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What To Know About Cryptocurrency
What is cryptocurrency?
Cryptocurrency is a type of digital currency that generally only exists electronically. There is no physical coin or bill unless you use a service that allows you to cash in cryptocurrency for a physical token. You usually exchange cryptocurrency with someone online, with your phone or computer, without using an intermediary like a bank. Bitcoin and Ether are well-known cryptocurrencies, but there are many different cryptocurrency brands, and new ones are continuously being created.
How do people use cryptocurrency?
People use cryptocurrency for quick payments, to avoid transaction fees that regular banks charge, or because it offers some anonymity. Others hold cryptocurrency as an investment, hoping the value goes up.
How do you get cryptocurrency?
You can buy cryptocurrency through an online exchange platform. Some people earn cryptocurrency through a complex process called “mining,” which requires advanced computer equipment to solve highly complicated math puzzles.
Where and how do you store cryptocurrency?
Cryptocurrency is stored in a digital wallet, which can be online, on your computer, or on an external hard drive. But if something unexpected happens — your online exchange platform goes out of business, you send cryptocurrency to the wrong person, you lose the password to your digital wallet, or your digital wallet is stolen or compromised — you’re likely to find that no one can step in to help you recover your funds. And, because you typically transfer cryptocurrency directly without an intermediary like a bank, there is often no one to turn to if you encounter a problem.
How is cryptocurrency different from U.S. Dollars?
There are important differences between cryptocurrency and traditional currency.
- Cryptocurrency accounts are not backed by a government. Cryptocurrency accounts are not insured by a government like U.S. dollars deposited into a bank account. If you store cryptocurrency with a third-party company, and the company goes out of business or is hacked, the government has no obligation to step in and help get your money back.
- Cryptocurrency values change constantly. The value of a cryptocurrency can vary rapidly, even changing by the hour. It depends on many factors, including supply and demand. An investment that’s worth thousands of dollars today might be worth only hundreds tomorrow. And, if the value goes down, there’s no guarantee it will go up again.
Paying With Cryptocurrency
If you’re thinking about paying with cryptocurrency, know that it’s different from paying with a credit card or other traditional payment methods.
- Cryptocurrency payments do not come with legal protections. Credit cards and debit cards have legal protections if something goes wrong. For example, if you need to dispute a purchase, your credit card company has a process to help you get your money back. Cryptocurrencies typically do not.
- Cryptocurrency payments typically are not reversible. Once you pay with cryptocurrency, you can usually only get your money back if the person you paid sends it back. Before you buy something with cryptocurrency, know the seller’s reputation, where the seller is located, and how to contact someone if there is a problem. Confirm these details by doing some research before you pay.
- Some information about your transactions will likely be public. People talk about cryptocurrency transactions as anonymous. But the truth is not that simple. Some cryptocurrencies record some transaction details on a public ledger, called a “blockchain.” That’s a public list of every cryptocurrency transaction — both the payment and receipt sides. Depending on the cryptocurrency, the information added to the blockchain can include details like the transaction amount and the sender’s and recipient’s wallet addresses. A wallet address is a long string of numbers and letters linked to your digital wallet. Even though you can use a fake name to register your digital wallet, it’s possible to use transaction and wallet information to identify the people involved in a specific transaction. And when you buy something from a seller who collects other information about you, like a shipping address, that information can be used to identify you later on.
How To Avoid Cryptocurrency Scams
Scammers are always finding new ways to steal your money using cryptocurrency. One sure sign of a scam is anyone who says you have to pay by cryptocurrency. In fact, anyone who tells you to pay by wire transfer, gift card, or cryptocurrency is a scammer. Of course, if you pay, there’s almost no way to get that money back. Which is what the scammers are counting on. Here are some cryptocurrency scams to watch out for.
Investment and business opportunity scams
- Some companies promise that you can earn lots of money in a short time and achieve financial freedom.
- Some scammers tell you to pay in cryptocurrency for the right to recruit others into a program. If you do, they say, you’ll get recruitment rewards paid in cryptocurrency. The more cryptocurrency you pay, the more money they promise you’ll make. But these are all fake promises, and false guarantees.
- Some scammers start with unsolicited offers from supposed “investment managers.” These scammers say they can help you grow your money if you give them the cryptocurrency you’ve bought. But once you log in to the “investment account” they opened, you’ll find that you can’t withdraw your money unless you pay fees.
- Some scammers send unsolicited job offers to help recruit cryptocurrency investors, sell cryptocurrency, mine cryptocurrency, or help with converting cash to bitcoin.
- Some scammers list scam jobs on job websites. They’ll promise you a job (for a fee), but end up taking your money or personal information.
Look for claims like these to help you spot the companies and people to avoid:
- Scammers guarantee that you’ll make money. If they promise you’ll make a profit, that’s a scam. Even if there’s a celebrity endorsement or testimonials. (Those are easily faked.)
- Scammers promise big payouts with guaranteed returns. Nobody can guarantee a set return, say, double your money. Much less in a short time.
- Scammers promise free money. They’ll promise it in cash or cryptocurrency, but free money promises are always fake.
- Scammers make big claims without details or explanations. Smart business people want to understand how their investment works, and where their money is going. And good investment advisors want to share that information.
Before you invest, check it out. Research online for the name of the company and the cryptocurrency name, plus words like “review,” “scam,” or “complaint.” See what others are saying. And read more about other common investment scams.
Blackmail emails
Scammers will often send emails that say they have embarrassing or compromising photos, videos, or personal information about you. Then, they threaten to make it public unless you pay them in cryptocurrency. Don’t do it. This is blackmail and a criminal extortion attempt. Report it to the FBI immediately.
Social media scams
If you read a tweet, text, email, or get a message on social media that tells you to send cryptocurrency, it’s a scam. That’s true even if the message came from someone you know, or was posted by a celebrity you follow. Their social media accounts might have been hacked. Report the scam immediately to the social media platform, and then tell the FTC at ReportFraud.ftc.gov.
How To Report Cryptocurrency Scams
Report fraud and other suspicious activity involving cryptocurrency to
- the FTC at ReportFraud.ftc.gov
- the Commodity Futures Trading Commission (CFTC) at CFTC.gov/complaint
- the U.S. Securities and Exchange Commission (SEC) at sec.gov/tcr
- the cryptocurrency exchange company you used to send the money
The previous article was an introduction about the two basic decisions that corporate finance helps a corporation in making. Prima-facie, these two decisions may look pretty simple. After all everyone raises money in their daily lives and puts it to productive use. Simple accounting can tell us whether or not we should make those financing and investing decisions. So, why is there a need for a complicated subject called corporate finance to make these decisions? Well, it turns out there is a need? The need arises because of this concept of nominal and real value of money. This article will explain why corporate finance is required:
The Concept of Inflation
We are all intuitively aware of the concept of inflation. We know that money loses its value every year. The same amount of money will purchase less and less every year. Let’s say that $100 is required to purchase a certain commodity of goods today. So if there is an inflation of 10%, the same goods will be available for a $110 next year.
Introduction to Nominal Value of Money
So, if we made an investment that was yielding 9% return this year, we would have a total of $109 next year from the $100 we had invested. In accounting terms we would have a profit of $9. This is because we are only considering the nominal values. Nominal values do not consider the effect of inflation, opportunity cost of capital and such other forces which cause the value of money to decrease in a given time period.
The Problem with Nominal Values to Measure a Firm’s Performance:
Nominal values present a distorted image of the firm’s performance to its shareholders and this is to say the least. Consider the case we discussed above. Here, the firm has lost 1% purchasing power. This means they were better off consuming the $100 in year 1 and could have purchased more goods with it rather than investing it and consuming $109 a year later. Thus, if nominal values are considered, firms will end up eroding their capital by investing their money in projects that offer a rate of return that is below the firm’s cost of capital.
Introduction to Real Value of Money
To offset this problem, specialists in corporate finance have come up with the concept of real value of money. The real value of money takes into account inflation, opportunity cost of capital and such other forces. Thus, firms that base their calculations on these inflation adjusted values make better financial decisions as compared to those that do not. The calculation for both real as well as nominal values is simple and can be done with the help of the following formula:
Real Value = Nominal Value / (1 + (i / 100))
i = The prevailing inflation rate in the market
Subjectivity in Real Value of Money:
It must be understood that the real and nominal values of money are subjective. This is because, they are determined using the inflation rate. There is no single measure of inflation. The government itself produces multiple estimates of inflation. Also, for the purpose of the company’s calculation, these measures may not be good enough. So the company may create its own inflation index depending on which the real values are calculated. Thus, there is widespread subjectivity in this calculation. Different companies use different rates to convert nominal values to real values.
The biggest take-away from the concept of nominal and real values is that money in one time period is not directly comparable to money in another time period. It is for this reason we have to calculate present values, future values and the like. These calculations form the backbone of corporate finance.
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