In 2009, Bitcoin was launched by an entity known as Satoshi Nakamoto. Through this, the world came to know cryptocurrency, a form of payment that can be exchanged online for goods and services. Over 18 million bitcoins are currently in circulation, with the total market cap updating frequently. To prevent both inflation and manipulation, only 21 billion bitcoins exist.
Many companies have issued their currencies, often called tokens, and these can be traded specifically for the goods or services that the company provides. Similar to arcade tokens or casino chips, one must exchange real currency for cryptocurrency to access the goods or services. Cryptocurrency, however, is a digital or virtual currency that is secured by cryptography. The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network, which makes it nearly impossible to counterfeit or double-spend.
Cryptocurrencies are systems that allow for secure payments online which are denominated in terms of tokens represented by ledger entries internal to the system. The term ‘crypto’ pertains to the various encryption algorithms and cryptographic techniques that safeguard these entries. These include elliptical curve encryption, public-private key pairs, and hashing functions.
Cryptocurrencies work using blockchain, which is a decentralized technology spread across many computers that manages and records transactions and improve security. Bitcoin, for example, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities arrest and prosecute criminals. However, privacy-oriented coins (which are far more difficult to trace) do exist, such as Dash, Monero, or ZCash.
Types of Cryptocurrency
Bitcoin, the first blockchain-based cryptocurrency, remains the most popular and most valuable. It represents approximately 46.5% of the total aggregate value of all cryptocurrencies in existence (over $1.8 trillion). At present, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these new currencies were built from scratch, while others are clones or forks of Bitcoin. Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as altcoins, are Ethereum, Cardano, EOS, Litecoin, Peercoin, and Namecoin.
Cryptocurrency blockchains are highly secure, but other aspects of a cryptocurrency ecosystem (such as exchanges and wallets) are not immune to the threat of hacking. Various online exchanges have been the subject of hacking and theft, with millions of dollars worth of coins being stolen in certain instances.
Disadvantages Associated with Cryptocurrency
Because cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive. This is particularly true if a backup copy of the private key does not exist. Additionally, there is no central authority, government, or corporation that has access to your funds or your personal information.
This semi-anonymous nature of cryptocurrency transactions likewise makes them well-suited for a host of illegal activities, such as tax evasion or money laundering. Cryptocurrency advocates, however, highly value their anonymity.
While cryptocurrencies are not rooted in material goods, some research identified that the cost of producing a Bitcoin (primarily a very large amount of energy) is directly related to its market price.
Advantages Associated with Cryptocurrency
Despite the above concerns, many observers see potential advantages in cryptocurrencies. Among these is the possibility of preserving value against inflation, facilitating easier exchange, and existing outside the influence of central banks and governments.
Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.
Wallets and Estate Planning
In modern cryptocurrency systems, your wallet or account address has a public key and a private key (known only to you) used to sign transactions. Before investing, one must first choose from the digital wallets that may be used to buy, sell, store, and invest in cryptocurrency. The key difference between the types of cryptocurrency wallets is whether or not they are available online, and the choice will depend on your accessibility and security needs.
Cold wallets are a better choice for those interested in better security. These wallets are designed for cold storage, meaning that they are offline. Hot wallets, on the other hand, must be connected to the internet. While they are more user-friendly and easier to access, they are less secure because they are more susceptible to fraud and other types of cyberattacks.
If you want your wallets to be part of your estate planning documents, it is highly recommended that you create a cryptocurrency access guide for your loved ones. Simply leaving cryptocurrency in a will can be a little tricky when compared to traditional types of assets. Unlike traditional money, cryptocurrency has no physical manifestation. For security reasons, cryptocurrencies are protected by private keys, which are typically 64 characters in length. Your heirs will need access to these, but you also would not want to compromise your security by sharing your private key directly.
Cryptocurrency can be included in your estate plan along with other assets such as money, property, and personal belongings, but gifting these requires extra steps. This is where St. George Utah estate planning lawyers can help.
Including Cryptocurrency in your Estate Plan
If you have any cryptocurrency that you wish to bequeath to a loved one, you need to include a cryptocurrency provision in your estate plan. Provide the legal right and necessary instructions so that your cryptocurrency and private key information will be transferred into the ownership of your beneficiaries. It is a powerful tool to pass on your private key information upon your death, without compromising your security and privacy today.
While creating a cryptocurrency access guide, specify which cryptocurrencies and the number of shares you own. In addition, leave the information on how to access your private key and the digital wallet that holds your cryptocurrency. Include information for locating your online digital wallet accounts and usernames and instructions on how to obtain the private key itself.
Others might choose to use a service, such as a cryptocurrency bank or multi-signature wallet that allows loved ones to access an account in the case of a death. Some might choose to write down the key on a piece of paper, and store it in a bank vault or safe deposit box. Either way, an estate planning professional can supervise you as you work on these things.
Seeking Legal Help and Avoiding Mistakes
Cryptocurrency is a digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities. While exchange rate volatility and vulnerabilities of the underlying infrastructure have been criticized, they are preferred given their portability, divisibility, inflation resistance, and transparency.
Including any cryptocurrency you own into your estate plans, such as a will or trust, is often the most ideal way to ensure your beneficiaries will have access to your digital assets. Seek legal advice from a trusted estate planning law firm. Consult with our St. George Utah estate planning attorney at Boyack Christiansen Legal Solutions today.
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