital age, storing wealth can be as simple as having your own account on a global ledger, which cannot be controlled by anyone. Cryptocurrency offers a much better way, not only as a store of wealth but as a means of encouraging reforms in our current financial system.

 

Stock Exchanges Vs. Cryptocurrency Exchanges: What’s the Difference?

In the traditional sense, exchanges are marketplaces where securities, commodities, and financial instruments are traded. Stocks and foreign exchange markets are traded in exchanges such as NYSE, or in the case of Forex, international banks and dealers working with exchange rates.

Cryptocurrency exchanges borrowed the idea from traditional exchanges. But instead of securities like stocks and bonds, traders deal with fiat and virtual currencies over the Internet. To have a better understanding of how cryptocurrency exchanges work, we will give some examples from real-world exchanges.

Exchanges are an essential part of the whole cryptocurrency ecosystem. They provide easy access to anyone who wants to trade digital assets apart from cryptocurrency mining. You’ve probably came across some of them, the most popular ones being GDAX (via Coinbase), Bittrex, and Poloniex.

At the moment, there are more than a hundred exchanges operating in many countries across the world today. We will take a closer look at how cryptocurrency exchanges work, and some basic information on how to use them.

 

How Exchanges Have Evolved

Savvy business owners and investors are always looking at markets for opportunities to further their business and financial goals. To a business owner, they can be used to raise capital by issuing bonds and shares to investors. Think of publically traded companies like Facebook, Amazon, and Microsoft. An investor sees exchanges as opportunities to make more money by purchasing stocks that would eventually grow in value.

However, there’s a certain limit to the number of shares a company could issue based on its total market value, and companies may choose to hold some of them for future use. Once it goes public, these stocks are traded in exchanges and investors can start buying and selling them through brokerages. (Chapter 3 explains how ICOs work in many ways like IPOs)

The first stock to trade on the NYSE was The Bank of New York in 1792 and still operates in Manhattan under the name Bank of New York Mellon.

For decades, trading floors were the center of activity for many traders and investors. Over time, traditional exchanges have evolved and most trading floors are now replaced by online trading platforms and automated trading software. The NASDAQ Exchange, which started out as an electronic price quoting service, was the first to implement automation to an exchange without the need for physical trading floors.

This transition provided the right environment for cryptocurrency exchanges to thrive in the outer reaches of the cyberspace. Cryptocurrency exchanges don’t have physical trading floors like NASDAQ or NYSE, but they provide greater access to millions of people across the world to buy, sell, and trade cryptocurrencies at a much cheaper cost.

Cryptocurrency exchanges also don’t require a sizeable amount of money to start trading, and fees are way much lower compared to traditional exchanges. In traditional exchanges, you usually need at least $1,000 to open and maintain a brokerage account, and you’ll have to pay commissions on each trade, maintenance fees, and low-balance penalties.

In contrast, cryptocurrency exchanges can be accessed directly on a person’s PC or smartphone without going through these brokerages. Anyone with access to the Internet can set up their own cryptocurrency exchange account at no cost and with no minimum deposit.

However, you need to familiarize yourself with exchanges since you’re basically doing all the research and hands-on trading all by yourself. Moreover, cryptocurrency exchanges don’t have the same level of government regulation as do traditional exchanges, and thus involve some risk.

There’s also a limit to certain privileges on most regulated exchanges depending on your account verification level. Typically, the longer you stay or trade on your exchange account, and the more information you give about yourself, the better your chances are at getting verified and increase your trading limits and withdrawals.

 

Familiarizing Yourself with Exchanges

Cryptocurrency exchanges borrowed many terminologies from traditional exchanges. Experienced traders know these terms by heart, but for those who are just learning the ropes, some words and phrases are a bit baffling. We’ll explain them here in layman’s term and provide some examples as needed.

Order Book – A list of all the buy and sell orders of traders in a market. It specifies the total number of bids and asks on a trading pair (e.g. BTC/USD), their quantity (size) and price, and presents them in graphical form. Order books play an important role in “price discovery” where the majority of traders agree on a certain price, thereby filling those orders and setting the current price of a given asset. Order books are now fully automated, capable of handling millions of buy and sell orders instantaneously. The process can be observed in real time in exchanges like GDAX, Bittrex, and Poloniex.

 

Trading Pair – Two different currencies traded on a market. With ETH/BTC trading pair, people are either buying Ethereum with Bitcoin, or selling them for Bitcoin. Traders set the bid and ask price of the currency they want to trade with using another currency. To put into perspective, in an ETH/BTC trading pair, ETH is the “commodity” being bought and sold, and BTC is the “currency” used to pay for them. Although, not an exact analogy, people who are new to cryptocurrencies and trading might be able to understand better using a more simplistic approach (both ETH and BTC are digital assets, and thus, barter transaction would be more appropriate). In a BTC/USD pair, it’s a lot easier to grasp since we’re talking here of a digital asset and a real-world currency (fiat). Also, in a trading pair, a currency can increase or decrease in value relative to its pair – much like Forex in a sense. In an ETH/BTC pair, if more ETH orders are being filled and greater quantities are sold at a higher price, it will be valued higher in BTC, and vice versa. In the grand scheme of things, a currency’s value is summed up based on how it performed across all online exchanges where it’s listed. (See https://coinmarketcap.com/ for a list of all exchanges.)

 

Bid/Ask  – Bids specifies the price traders are willing to pay on a trading pair for a given quantity of cryptocurrency. Asks, on the other hand, specifies the price traders are willing to sell their cryptocurrencies for. Bids and asks are usually shown in graphical form in order books as the “bid and ask wall” juxtaposed against each other, often resembling a valley – also called “market depth.” The lowest point is where traders agree on a certain price. Orders placed somewhere near the current price (“market orders”) are often filled almost immediately, while those placed further away (“limit orders”) may take some time. Traders may cancel their orders and move them elsewhere if it takes them too long, or if they want to take advantage of a major price action days or weeks ahead.

 

Bid-Ask Spread – A gap formed when both sides of the market don’t agree on a common price and no orders are being filled. It is the difference between the lowest bid and ask price on a trading pair. For instance, a trader wants 0.1 BTC for $1000, and another wants to sell his at $1,010. We have a price spread of $10. The bigger the difference, the wider the bid-ask spread. Too wide of a bid-ask spread will have an impact to a market’s liquidity.

 

Trading Volume – The total amount of cryptocurrency traded in the market at any given time. For instance, in a BTC/USD trading pair, the trading volume for an hour of trading could be $35,000,000, closing at $10,000 per BTC. They’re usually shown as multi-coloured or monochrome bars at the base of a price chart. In a multi-coloured price chart, green-coloured bars meant the closing price is higher than the previous one; for red-coloured bars, it’s the other way around. A dark-coloured bar meant the closing price is equal to the previous one. In most cryptocurrency exchanges, viewers can change the duration from a 1-minute, 5-minute, 30 mintue, 1-hour trading volume, and so on. Markets with high trading volumes are considered to have high levels of liquidity.

 

Price Chart – A graphical representation of the price actions with respect to time. Price charts reveal whether a currency’s value is on an uptrend (“bullish”), downtrend (“bearish”), or has undergone periods of stagnation, high volatility, parabolic moves (market bubble), and sell-offs. They can be shown in candlestick or line format. Candlestick charts also have a colour scheme (green for “bullish” and red for “bearish”) that matches the trading volume. Sometimes bearish candles will close at a higher position relative to the previous one resulting in colours which are opposite to the trading volume. In a line format, each point represent the closing prices. Viewers can also change the duration from a 1-minute, 5-minute, 30-minute, 1-hour price chart, and so on.

 

Circulating supply – The best approximation of the number of coins circulating in the market and in the general public’s hands (https://coinmarketcap.com/faq). In traditional exchanges, these are the total number of publicly traded stocks as opposed to locked-in stocks withheld by the company or shareholders. Circulating supply helps determine the total market value (market capitalization) of a cryptocurrency.

 

Maximum Supply – the total supply of cryptocurrency that will ever be produced. Most cryptocurrencies are deflationary in nature, i.e., they have a fixed supply. Bitcoin is set at 21 million BTC, while some premined coins such as Ripple has a maximum supply of 100 billion XRP, 55% of which is being held in escrow by the company.

 

Market Capitalization – The total market value of a cryptocurrency, determined by multiplying the circulating supply with the current market price of each coin or token. It’s the equivalent of a company’s total market value in a public exchange, which is also determined by multiplying the total number of outstanding shares with the market price of each share.

The Taxman Is Catching Up On Cryptocurrency

Revenue agencies around the world are scrambling to figure out a way to tax cryptocurrency as governments are beginning to realize they are losing out on a vast source of revenue.

We’re now seeing how cryptocurrency would fit into our economy, and more people from institutions and the mainstream society starting to acknowledge them as a store of value and as a medium of exchange. Consequently, this would also mean tax obligations for miners, buyers, traders, merchants, and everyday users.

Here are things we need to know to prepare ourselves for the tax season. We’ll cover some important issues, fundamentals of taxation and how they would apply to our cryptocurrencies. But before we start, here at CryptMin and CryptEdu, we encourage you to always pay your taxes and report your capital gains to the government. It’s never fun having the taxman after you.

 

Tax Laws Are after It

Despite what people tell us in social media and cryptocurrency websites about privacy and anonymity, dealing with cryptocurrencies can leave behind footprints for the CRA or the IRS. Blockchain transactions are public records – everybody sees it, including your taxman.

The truth is blockchain transactions are more transparent than our traditional banking system. The key difference is the use of public keys instead of real names, which makes every transaction pseudonymous. However, since no two public keys are alike, once it gets tied to a real person’s name or company, authorities can easily track every transaction that was ever made with that public key. (Note: some “underground” cryptocurrencies encrypt their true addresses on the blockchain ledgers like Monero and Zcash, and thus more difficult to track.)

Some places where the CRA or the IRS can get a hold of your identity are cryptocurrency exchanges, online wallets, cloud mining sites, mining pools, and the social media. Although gateways are largely unregulated these days, it’s only a matter of time before governments and regulators will require each one of them to disclose information they have about their customers upon request.

Coinbase, for instance, are required to conduct KYC on their customers before they can start buying, selling, or trading on GDAX. Same is true with cloud mining sites when accepting payments from customers using their credit card or bank account. Genesis Mining does so whenever customers buy their mining contracts. They’ll have their customers’ public keys as well for payouts.

From the governments’ perspective, these are all treasure troves when looking for information about people who owes them money. Depending on the exchange, cloud mining company or the country they’re in, government agencies can have access to these customer data.

They could also set their sights on social media, particularly content creators in YouTube, Facebook, or Twitter who display their public keys for accepting donations, or even online stores who take cryptocurrency as payment for goods and services. And while customers and everyday users might get away with it by putting them in cold storage (mobile, hardware, or paper wallet), sooner or later, regulators will find a way to catch up on them as well.

 

Conflicting Views on Cryptocurrency

The IRA and CRA treats cryptocurrencies just like any asset. Their value may fluctuate from time to time, but until they go out and are sold in exchanges for fiat, holding these currencies is not a taxable event. A Capital gain tax will apply when selling cryptocurrencies in exchanges. However, determining the exact price on the date of acquisition is necessary to properly assess how much capital gain the seller is obliged to pay taxes for during the re-sell.

As you might expect, getting the numbers right on a person’s capital gain is going to take a lot of work and making sure every transaction in cryptocurrency exchanges are properly documented. It’s possible, for instance, that Coinbase would be asked to disclose their records for taxing purposes on each buy and sell and the dollar valuation on each individual transaction to see how much capital gain a customer has.

When using it to buy goods and services, or trading them with other cryptocurrencies, bartering laws will apply. This is where it gets a little tricky when you consider capital gains on your cryptocurrency for every purchase. For instance, you bought a thousand dollars’ worth of Bitcoin and decided to buy furniture with it when the value goes up by 50%.  The next month, you buy your furniture with Bitcoin which is currently priced at 1,500 USD. According to law, you’ll also have to pay for the gain tax as it is with bartering goods. In essence, you’re paying tax twice for buying furniture with Bitcoin – gain tax on Bitcoin and GST/HST on the furniture. And since you’re exchanging your digital asset on a short-term gain, it will be taxed just like a regular income which is the highest for capital gain tax.

Businesses will have to deal with the same problem when accepting cryptocurrency payments. If clients chose to pay with Bitcoin, which by definition is property/digital asset, they’ll have to report it as income (see the confusion?). This carries a lot of risk for business owners due to the volatility of cryptocurrencies. They might end up paying taxes on the sale despite the fact that the value of cryptocurrencies have already gone down.

 

Tax Implications for Miners, Traders, and Buyers

Regulators are catching up on cryptocurrencies fast. There will probably come a time when every cloud mining company, exchange, and wallet service in every country will be required to keep records about their customers in order to run their business. In this case, we need to prepare ourselves to avoid getting burned when the tax bill arrives.

Cloud mining companies can take advantage of tax deductions by writing off electrical and maintenance expenses in running their cloud mining facilities. This is a lot better than dodging regulations and taking a lot of risk of being caught and paying huge penalties or even losing the whole business. Technically speaking, cloud mining companies don’t pay out their customers – it’s a rental service. Whatever payout their customer receives depends on the mining pools they choose to join in and the currencies they want to mine with the hash power they bought from the cloud mining service. They might also take a cut from the mining rewards as a service charge on top of the rental fee or contract price (all depends on the cloud mining company). This is considered a taxable event, and laws regarding cryptocurrency transactions will apply.

Mining pools also take their share of the mining rewards as their service fee, usually around 1-4%, and hence, it is a taxable event according to laws on bartering, i.e. cryptocurrency for mining service. Exchanges and traders will be hit the hardest, especially day traders and swing traders. Under existing tax laws, short-term capital gains (assets acquired below one year) will be taxed as regular income. This applies, not only when cashing out and locking in their profits with fiat, but when buying other cryptocurrencies with it, e.g. buying Bitcoin with Ethereum.

Everyday users might also have to deal with this when buying or using cryptocurrencies for everyday transactions. Some complications may arise for buyers and business owners as mentioned earlier in this article.

Tax laws regarding cryptocurrencies still needs a lot of refinement; implementing it at its current state can be problematic and cause a lot of confusion. Sooner or later, our governments might come up with better tax laws regarding cryptocurrencies and begin the process of pursuing anyone who gets their hands on them. When the time arrives, we would have already prepared for such eventuality.

Interested in mining? Learn the basics of cryptocurrency mining at CryptEdu.com or start  hassle-free cloud mining at Cryptmin.com today.