With the world of finance continually changing and evolving, one digital asset class with the power to revolutionize things has emerged: cryptocurrency. Powered as it is by blockchain technology, this digital form of currency that enables online transactions to be carried out securely, offers a range of unique investment opportunities. Having great potential to be a major disruptor within financial systems, cryptocurrency continues to try and shape the future of finances and redefine how we engage with assets that are digital.

With all of this in mind, it’s important that accountants understand cryptocurrency, and to help you get to grips with it, here is a basic guide:

Types of popular cryptocurrency

Operating in the virtual realm alone, and taking advantage of advanced techniques in cryptography, cryptocurrency enables complete security over transactions, along with complete transparency, and below are some popular types:

  • Bitcoin (BTC)

First launched in 2009 and invented by an anonymous person (or persons) using the name Satoshi Nakamoto, this is the first and most valuable form of cryptocurrency. Responsible for introducing blockchain as a concept, this widely used cryptocurrency remains popular all around the world.

  • Ethereum (ETH)

Decentralized and featuring open-source blockchain with smart contract functionality, Ethereum was developed in 2015, and its native cryptocurrency, Ether, is, by market capitalization, the second largest in the world. While it serves as a form of digital currency, it is also a platform for the constructing of decentralized applications, or DApps.

  • Ripple (XRP)

A cryptocurrency and a digital payment protocol, Ripple was formed in 2012, aiming to provide quick and low-cost money transfers internationally. To facilitate money transfers between differing fiat currencies in the Ripple network, XRP is used.

  • Litecoin (LTC)

Drawing its inspiration from Bitcoin, Charlie Lee created Litecoin in 2011, boasting speedy confirmation times of transactions, and a hashing algorithm that differs from others.

  • Cardano (ADA)

This blockchain platform for smart contracts can be compared to Ethereum, with its development commencing in 2015, and its launch taking place in 2017 by the co-founder of Ethereum, Charles Hoskinson. The ADA token of Cardano is, by market cap, one of the biggest cryptocurrencies.

What makes cryptocurrencies so popular?

The fact that cryptocurrencies offer decentralization and anonymity, and have a huge potential for delivering high returns, has made them popular components of a financial ecosystem that is both more inclusive, and more accessible.

Accounting and cryptocurrencies

While not all accountants will deal with them, there is a growing demand for professionals within the tax industry to be well-versed in the taxation of cryptocurrency, hence having an understanding of them, could prove beneficial for the future.

With the potential to muddy the waters of the accounting process as a result of their unique characteristics, cryptocurrency transactions can cause balance sheet fluctuations that necessitate meticulous analysis and monitoring. Anonymous transactions also raise significant challenges when it comes to identifying those parties involved, and making sure they’re fully compliant with all regulatory requirements.

With the nature of digital currencies evolving continually, accountants must ensure that they keep themselves up-to-date with all of the latest tax regulations that may affect cryptocurrencies, which can differ greatly between jurisdictions.

What can accountants do to enhance their cryptocurrency knowledge?

There are a number of ways in which accountants can enhance their knowledge of cryptocurrencies, some of which are listed below:

  • Join a professional community

Professional communities and forums dedicated to the world of the cryptocurrency, can be great sources of information, and there are plenty of websites and webinars hosted by experts within the field that accountants can join and learn from.

  • Take an online course

Using platforms such as Udemy, Khan Academy or Coursera, accountants can take any number of online courses to learn more about cryptocurrencies and its fundamental concepts, blockchain technology, and what implications these have on accounting and taxation.

  • Read research papers

By reading papers written by researchers on the subject, and by attending industry events and seminars, accountants can gain a deeper understanding of trends within cryptocurrency and any changes to its regulations.

  • Get hands-on experience

By creating a digital wallet, carrying out small transactions and tracking them, accountants can familiarize themselves with the technology and get a better understanding of how the transactions work.

As cryptocurrencies continue to evolve and to change the way in which digital transactions are carried out, and more and more people use them, accountants will face a growing need not just to familiarize themselves with digital currencies, but to have a deeper understanding of them and their tax implications.