If you are going to involve yourself in the crypto world, there is much to learn, but I will try to cover the basics here.
The current dominant blockchains
The landscape of dominant blockchains is likely to change over time. It is a lot more complex than this, and over time will become an absolute jungle, forming its own ecosystem. But for now, the leading technologies are as follows:
Bitcoin (BTC) was the first Blockchain and does not support “smart contracts (AKA “Tokens”) until future software releases such as Rootstock (RSK). Ethereum in its modern-day form (ETH) is the most common smart-contract (tokenizable) blockchain and is used as “gas” to conduct transactions of both itself as a crypto and its “Tokens”, which are referred to as “ERC20Tokens”. All of its many ERC20Tokens operate on its Blockchain and share the over-arching ETH Wallet Address. Other blockchains also exist and have their own specifics in terms of value and potential. Be mindful of what your Hardware Wallet (Trezor or Ledger Nano S) supports in terms of your capability to securely store these crypto assets before you invest in a specific crypto.
In the overall crypto market at the time of writing there are about 1500+ various cryptos.
How does it work in practice?
Each Blockchain exists simultaneously around the world in a decentralised fashion amongst hundreds and thousands of nodes across the planet. To interact with these blockchains you use a “Wallet”. A “Wallet” consists of two things – a PUBLIC KEY and a PRIVATE KEY.
Each KEY is a simple “string” of characters. And although confusing at first, when you develop and wrap software around the use of these keys and your interaction with the blockchain the usability and use-cases begin to show.
PUBLIC KEY: (Example looks like: “0x117fa382Eb6aA693862c34vb24a63BE5fet9Cvd0”)
Think of this PUBLIC KEY as a BSB/Account number… It does not matter if it is seen by other parties as it is only used for receiving the Blockchain units of account in the ledger.
PRIVATE KEY: (Example looks like: “8a6b6f45336961ff467b356f6c6e652c0aa1a3cb18e7caf018dxceex0x38229”)
Think of this PRIVATE KEY as an almighty password which must be guarded immaculately. Anyone that has this key can essentially withdraw or send units of account from the corresponding Wallet (PUBLIC KEY) on the Blockchain.
Here is a picture to try to help you visualize how one would send “Litecoin” from one address to another.
Do note that each blockchain has its own standard for the Wallet Addresses. The example of the above Public Key of “0x117fa382Eb6aA693862c34vb24a63BE5fet9Cvd0” is an address for the Ethereum Blockchain. Whilst in the screenshot above, the Address starts with “LQ3B36Yv2~” as that is in line with the standards for the Litecoin Blockchain.
You will come to see that this “Distributed Ledger Technology” in daily use, is essentially just the blockchain with graphical user interfaces wrapped around it.
Crypto Regulation Is Coming
For too long, the machinations of society have ignored DLT in all of its forms. The disruptions which it potentially brings is beyond comprehension and indeed, societal disruption on many layers will happen. However, the days of the “wild west” in crypto are closing and a new chapter is forming in its lifecycle.
Authorities ignored cryptos long enough to the point that they could not ban it. They left it too long – long enough to evolve for it to actually prove its true value to humanity. Now they are in for a troubling age of digital disruption akin to the age of when Arpanet evolved into the Internet. Even the mainstay concept of value on our planet, “money”, is likely to face significant disruption… although the change has a chance to be smooth – and I hope that is what is achieved. However, the first step in the more-or-less “orderly” adoption (especially over 2018) of this technology across the planet is Regulation!
Governments of different nations are taking different approaches of regulation, trying different strategies, but either way… it’s an all or nothing end-game upon completion. Japan now sees it as legal tender, in 2018 Vietnam will also, while other countries have outright banned crypto, but the largest majority simply classify it as another asset in accounting terms. The disruptive nature this will have in terms of tax income and financial governance volatility across the planet is yet to be seen… but the regulation of such is coming.
It is time to prepare your holdings and get your house in order
All money is already inherently digital… but DLT just moves its current system to an immutable, almost invincible ledger. For years, the powers that be have been pushing for a cashless society to try to prevent any “money” being hidden from the hands that collect taxes and keep the glue of society in economic balance.
By watching the developing rollout of regulation around the world, it can be presumed that the next few years will involve ever increasing occurrence of regulation forming. Apart from the USA SEC slowly implementing small pieces regarding their corner of the world. We have nations not only trying to bring their own fiat currency into a DLT system in terms of a Crypto Ruble announced by Russia, a Crypto Yuan announced by China and even here in Australia, a “Digital Australian Dollar” being proposed. We can already see news headlines for the looming regulation on an ever-increasing basis globally.
Additionally, the Anti-Money Laundering and Counter Terrorism Financing Bill going through Australian parliament right now in late 2017 is likely to take effect in 2018 and affect many Australian crypto users.
This first wave of regulation, amongst many others, starts to form an increasing trend toward regulation, and you should start to consider the importance of your compliance whilst investing. This is especially true if you do not want to be bothered later on in life by legislative liabilities from past actions. Prepare now if you are concerned.
For those of you that believe that taxation will not affect you
It may take 5 years, but with Data Matching and Artificial Intelligence retroactively scraping the blockchain at some point in the future, discrepancies in your compliance may form into liabilities as time progresses. Everything you do is recorded on the blockchain forever. It would be wise to be aware of potential future threats of confiscation or over-taxation of your portfolio, and mitigate risks appropriately.
Tax And Crypto
Now this is a big topic. Sincerely, if you have images in your head of wealth and lifestyle from your investment in crypto… I fully recommend that you comply with all laws regarding your tax obligations and take the matter with utmost importance. It is often those people, which have sudden changes in financial circumstances, that are the usual target to audits and interest from authorities. Take the time to understand your tax obligations seriously (and fulfil them), as some of the easiest and risk-free strategies can have multiplied returns through tax efficiency, and also the all-important include certainty of holdings. These strategies also can, through tax efficiency, contribute to your bottom line over time – and also help you develop your strategy for navigating the crypto landscape in a less emotional, more logical manner.
A lot of people in the crypto world completely ignore any idea of tax obligations when it comes to crypto. Many also have created a potential mess of liabilities for themselves in terms of keeping track of their cryptorelated tax obligations.
It is not hard to hide your wealth in crypto, but then again, you can just as easily hide cash under your mattress. The REAL problem exists whereby in a future (say 5 years from now), you may not have any easy or viable means of spending this money without raising red flags for audits or investigations or blacklisting/whitelisting of Wallet Addresses. The depth of the technological capabilities and the lack of privacy we may be moving into is yet to be seen. The REAL question if you plan to hide your crypto stash is whether or not you are even going to be able to spend it in future…
If starting fresh…
If you are a newcomer to the crypto world, and are starting fresh, you should not begin until you have the following:
– A clear plan of what and why you want to invest, and an understanding that you are investing in a considerably high-risk asset.
– Your personal financial structure planned and understood.
– One or many Hardware Wallets – Trezor or Ledger Nano S.
– An understanding of Security concepts in this document both Technical and Physical
– An understanding that everything you do has consequences and that “moves” or actions should be thought out carefully beforehand, and recorded considering tax obligations. – An emotional resilience to ignore all the Fear, Uncertainty and Doubt (FUD) that exists as created by the predatory players in a largely unregulated market.
If the above is all adhered to, you should have relatively few events of “tripping over your own feet” in terms of exposure to unwanted liabilities.