What is blockchain?
If you haven’t heard about blockchain and cryptocurrency by now, you’ve likely been living under a rock. The outpour of information quickly flooded media outlets after cryptocurrencies reached record heights in December 2017. An anonymous person, known by the pseudonym Satoshi Nakamoto, created software to enable his vision of a digital currency, Bitcoin. Researchers were quick to argue the value of Bitcoin and all cryptocurrency was in the underlying technology called blockchain. In very simple terms, blockchain technology is an open access shared ledger that keeps a record of all transactions between parties. New information is added in blocks linked to the previous blocks, resulting in a chain of blocks being built. By design, the ledger is unable to be modified, creating a secure P2P network.
How to get started with cryptocurrency?
A user that wishes to become a part of the Bitcoin network can download the open source software, Bitcoin Core. There are a few software programs available to connect to the Bitcoin network, but Bitcoin Core is the updated original that was created by Satoshi Nakamoto. After the software has been downloaded and installed, which could take several hours if not days depending on your internet speed and hardware, the blockchain which contains every transaction ever made is available to the user.
A computer that has the software installed is called a full-node. A full-node helps the network verify transactions. The more full-nodes available on the network, the more secure the network and the quicker transactions are processed. Today the Bitcoin network has over 6000 full-nodes. The authenticity of the transactions are protected by encryption and the use of private and public keys corresponding to the sending addresses, which are generated and assigned to new wallets.
Using wallets and exchanges, users can exchange US dollars for cryptocurrency and send and receive the currency. Although a user’s transactions are recorded publicly, the user’s personal information is not included in the ledger. There are many wallets available to anyone who wishes to use cryptocurrency as a value exchange, and many wallets do not require the user to become a full-node. Arguably, the most popular wallet available online is Coinbase. Coinbase is an exchange and wallet that offers the exchange of 6 different cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, and 0x.
There are over 6 million different wallets now available online, many of which are easy to download and do not require the user to connect to the blockchain network (aka becoming a full-node) creating an easy entry way for anyone who wishes to exchange cryptocurrencies. Also, many businesses now accept major cryptocurrencies like Bitcoin and many governments are recognizing the currency as a legitimate asset. According to a report by the World Economic Forum, 10% of the world’s GDP will be recorded on blockchain related technology by 2025.
What does this mean to an accountant?
Accounting professionals who wish to broaden their expertise in cryptocurrency and make themselves available to the growing crypto-market need to have a basic understanding of the following:
· Overall familiarity with cryptocurrency wallets
· Sending and receiving transactions in wallets
· Downloading historical transactions from wallets
· Converting the value of cryptocurrencies into US dollars
· Recording digital currencies into accounting software
· How the currency should be recorded for tax purposes
Although accounting software developers like Intuit pledge to always bridge the divide between accountant and technologist, it is unlikely that Intuit and others like Blox, for example, will be able to create seamless integrations with the 1500+ cryptocurrencies now available. The new accountant will need to rely on their own understanding to fulfill their responsibility. For accountants already recording crypto transactions, they’ve had to learn the UI of the wallet (potentially many wallets) and how to record gains/losses, sales, and payments within their accounting software.
*Join me in my next posts to learn about how a wallet works but most importantly how to use a wallet, the difference between an exchange and a wallet, the different ways revenue will be generated using cryptocurrencies, and for resources on how to record transactions in your accounting software.*