Crypto vs. cash: Is crypto real money?
Ever since Bitcoin was launched in 2008, following the release of the famous Bitcoin White Paper that described this new technology and decentralized digital currency, cryptocurrency has taken investors on a wild ride. Bitcoin, the original cryptocurrency, spawned other coins, including ethereum, litecoin, dogecoin, and more than 22,000 other altcoins.
Read: 3 Things You Must Do When Your Savings Hit $50,000
But is crypto “real” money? How does it compare to the US dollar as a form of currency? And is crypto secure? Here is an exploration of the similarities and differences between crypto and fiat currency, specifically the US dollar.
What is cryptocurrency?
Cryptocurrency is a form of decentralized, virtual currency. That means you can’t hold a bitcoin in your hand; it is transferred only by digital means on a blockchain, with transactions verified by users.
Using crypto for transactions eliminates the need for a third-party payment processor, such as PayPal, Venmo, a bank, or a credit card company. This helps make transactions secure and anonymous.
Some people may consider crypto “real” money because you can use it to exchange goods, services or other currencies – including other cryptocurrencies or even cash. For several years, US banks have discussed the possibility of considering bitcoin as a “legitimate asset class”, which means that it will be recognized as real money.
However, bitcoin and other cryptocurrencies are not currently considered real money by the Federal Reserve or US banks.
Crypto and taxes: When crypto is treated like real money
The IRS classifies crypto as a property or digital asset, meaning you pay capital gains tax if you trade crypto for a profit. Most crypto transactions are not taxed until the crypto is paid out and converted to US dollars, exchanged for another coin or currency, or used to make a purchase.
The IRS can tax crypto as income under certain circumstances. If you receive crypto as payment or through mining or staking activities, the government may tax your cryptocurrency at your marginal income tax rate.
If you traded, earned, bought, or sold crypto in 2022, it’s a good idea to talk to a tax professional about how to report your crypto income and losses on your state and federal tax returns.
Differences Between Crypto and US Fiat Money
Cryptocurrency was created to be an alternative to fiat currency. As such, they have significant differences.
Cryptocurrency is not backed by any assets, such as gold or silver – but neither is the US dollar. However, the US dollar is backed by the federal government. Cash and crypto are different because crypto is decentralized and not backed by any government or institution.
Crypto is also different from real money because it is not tangible. You cannot hold bitcoin or ETH or any other altcoin in your hands.
Volatility and use cases
Finally, cryptocurrency also tends to be more volatile in the way it gains or loses value. Fiat currency has specific use cases – it is used to make purchases of all kinds.
While some cryptocurrencies have use cases, such as use on Web3 or stabilizing blockchains, many are only worth the value investors give them.
Similarities Between Crypto and US Fiat Money
Crypto and American money are similar in that they can both be used to exchange goods and services. In some cases, crypto income is taxed just like cash income.
Both dollars and cryptos can be invested with the hope that their value will grow in the future.
Will crypto become real money?
Although cryptocurrency may or may not be recognized as legitimate currency by the US government in the future, it can be converted into US dollars by selling it – either privately on the blockchain or through a crypto exchange – just like you can sell stocks or bonds.
Is cryptocurrency safe?
Cryptocurrency is notoriously volatile. While all investment comes with risk, crypto is very high risk.
Crypto can lose value quickly, while the US dollar remains relatively stable over time. The Federal Reserve controls the money supply to prevent the US dollar from crashing and losing all its value.
No such protections exist with crypto, as exemplified by the ongoing crypto winter, where cryptocurrency as a whole lost 65% of its value year-over-year between December 2021 and December 2022.
In terms of security, cryptocurrencies cannot be counterfeited – unlike fiat currency – due to the blockchain technology they operate on. However, your crypto account may be hacked, resulting in the loss of funds.
It is best to store your crypto offline in a cold wallet for maximum protection.
While your money in a US bank is protected up to $250,000 per account by the Federal Deposit Insurance Corporation, crypto is not protected by the US government. If you use a crypto exchange, make sure the exchange has fraud insurance.
As crypto grows in popularity and adoption, it may be used more frequently for purchases. Right now it is not recognized as real currency by the US government. However, it can be used similarly to US fiat money in many cases.