Cryptocurrencies today: how they became a legal instrument for investment

The surge in the popularity of cryptocurrencies in recent years ($10,000 per bitcoin in 2019, $45,000 in April 2021) is due to the fact that participants in this market are trying to make the instrument more transparent and understandable to consumers, to tie it to some real things.

  • Cryptocurrency can be used directly to buy goods and services in the real world: real estate, cars (not only Tesla), airplane tickets, software. There is a famous anecdote about how one programmer exchanged 10,000 BTC for two pizzas in 2010. They also try to popularize the new currencies by selling merch (T-shirts with the logo) for them.
  • Introduced NFT – a non-exchangeable, unique token (first appeared on the Etherium blockchain) to which any tangible or digital object can be tied: a picture, song, video, animation, meme, skins in a game. It is a fallacy to think that NFT guarantees any copyright, transfers it or protects the object from destruction and copying, even though hundreds of millions of dollars have already been earned on it.
  • Companies whose business is connected with crypto enter the IPO: in April 2021, the cryptocurrency exchange Coinbase appeared on NASDAQ, its capitalization exceeded 100 billion dollars on the first day of trading. Kraken and Gemini exchanges are going to follow the same path. They are attracting hundreds of millions of dollars in venture capital investments, like the BlockFi cryptocurrency startup platform or PayPal partner Paxos. A special class of companies has even emerged, DeFi, decentralized financial companies that run blockchain-based applications and protocols as an alternative to banks and brokers.
  • In order to combat the main problem of cryptocurrencies – high volatility – stabelcoins (stablecoins) linked to traditional currencies were invented. For investors, they are a convenient trading pair or a start-up investment option, as well as a profit-taking tool (it is not necessary to withdraw profit in case of a successful transaction into regular money). For example, each Tether token is backed by $1. There are such currencies for the euro and the yen.

Cryptocurrencies even have their own anti-inflationary tool – the burning or withdrawal of some tokens from circulation to stabilize supply and demand, that is, the cryptocurrency rate. The procedure is practiced by Binance Coin, Ripple, Tron and many obscure currencies

  • Finally, cryptocurrency trading platforms are legalized through providing state authorities with data of their users, identification of e-wallet owners. The original idea of anonymity recedes into the background if we recognize cryptocurrency as a means of payment for legal goods and an instrument of investment.

State policy on cryptocurrencies

States, represented by regulators, seem ready to take back control of cryptocurrencies, which were created to avoid it. Governments do not regulate the issue of gold either, but they fully control its circulation.

In early September 2021, the U.S. government announced that it will soon publish new tax rules for transactions with digital currencies. Citizens have to pay tax on profits in any case, they will just write clear norms for cryptocurrency, and cryptocurrency brokers, apparently, will be forced to report any transactions to the tax authorities.
Taxation is the government’s main tool for recognizing cryptocurrency as a legitimate means of trade. It can be implemented only by eliminating anonymity. Large cryptocurrency exchanges are ready to meet the challenge. They are also interested in legalization and attracting mass investors.

Another way to introduce the state into the digital money system is to create national cryptocurrencies. For example, in China, blockchain is officially recognized as a priority technology for development. Bitcoin has actually been abolished (with up to 50% of its mining capacity in China), and the digital yuan is gradually being introduced: from August 2021, it can be used to top up transport cards and pay for metro fares.

Dozens of countries have either launched their own digital currencies, are testing them, or have announced initiatives to introduce them. As the head of the U.S. Securities and Exchange Commission said, financial innovation cannot thrive outside of public policy. In fact, of the three key ideas in blockchain, only decentralization remains.
In September 2021, El Salvador became the first country in the world to recognize bitcoin as legal tender. It must be accepted as payment by all merchants who have access to the technology. This even led to protests. BTC first rose and then collapsed by 10%, probably due to technical glitches in the Chivo app.
Perhaps the main achievement of cryptocurrencies over the past 10 years is that they have firmly occupied their information niche. News related to them, in one way or another, appears regularly in popular non-financial media. And this is the most powerful tool of their legalization in the mass consciousness.

How to invest in cryptocurrencies, how safe it is, how and where to buy them, can you predict the growth and decline – read in our next article.

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