FOX 35 INVESTIGATES: Cryptocurrency confusion

LAKE MARY, Fla. - Over the last few months, cryptocurrency has exploded in popularity and value.

Bitcoin, Ethereum, Dogecoin – buyers are going crazy for cryptocurrency. Over the last year alone, the number of people with a blockchain wallet has jumped by more than 20 million.

So, why are so many people buying it? It’s confusing, but FOX 35 is here to clear it up.

WHAT IS CRYPTOCURRENCY?

Cryptocurrency is digital money that is transacted over the blockchain.

"It operates without central authority, so you don't need to deposit money in the bank," Ecodelogic Project Manager Neil Belliveau said.

More businesses are starting to accept Bitcoin, one of the most popular cryptocurrencies, as payment. 

Telsa bought $1.5 billion worth of Bitcoin. Starbucks is partnering with an app that will let you convert cryptocurrency into U.S. dollars so you can buy items at its locations and Paypal is also allowing people to use cryptocurrency. 

The "checkout with cyrpto" feature allows you to convert Bitcoin and other digital currencies to U.S. dollars that Paypal uses to complete the transaction.

Even if you are not buying items with cryptocurrencies, investors still buy it and watch it closely.

"People call it Gold 2.0, so people are using it as an alternative to gold and silver to be able to store their wealth," David Derigiotis, with Burns and Wilcox, tells FOX 35.

Cryptocurrencies are decentralized, so there are no banks involved. So how does it work? That’s where the blockchain comes into play.

 "A block is just data, and it’s chained together to the next block. So, it just constantly starts chaining together one after another. There's really no way to go back and edit or change a block. So, there's always a record of everything," Belliveau said.

Think of each block building off the last one. Every time someone buys or sells, the blockchain keeps count, just like a bank would. It keeps track of every transaction. It’s a digital ledger.

Unlike cash, you don’t see cryptocurrency or touch it, so it is up to you to keep tabs on it or risk losing it forever.

"If you're looking to purchase it and looking to keep it, do your homework on where you are going to keep that money and who you are going to use an exchange," Stephan Boehringer, with Ecodelogic, said.

There are several exchanges to buy or sell cryptocurrencies. One of the most popular options is Coinbase. In the United States, it is required to keep deposits in its system secured at U.S. banks.

"Because they are secured at U.S. Banks, everyone who has money in Coinbase is actually protected through FDIC because FDIC insures those accounts up to $250,000 apiece," Boehringer said.

If you choose to store your cryptocurrency on the Internet, Derigiotis says you should take a couple of extra steps to protect your coins.

"Number one, I would create an e-mail address that is unique and specific for that account only. That way, if that email is involved in a data breach, any other place you visit online, it won't directly impact your email address tied to your crypto account," he said. "Set up multi-factor authentication. So you're going to sign in with a password, which is how you're usually able to authenticate yourself through first means, and then there will be a code through a second variation, whether it’s receiving it on your phone or using some type of app."

INVESTING IN CRYPTOCURRENCIES

Once you’ve done your research and you’re still interested in buying cryptocurrency, you probably may wonder when is a good time to buy?

When you think of investing, you may start to think of stocks. However, cryptocurrency is not the stock market.

"Crypto is more volatile," Boehringer said. "I consider it more volatile than stocks, so you really need to figure out what you have a stomach for from an investment standpoint."

High-risk can lead to high reward though.

"Ten years ago, it was virtually nothing and today, or April of this year, the economic impact that crypto has, overall the value of it, it has a 2.2 trillion dollar value," Boehringer said.

Don’t dump your life savings into cryptocurrency. Experts say you should only invest what you are willing to lose. 

While cryptocurrency is all virtual, they have real-world tax consequences. If you choose to buy and sell, keep a record because it must be reported on your tax return.

"For tax purposes, virtual currency is treated as property and that means tax principles applicable to property transactions apply to transactions using virtual currency," Stephen Palley, a partner at Anderson Kill, said.

According to the IRS, if you hold an investment for less than a year and it appreciates in value when you sell it, you will have a short-term capital gain. These gains are taxed as ordinary income.

"The principal is if you hold virtual currency for one year or less, you'll have a short-term gain or loss," Palley said.

If you hold cryptocurrency for longer than a year, it will be subject to capital gains tax rates. How you receive cryptocurrency can also be a factor.

"If someone paid you in Bitcoin, the IRS would treat that as taxable income," Palley said.

If you’re new at cryptocurrency, make sure you talk to a professional tax preparer to make sure you understand all the consequences.

MINING CRYPTOCURRENCY

You can buy cryptocurrency or you can earn it by mining it.

Even though cryptocurrency has been compared to gold, you don’t need to mine it. You just need a computer and some equipment. The computer you have needs to be able to solve some extremely complex computational math problems. You don’t need to be a computer genius though, you just need the right equipment.

 "I built these rigs that had six graphic cards, hanging from a rack that were attached down to a motherboard and then a power supply hooked into it. You don't even have a monitor attached to it," Aaron Jayjack, who mines cryptocurrency, said.

It can be a pricey hobby though.

"My biggest cost of mining, trying to keep my house cool. My electric bill is normally like $200-250, but at peak mining, I was spending $700-$800 in the summer months because I was running that air conditioning so much," Jayjack said.

Miners get paid in virtual currency to essentially work as an auditor. They have to verify the legitimacy of the transactions.

 "When you're mining, you're voting with your machines on all the transactions and making sure everything adds up," Gabe Higgins, of Blockspaces, said.

One of the most popular cryptocurrencies to mine is Bitcoin. To earn Bitcoin, miners have to verify one megabyte, or one block, worth of transactions before they are even eligible to earn Bitcoin.

"You accrue it after a block is completed because multiple people can participate in mining that block," Belliveau said.

 You also need to be the first one to finish that block. It is a matter of luck.

 "It's definitely a numbers game, that's what it boils down to."

 In addition to lining the pockets of miners and supporting the Bitcoin ecosystem, mining serves another vital purpose: How new Bitcoin is released into circulation.

There is a finite supply of Bitcoin. This means there will be a time when Bitcoin mining ends. The total number is capped at 21 million, but miners aren’t expected to hit that number until 2140.

Just because mining will come to an end does not mean transactions will not need to be verified anymore. Miners will continue to verify transactions but will be paid in other ways.

Bitcoin is not the only cryptocurrency that can be mined. You might have to hang on to it for a while.

"Maybe you're only generating $10 a day worth of cryptocurrency. It’s more about the long-term. It might be $10 a day now, but in 10 years that might be $100 or $1,000 a day that you were actually mining," Jayjack said.

FUTURE OF CRYPTOCURRENCY

"This is catching on faster than I would have predicted."

What started out in 2009 as an underground obsession has become a mainstream discussion. Bitcoin’s value has been surging over the last year. In just 2021 alone, it has jumped tens of thousands. On January 27, one Bitcoin was worth $30,000. Fast forward to May 12, it was at $55,000.

"As of April this year, the economic impact that crypto has overall, the value of it is $2.2 trillion," Boehringer said. "That is equal to the annual GDP of the United Kingdom."

One of the biggest supporters of cryptocurrency is Tesla and SpaceX CEO Elon Musk. Tesla bought $1.5 billion worth of Bitcoin and then announced you could use your Bitcoin to buy a car. The company has since tabled that idea due to concerns over the environmental impacts of mining Bitcoin.

Paypal also announced it will start to allow cryptocurrency as payments. Customers will be able to convert cryptocurrencies like Bitcoin at checkout.

Cryptocurrency is only the beginning.

 "Blockchain is not just Bitcoin. Bitcoin is the first use case. It's certainly the most well known and most successful. There are several other use cases that continue to bubble up every single day," Rosa Shores, CEO of BlockSpaces, said.

The blockchain technology that keeps track of Bitcoin’s transactions has the potential to turn our entire world digital. 

BlockSpaces is a blockchain company that helps businesses integrate the tech into their platforms for tracking and tracing.

"We currently are working on a digital ID project at USF, as well as a potential pilot for food supply chains," Shores said.

The blockchain has the potential to do things, like buying a house, a lot simpler.

"Your bank can trigger a contract and you only need to serve up portions of your identification that are needed to prove your loan, not necessarily something they don't need. Your first born’s ID, just pieces of your information," Shores said. "Where there is not necessarily an intermediary that has to walk you through the mortgage process."

As the world deals with the pandemic, the technology could keep your vaccine data secure.

"With the COVID identification, we are utilizing blockchain in a way that applies for digital ID within that vaccine ecosystem," Shores said.