This article is by Glenn Stok, a systems analyst with a Master’s Degree in Computer Science and hundreds of published educational essays.
This essay examines how blockchain technology and cryptocurrency will affect banking, commerce, and your money.
We will examine how blockchain's security features are used in various fields besides merely being the underlying technology used for cryptocurrency. I'll also give you an understanding of your tax obligations with cryptocurrency.
Let's begin with a complete review of all aspects of this technology so you'll see the relationship between cryptocurrency and blockchain.
What Is Cryptocurrency?
The main idea of cryptocurrency is to allow for transactions of digital payments between two people with no intermediary to oversee its validity. Blockchain is the software infrastructure behind it.
Bitcoin was the first cryptocurrency. There are over 1,600 cryptocurrencies listed on Wikipedia as of August, 2018.1
What Is Blockchain?
You could think of blockchain as a chain of blocks making up a ledger of all transactions. This ledger is a shared linear transaction log. Once a block is authenticated and accepted, it can never be altered. Due to that, the blockchain securely holds the recorded history of all transactions.
New blocks can be added to the end of the chain. The acceptance of new blocks is called mining and is done by a complex network of computers that analyze new transactions to verify accuracy. Once verified, the new block is accepted into the chain with a hash value representing all previous transactions.
If a hacker modified any block, all the following blocks would become invalid because the hash count would no longer match when the algorithm checks the new block. Therefore, no transactions can be falsified.
What Does 'Mining for Coins' Mean?
Note that I referred to the verification process as mining. Miners run that network of computers. They run algorithms to log new transactions and confirm their validity.
The algorithm they use is called Hashcash. It verifies Proof of Work by calculating hash values of prior blocks and compares that to the stored hash value in the last block in the chain.
If a hacker corrupted any block of data, all the following blocks would contain incorrect hash values and fail the Proof of Work test.
In return for this work, miners receive payment in Bitcoin for their effort. That's why they are called miners—they mine for Bitcoin.
The result of this continuous mining is no one can arbitrarily modify transactions without the Hashcash algorithm catching the error.
Thanks to this technology, digital payments can be made without third party intervention because the miners verify the transactions. Once verified, the payments cannot be reversed. That eliminates fraud.
This technology is not only useful for cryptocurrency transactions. It can be used for any type of data sharing. I’ll discuss that later in this article under “Acceptance and Implementation of blockchain."
Who Invented Bitcoin and Blockchain?
Nobody really knows. A person or a group using the pseudonym Satoshi Nakomoto published a Bitcoin whitepaper describing the idea in October 2008. However, based on forensic linguistic analysis, it’s possible a former law professor, Nick Szabo, is the author of the Bitcoin whitepaper. That had been reported in 2014 by a group of forensic linguistics experts at Aston University.2
The whitepaper solved the problem with digital payment transactions without trust by assuring the integrity of the transactions.
Trust is not a problem when making payments with cash. No one can reverse the transaction. However, when making payments online, a third party needs to be involved as a trusted intermediary. That is where blockchain solved the problem.
Bitcoin was simply the first item of value to use the technology. That soon opened the door for other Cryptocurrencies to follow, such as Bitcoin Cash, Ethereum, and Litecoin. There are many, and each one has its own blockchain with somewhat different structures.
What Caused the Rise and Fall of Bitcoin?
Bitcoin reached a value close to $20,000 in 2017 and then fell to hover around $6,000 throughout 2018.
In March of 2020, Bitcoin fell to a low of $4,270, possibly due to COVID-19 uncertainties. However, by December of 2020 it bounced back and reached a new all-time high over $24,000.
To understand the reason for its volatility, a little knowledge of “Debt vs. Demand” is necessary.
Fiat currency (such as U.S. dollars) is created from debt. The actual reason is beyond the scope of this article, but if you’re interested, I’ve included a link to a YouTube video about “Money as Debt” in the references.3
The point is that the value of cryptocurrency is based on supply and demand, not from debt as with fiat currency. The supply of Bitcoin, for example, is fixed at 20 million coins. Only the demand can change. As demand increases, the value of the Bitcoin goes up.
The reason why it dropped to less than half in January of 2018, in my opinion, is because it was not considered to be a dependable currency for commerce. The verification of transactions by miners is too slow. Therefore demand has leveled off, hence the drop in value. That’s why Bitcoin Cash was developed, which I'll describe in a moment.
You might be wondering what made Bitcoin gain value again to reach an all-time high in December 2020. I think it might have something to do with the way the Fed "created" more fiat currency to pay everyone in the United States $1,200 for the Coronavirus Tax Relief.
In my opinion, people began to realize how the U.S. dollar shrinks in value as more is created. There is a fixed amount of Bitcoin in existence that will never increase, so more people began purchasing it. That's how supply and demand works as I just described a moment ago.
"Bitcoin Core" Vs. "Bitcoin Cash"
Due to its slow transaction process, Bitcoin has become an instrument to hold wealth, while Bitcoin Cash was designed to exchange value. It also provides a safe online payment system for commerce that does not require a middleman to execute the transactions, and its blockchain is designed for faster transactions.
The original Bitcoin is called Bitcoin Core for the sake of clarity. Its symbol is BTC. The symbol for the newer Bitcoin Cash is BCH. Notice the different letters in the symbol (BTC vs. BCH).
The problem with the original Bitcoin (BTC) is that its blockchain size is only 1 MB. That no longer is large enough to handle the volume. Therefore Bitcoin transactions take minutes, and even hours, to verify. As volume increased, that small size couldn’t handle the transactions in a timely manner.
The algorithms that the miners run to verify slowed down the process with a 1MB size limit. That caused transaction fees to increase, making the use of Bitcoin unsuitable for everyday commerce.
Bitcoin Cash (BCH), on the other hand, was created with a dynamic blockchain. It starts with 4MB but can increase in size as needed. That allows for faster confirmations and lower fees.
The Turbulent Hard Forks of Bitcoin Cash
Bitcoin Cash has had its heartaches. In November 2018, it was split with hard forks creating two individual blockchains. Anyone who had Bitcoin Cash had the same number of Bitcoin Cash and Bitcoin SV, where the total value was equal to what the Bitcoin Cash was worth before the fork.
Then on November 15th, 2020, another fork created individual chains for what is now called Bitcoin ABC (BCHA) and Bitcoin Cash Node (BCHN).
Not all platforms are supporting the forks. Coinbase, for example, only allows sending existing Bitcoin SV one might have to another wallet or platform. They don't support buying or selling it. The same might be true with Bitcoin Node, although at the time of my writing this addition (update), the forks do not show up in accounts.
Only the original Bitcoin SV is present. But the only way to sell it is to send it to another platform that supports it.
This latest hard fork has been the result of disagreements over the tax that miners need to pay.
Another Reason for the 2018 Crash of Bitcoin
I remember seeing Bitcoin with a value of $100 back in 2012. I wish I had bought it at that time, since it reached $19,000 in 2017, but I considered it too speculative—and I still do today.
Since it’s highest value, and from that time until late 2018, Bitcoin and other cryptocurrencies have crashed. There is a perfectly logical reason for this. The price had run up prematurely.
The value grew because of all the speculation. Investors saw the rapid growth, and they wanted to be on the bandwagon without understanding the underlying technology of the blockchain.
The design of the Bitcoin blockchain was too limited, as I discussed earlier. It couldn’t handle the high volume, which slowed down the transactions. Buying and selling Bitcoin took way too long to complete.
Using it to make commerce purchases was useless. When you buy coffee at Starbucks, you expect the transaction to be completed in seconds, not hours.
The technology needed improvement, no doubt, and the algorithm for blockchain had been redesigned to allow for future growth with other cryptocurrencies such as Bitcoin Cash and Ethereum.
Bitcoin Cash, for example, had a redesigned dynamic blockchain that can increase in size to allow for growth, as I discussed above.
Besides the underlying technology, there is another aspect of Bitcoin that is the reason for the present decline in value. That is that the market wasn’t (and still isn’t) ready for cryptocurrency. Widespread usage needs to occur to warrant such a massive increase in value.
As of 2018, there were only a handful of merchants accepting Bitcoin for payment. That needs to be widespread before people feel inclined to use it. The market for using Bitcoin in commerce didn’t grow as fast as it’s increasing value. That may have caused speculators to become worried, leading to a quick selloff.
Another problem for which I don’t see a solution is that the Bitcoin blockchain has proven to be more energy-intensive than traditional payment systems. The process of mining to verify transactions takes enormous computing power. For this reason, miners have to rent office space in towns where the cost of electricity is very low.4
Bitcoin may still have a future, but I wouldn’t speculate with purchasing any of it right now. We also don’t know which cryptocurrency will survive.
Nevertheless, Coinbase, a trusted platform for buying, selling, and holding cryptocurrency, claims that 50,000 users are opening accounts monthly.5 That means there is still a growing interest in the desire to speculate. I consider Coinbase the safest digital wallet to hold cryptocurrencies.
What Is a Digital Wallet?
A digital wallet is where one stores their cryptocurrency. I’ve researched many digital currency wallets and narrowed it down to three types:
- An online account such as Coinbase
- An app for smartphones
- Flash memory hardware wallet
The only one I felt is the most secure and honest is Coinbase. They also support the buying and selling of cryptocurrency in a safe environment.
Some digital wallets have been hacked. There are horror stories. I found Coinbase to be truly secure, with triple security. You can’t open an account without a driver’s license to prove your identity.
If you log on from an unknown computer or phone, they will email you to your known address, and you need to click the link in that email to complete the login. They also use Google's authenticator app so no one else can log into your account.
I wish all financial institutions would use all that protection.
With over 1,600 cryptocurrencies in existence, some of the less ethical ones use pump-and-dump schemes to manipulate their prices.
Coinbase is careful to accept only the most credible cryptocurrencies. As of June 2020, they only support the following:
- Bitcoin Cash
- Ethereum Classic
- Stellar Lumens
- Basic Attention Token
- US Dollars
Is Blockchain Trustworthy?
I explained how useful it is to eliminate the need for third-party intervention to guarantee the transaction's integrity.
If a transaction on the chain is modified, then the hash counts cause all the future transactions on the chain to be invalid. That makes it tamper-proof.
There is one additional thing to consider. The data!
It still is a requirement that the person or agency entering the data is trustworthy. The only thing blockchain does is make the transactions static so they cannot be changed. Therefore, if you make a purchase and pay for it, and your payment is recorded on a blockchain, no one can come along later and insist that you never paid.
It has been well-publicized that several Bitcoin exchanges have already been hacked. That is due to a security breach where the agency was careless with protecting their email accounts and allowed passwords to be stolen.
That will always happen, in my opinion, until the day comes when personnel exercise more due diligence with their systems.
As for the blockchain, no one tampered with the data. That was secure. A blockchain cannot be hacked. Only an institution can be hacked, and the attempt gets recorded in the blockchain.
For that matter, the blockchain even shows where in the sequence the hacking took place, and the amount stolen. However, due to the anonymous nature of the technology, the hacker could not be located. That is why it’s so essential to safeguard computer logon and password information.
So, there are three things to consider with regard to the trust issue:
- You still need to trust the vendor you’re dealing with to enter the correct information onto the blockchain.
- You need to keep your passwords secure.
- Company personnel need to be trained to avoid clicking on unknown links in emails that provide hackers an open door to install malware. That is the same if we’re talking about blockchain or any other computer data security.
Are Cryptocurrency and Blockchain Just Hype?
The requirement for long-term value growth is with having a marketplace that quickly adapts to the technology and uses the product in commerce. Short of that, it can quickly fade away as a failed experiment.
The acceptance of the technology has been slow, at least for use of cryptocurrency for payment systems. I don’t know there is a future for it since transactions are permanent and cannot be changed. That also means if one needs to dispute a purchase, for example, they can’t.
When you pay with a credit card, and the merchant fails to give you what you paid for, you can dispute the charges, and the bank will get involved to decide who the victim is. The bank will then reverse the charges if necessary.
Blockchain simply gives both parties the ability to trust the transaction, and not the actual business behind it. In my opinion, this is a significant flaw in the technology. It does not seem to have a favorable solution—at least not yet.
I do see that it is useful in other industries not related to payment systems, especially for data sharing.
How Blockchain Will Transform Business With Added Security
I don’t know what the future holds for cryptocurrencies, but I see a developing trend towards the adoption of blockchain in various fields.
In the years to come, blockchain could be a powerful foundation for protection and verification of data and transactions in the healthcare, transportation, publishing, accounting, and law enforcement industries.
The following are several examples that I found.
Blockchain in Healthcare
Patients have a problem with sharing health records among their various doctors. Clinics, pharmacies, and hospitals all use different data exchanges that are not compatible with one another. Patient records are sometimes entered incorrectly, and patients have no way to verify their accuracy.
A single blockchain ledger could solve that problem, avoiding the need for doctors to send information back and forth, and giving them immediate access to updated records and giving them the ability to provide more coordinated care.6
A Blockchain-Driven effort to handle healthcare provider data has been launched by Humana, MultiPlan, Optum, Quest Diagnostics and United Healthcare.7
Blockchain Templates Available from Amazon Web Services
Amazon’s cloud computing division, known as Amazon Web Services (AWS), provides templates for blockchain implementation. Their new division, "AWS Blockchain Templates" was launched in April, 2018.8
Software developers will be able to use these templates to create projects based on the blockchain technology, specifically for cryptocurrencies such as Bitcoin.
Amazon and Starbucks Incorporate Blockchain
There is a growing trend for companies to use blockchain in a productive way to increase efficiency with business applications.
Many corporate enterprises are collaborating on that effort. Among them are Amazon and Starbucks, who are finding ways to lower prices for their consumers by using blockchain to streamline the supply chain and reduce transactions fees.9
IBM Blockchain-Powered Media Transactions Tracker
In partnership with Mediaocean, a software supplier, IBM has created a Transactions Tracker using blockchain technology.
That will help avoid fraud in the media buying industry. Presently some middlemen receive some of the funds paid by advertisers. A blockchain will capture where the money is going and allow payments to go to the appropriate publishers responsible for ad placement.10
Penske Logistics Blockchain in Transport Alliance
The transportation industry covers a wide range of commerce, such as with the food and beverage supply chain.
Penske, a transport company providing truck leasing, rentals, and logistics, recognizes the benefits to their customers that are afforded by the use of blockchain.
Early in 2018, they became members of the Blockchain in Transport Alliance (BiTA) to learn about solutions for better transport efficiency.11
Blockchain Can Protect Authors from Plagiarism
Maven, a writer’s platform, has partnered with Po.et, a blockchain technology company, to give content creators protection of their articles.
Po.et blockchain provides a shared ledger of metadata, timestamp, and ownership information of creative content so that search engines will know who published first in case a duplicate content is found.12
Law Enforcement and Public Safety
Police Stations from various neighborhoods can have their data shared. Blockchain can provide a secure system allowing sensitive data to be accessible only by authorized personnel. The log of access dates, and by whom, would become a permanent record within the blockchain.
Blockchain for Public Records
Blockchain can also be used for sharing and verifying public records. The following are several examples:
- Car Titles
- Property Titles
- Government Benefits
- Death Certificates
- Marriage Certificates
- Birth Certificates
Blockchain Can Help Track COVID-19 Vaccination
In the same way that blockchain assures financial transaction authentication, one can use it to track and confirm drug distribution. That is especially useful for tracing the administration of the COVID-19 vaccine. It provides the ability to know who was immunized.
IBM has been developing a blockchain for this purpose, and it enables organizations to verify vaccination records of individuals entering their premises.13
Imagine Presidential Elections Controlled By Blockchain
We could avoid deception in the election process if voters entered ballots through a blockchain.
Election officials could authenticate all the ballots with no chance of interference from individuals who want to change the actual votes. That fraudulent activity wouldn’t be possible anymore, and the entire process would become trustworthy.
Government Regulation of Tax on Cryptocurrency
Cryptocurrency is becoming a standard acceptance among many organizations such as PayPal and Coinbase. Over 100 banks are testing instant payments using cryptocurrency. And banks in China, Sweden, and the UK have indicated similar interests.14
What all that means is that people will end up having many tiny transactions that might be difficult to keep track of for tax purposes. But taxes are a definite reality.
In the United States, the IRS has issued guidance about the obligations for paying taxes on crypto transactions. They consider it as property, not currency. Therefore, any gain or loss needs to be reported.15
The 1040 tax form for 2020 includes a question on the first page, asking if one had any cryptocurrency transactions in the year. It’s evident that the IRS wants to be sure taxpayers are aware of their tax obligations with cryptocurrency.
I wonder how complicated that will become since banks and other institutions are beginning to accept crypto to make purchases. The way I see it, every transaction, no matter how small, would result in a taxable event since a gain or a loss would have been recognized when selling the coins to make a purchase.
Imagine that you need to report the tax due when you buy a cup of coffee because you sold your crypto to buy the coffee. That could very likely become a nightmare for taxpayers, in my opinion. But it’s true. The IRS makes it clear that all sales and conversions of crypto is reportable.15
Tax on Free Cryptocurrency
Some companies started offering small gifts of cryptocurrencies to customers for their loyalty or for completing surveys. According to IRS guidelines, you need to report these payments as ordinary income on Form 1040 Schedule 1, “Additional Income and Adjustments to Income.” You report the amount based on the value when received.
Later, if you sell those coins or any coins you purchased, according to the IRS you’ll need to report the gain or loss from the base value when received on Form 8949, “Sales and Other Dispositions of Capital Assets,” and summarized on Form 1040 Schedule D. That is the same when you sell any capital asset.
I find it interesting that blockchain started as a tool for creating digital currency, and progressed to something much more powerful.
As multiple industries are discovering various uses for the technology, I see this as a growing field offering new developments in all areas that require the integrity of transactions as well as safe and secure data sharing.
Cryptocurrency, on the other hand, has its weaknesses with slow transactions due to the delay with blockchain verification. And with the complex nature of tracking tax consequences on every transaction, I don’t see it becoming a useful means for commerce.
However, it could be a valuable asset for holding wealth. That is especially possible with Bitcoin because it has a finite number in existence and will never increase in quantity, similar to gold. Therefore supply and demand could cause it to grow in value continually.
That is unlike fiat currency that governments can continue to print when needed, causing its devaluation and inflation.
- List of Cryptocurrencies. (Aug 19, 2018). WikiPedia
- Nermin Hajdarbegovic. (Apr 16, 2014). Linguistic Researchers Name Nick Szabo as Author of Bitcoin Whitepaper. Coindesk.com
- Money as Debt. (May 9, 2012). YouTube Video
- Tom Sowa. (May 10, 2014). Northwest’s cheap power drawing bitcoin miners. The Seattle Times
- Olga Kharif. (August 14, 2018), Coinbase Says It Was Signing Up 50,000 Users a Day. Bloomberg
- Kerrie Holley. (Sept 10, 2018). Health Care Conversation. Optum.
- Humana, MultiPlan, Optum, Quest Diagnostics and UnitedHealthcare Launch Blockchain-Driven Effort to Tackle Care Provider Data Issues, (April 2, 2018). Optum.com.
- Evelyn Cheng. (April 20, 2018). Amazon Web Services launches 'blockchain templates. cnbc.com
- David Drake. (June 22, 2018). Will Blockchain Technology Boost Collaboration Among Corporates? Iris.xyz
- Helen Partz. (June 19, 2018). IBM Launches Blockchain-Powered Media Transactions Tracker to Prevent Advertising Fraud. Cointelegraph.
- Chris Abruzzo. (May 16, 2018). "Using Blockchain Technology to Improve Efficiency." Penske Blog
- Gretchen Bakamis. (Jan 31, 2018). "Maven Partners with Blockchain-Based Media Platform Po.et to Empower Independent Publishers." Businesswire
- Watson Health. (December 18, 2020). “IBM and Salesforce join forces to help deliver verifiable vaccine and health passes” - ibm.com
- Zubin Mogul, Bernhard Kronfellner, Michael Buser, Chi Lai, Kenneth Wee, Will Rhode, Kaj Burchardi, Anna Golebiowska, Pratin Vallabhaneni, John Wagner, and Alexander Abedine. (November 5, 2020). “How Banks Can Succeed with Cryptocurrency” - Boston Consulting Group
- "Frequently Asked Questions on Virtual Currency Transactions.” (October 8, 2020) - IRS.gov
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2018 Glenn Stok
Glenn Stok (author) from Long Island, NY on May 20, 2019:
Thanks James - I bet your daughter-in-law could answer any questions you might have. The miners are the ones responsible for verifying transactions. Technically no one can fool the system, although people who aren’t careful allow hackers to get into their wallet (account). But that’s true with any financial institution.
James A Watkins from Chicago on May 20, 2019:
Thank you for this needful article. My daughter-in-law worked for a few years at a bit mining company in Wenatchee, Washington. That piqued my interest but I didn't really understand it until I read George Gilder's book, Life After Google, recently. Fascinating stuff. Excellent Hub.
Glenn Stok (author) from Long Island, NY on October 01, 2018:
Liz, You’re not alone. Many people don’t know the details behind it, which is one reason I believe bitcoin got pumped up so much. Speculators bought into it without researching bitcoin's blockchain software.
Liz Westwood from UK on October 01, 2018:
This article was overdue for me. For a while now I have heard the terms but not been familiar with the detail behind it. Thanks for a great explanation.
Glenn Stok (author) from Long Island, NY on September 28, 2018:
I think you’re right Heidi, Blockchain is already involved with many new developments, as the examples I listed at the end of the article. I’m not so sure about cryptocurrencies though. That’s another matter.
Heidi Thorne from Chicago Area on September 28, 2018:
I've taken a couple of online courses on blockchain and crypto. Not because I'm hyped up to be a crypto millionaire (billionaire?) or anything like that. But because I want to understand how it will impact our world.
Great review of the fundamentals. But as you and I both know, this is such as profound topic that it could take volumes. :) Thank you for sharing the basics with everyone. I think, in time, this will impact our entire economic and currency system more than we can imagine.
Have a great weekend!
Glenn Stok (author) from Long Island, NY on September 28, 2018:
Thanks Pamela, This sure did take a lot of time to get done, with all the research involved. Thanks for the feedback on how well I did with making it understandable.
Pamela Oglesby from Sunny Florida on September 28, 2018:
I must admit I have been very ignorant concerning bitcoins or blockchain. Your article was very informative, and I feel I have some understanding now.
I appreciate the work you put into writing an article about the complications and pitfalls of bitcoins and blockchains. The future of blockchains seems great according the list you included. I think you explained everything in a very understandable fashion.