know about the CryptoCurrencies
By: Tax Pro
Tags: Bitcoin Wallet, Bitcoin Mining, Big Data, Bitcoin, Cryptocurrencies Market

CryptoCurrencies

In the last 21 years, almost every part of organisation has been transformed due to the digital revolution. Internet, social media, and now mobile devices have changed the way companies do business. Cryptocurrencies are the next step in this process and it is bound to reshape the ways in which companies do business.

concept of Bitcoin

The concept of Bitcoin was introduced in a 2008 paper by a pseudonymous developer named Satoshi Nakamoto. Bitcoin is a peer-to-peer, electronic cash system. It provides a digital alternative to traditional money. Bitcoins are created and transfer based on an open-source cryptographic protocol that is independent of any central authority. Bitcoins can be transferred through a computer or smartphone directly. There is no role of any intermediate financial institution like banks. Bitcoin is a digital medium of exchange that is created, acquired, held, and traded electronically.

These currencies are more than a new way to make sales and purchases and can be termed as a protocol for exchanging values over the Internet without the role and need of any intermediary like banks. These are the currencies that are born on the Internet and can be used in the physical world.

Bitcoin, being one of the commonly known and used cryptocurrencies in the world, is used in this article to represent cryptocurrencies. The article addresses the basic concept of Bitcoins and accounting and audit issues of Bitcoins transactions.

The concept of Bitcoin was introduced in a 2008 paper by a pseudonymous developer named Satoshi Nakamoto. Bitcoin is a peer-to-peer, electronic cash system. It provides a digital alternative to traditional money. Bitcoins are created and transfer based on an open-source cryptographic protocol that is independent of any central authority. Bitcoins can be transferred through a computer or smartphone directly. There is no role of any intermediate financial institution like banks. Bitcoin is a digital medium of exchange that is created, acquired, held, and traded electronically.

Photo by André François McKenzie on Unsplash

How Bitcoins are created

Bitcoins are created via a process called mining. Mining involves solving continuously increasingly difficult cryptographic problems. Mining requires progressively more powerful computers for productive mining. The problems being solved, register and validate Bitcoin transactions on the Blockchain. Blockchain is a public ledger recording all bitcoin transactions. The public nature of the blockchain and the system of confirming transactions by consensus allow the bitcoins to be verified during exchanges and prohibit users from spending the same bitcoin twice.

Bitcoin is the first, most popular, and most successful of cryptocurrencies. But what exactly does that mean? Cryptocurrencies are money on steroids. They are the digital equivalent of (and competitor to) more familiar currencies like Dollars, Euros, etc. They use technology and cryptography to provide users with capabilities beyond what can be done with the monetary and payment systems they’re accustomed to. Cryptocurrencies are to money what superheroes are to regular people.

Cryptocurrencies are money on steroids. They are the digital equivalent of (and competitor to) more familiar currencies like Dollars, Euros, etc. They use technology and cryptography to provide users with capabilities beyond what can be done with the monetary and payment systems they’re accustomed to. Cryptocurrencies are to money what superheroes are to regular people.

Each account (“Bitcoin address”) has an associated secret code (“private key”) that the system uses to assert that address’s control over the bitcoin the address contains. When bitcoin is spent, the address must provide its private key. Fortunately, most end users don’t work with the keys directly and will probably never see one. The wallet software and the Bitcoin network handles all that for them.

Each Bitcoin transaction is simply a record of how currency has moved from a set of source addresses to a set of destination addresses. The Bitcoin protocol performs a number of actions… verifying that the source addresses actually controls the BTC being moved, for instance… and then writes the transaction to the blockchain.

Special Bitcoin users called “miners” are responsible for writing the transactions. This isn’t as simple or straightforward as it sounds. Each miner or group (pool) of miners is constantly working on a specific mathematical problem. Not only is this problem difficult, it actually becomes MORE difficult as more people try to solve it.

The first to solve the problem correctly gets to write the next block of transactions to the ledger. In return for their effort, they earn some newly created bitcoin, plus they get to keep all the transaction fees in the block they just wrote. In the case of a mining pool, this reward is distributed to the members in the pool, usually based on the amount of work each member contributed. The miner that writes the block gets to pick which transactions get written and it’s in their best interest to pick the transactions that have transaction fees associated with them.

Thus, while the transaction fees are technically optional, if you want the miners to care enough about your transaction to write it, you should always include the appropriate fee. All of this applies to Bitcoin, but most other cryptocurrencies operate similarly, with differences in the exact math problem being solved, how the difficulty scales, how miners are rewarded, etc.

Participants in bitcoin generation and transactions:

There are various participants in bitcoin generation and transactions. These are as follows:-

(i) Miner: Miner creates bitcoins from the mining process and pumps bitcoins into circulation in the digital world. Miner creates bitcoins through a mining process that takes place using specialised computer hardware and software to solve complex algorithms. Every time the algorithms become tougher to create new bitcoins similar to the mining of gold becomes tougher over time.

(ii) Consumer: Consumer obtains bitcoins either through mining or purchase and uses bitcoins for any business transactions.

(iii) Dealer: Dealer in bitcoins transactions buy and sell bitcoins and/or operate specialised bitcoin exchanges;

(iv) Trader: Traders generally speculate on short-term price movements of bitcoins. By speculating, traders sale or purchase bitcoins on exchanges or privately and make a profit.

(v) Investor: Investor holds bitcoins with the hopes of long-term price appreciation.

Bitcoins once created reside in a digital or cyber wallet and are not issued in the form of coins or paper bills. They only appear as a string of characters on a computer. The wallet can be either cloud-based for mobile payments or can be stored on a local system ensuring maximum security. Each Bitcoin wallet is associated with an address.

An address can be a unique series of numbers and characters. However, the identity of the user is not known to others which allows the confidentiality of participants in any bitcoin transactions. Bitcoin transaction requires a peer-to-peer computer network. This depends on the participation of many computers and users. They maintain the integrity of the system by participating in the transaction. The participants also inject bitcoins in circulation and verify transactions through an electronic log.

The bitcoin ledger is not owned or controlled by any one party. This blockchain ledger can never be altered and records can never be destroyed. Information can only be added to the ledger and never removed. Before anything can be added to the ledger, it needs to be validated and confirmed by the network’s users who secure the legitimacy of the network and the transactions passing through it.

Each completed bitcoin transaction has a public key and a private key. The public key is like an email address and can be seen by everyone. On the other hand, the private key is like an email password and can only be seen by the party to the transaction. When a transaction is created by a user, its effective date is stamped. The transaction is then added to the chronology of an ongoing chain transaction. Independent users employ specialized software to verify that transactions are correctly entered into the system. The system compensates these users by awarding bitcoins to them.

CONCLUSION

Bitcoin, by virtue of their nature, are not tied to any legal jurisdiction in the world. Historically, bitcoin has extreme volatility and so far has not got general acceptance alongside of the conventional currencies of countries in the world. Still, in days to come, bitcoins are bound to transform the conduct of financial transactions. Use and acceptance of Bitcoin transactions will increase over time and the bitcoin transactions framework will take concrete shape once it takes a legal proclamation by countries in the World. The accounting and audit profession will also undergo a major disruption and challenge in the coming years due to bitcoin use in business