Analyzing Modern day Cryptocurrencies
As cryptocurrencies are in the early innings, it is surrounded by many issues for its development. Most important are the philosophical and political implications on them. Cryptocurrencies are inherently political as they challenge the traditional social contract under which the societies operate. As they are created by a decentralized form of wealth, they are governed by code alone.
The Accounting Treatment, Privacy and Regulation issues surrounding blockchain and Cryptocurrencies needs to be fully determined. It is necessary to discuss these tangible aspects for cryptocurrency development.
Cryptocurrency is considered to be volatile and this is as a result of various factors such as the rule of supply and demand, Applications of cryptocurrencies, Regulatory changes and Technology changes.
Let’s have a detailed view on factors effecting the price of Cryptocurrency.
Supply and Demand of Cryptocurrencies
The supply of the bitcoin coins is limited by a code in the blockchain. By 2140 the number of the bitcoins is expected to reach a number of 21 million, with the rate of increase in Bitcoin the supply of the coins decreases. With the adoption of Bitcoin being increased, the price of Bitcoin will also continue to grow. Bitcoin is not the only cryptocurrency that has limits on Issuance. The supply of litecoins is capped at 84 million units. The purpose of this limit is to provide an increased transparency in the money supply, which is a contrast to government backed currencies. At any given time any individual can determine the supply of the currency and calculate the value accordingly.
Applications of Cryptocurrency
In order for a cryptocurrency to gain value it needs to be used. Any miner of a rare material can see a rapid appreciation in its value if it is used. If a metal is not used, it becomes worthless and the same dynamic applies to cryptocurrencies too. Bitcoin at present has value as a means of exchange. Other alternatives can improve its value based on Bitcoin model or create any other usage to increase its value one of such example is Ether. As the use for cryptocurrency increases , its corresponding demand and value also increases.
As the regulations for cryptos are not yet determined, the value is strongly influenced by the future regulations. For example cryptocurrency exchange regulations in the US are in an uncertain legal territory, which is much as the ownership of gold was outlawed in 1930s in US. It is likely that the ownership of the crytpocurrency would move offshore and will severely undermine their value.
Not like the physical commodities, the changes in technology will affect cryptocurrency prices. The Bitcoin was negatively impacted by the controversy of altering the underlying technology to improve the transactions. After the change was done, the price of bitcoin increased in just a span of two weeks. The news reports of hacking lead to price decreases. There is a risk of crash with this emerging phenomenon of volatility.
Accounting Treatment of Cryptocurrency
The accounting guidelines of cryptocurrency are most likely not cash or cash equivalents as they lack the liquidity and also the stable value of cash. The accounting treatment of cryptos is uncertain as it has no official guidance from the International Financial Reporting Standards or the American Institute of CPAs (AICPA)
In the US, the government is saying that holders of cryptocurrencies should account for them as a personal property, with the gains or losses on their purchases and sales. The value of the cryptocurrency holdings seen on the balance sheets would be a fair market value at the time of receipt. Therefore a rapid increase in the prices of cryptos leads to enormous gains; which is subjected to capital gains tax. Outside US the accounting treatment of cryptocurrencies varies. In EU cryptocurrencies are treated like a government backed currencies. In Germany and UK they are treated as private money.
Regulation of Cryptocurrency
The regulatory treatment of this cryptocurrency continues to evolve, because the technology transcends global boundaries and the influence of national regulators are limited. As the cryptocurrencies are specifically designed to avoid the government controls, its uncertain whether these cryptocurrency regulations will be successful or not.
Japan is the first country to take an unambiguous and encouraging regulatory approach. It has legally recognized bitcoin and also created a regulatory framework to flourish the industry. On the other hand US regulators are less keen about the virtual currencies.
Security and Privacy Issues:
Computer hacking and theft are the serious concerns for the widespread acceptance of the cryptocurrencies. The issue has continued to rise with the popularity of cryptocurrencies. The pseudonymous nature of the blockchain and bitcoin transaction has also raised few concerns. If a good or service is defective the transaction can be called for cancellation and the funds are returned to the buyers in a typical centralized transactions. But in a cryptocurrency ecosystem, there is no central organization to ease the resources against the seller.
Our friends at Mrbtc developed an interesting infographic on the topic – 33 Cryptocurrencies described in four words or less, please checkout the following infographic and let us know your thoughts on it.