Top ten questions on crypto

Wondering where to start? We know the ever-expanding world of cryptocurrency can seem impossible to navigate for many investors. Fidelity’s Meghan Chen and Vivian Hsu provide their answers to commonly asked questions to help guide you on your way.

1: How many cryptocurrencies are there? 

There are currently thousands of cryptocurrencies in existence. Many of these have only a very small following, while some, like bitcoin and ether,¹ have a large number of users and investors.

2: Who created Bitcoin? And when was it launched?

Bitcoin was first described in a white paper released in 2008 and published under the name “Satoshi Nakamoto.” The protocol underlying Bitcoin was released in 2009 as open source software². The Bitcoin network is a worldwide network of computers that run Bitcoin software.

3: How would you explain Bitcoin and blockchain to someone who is hearing about them for the first time?

Bitcoin is a digital asset that can be transferred among participants on the Bitcoin network on a peer-to-peer basis. The Bitcoin blockchain is a ledger of bitcoin transactions that takes the form of a chain of blocks. Each block contains a collection of bitcoin transactions. Copies of the Bitcoin blockchain exist on thousands of computers across the Bitcoin network.

4: What is bitcoin mining?

Bitcoin mining is the mechanism by which participants on the Bitcoin network reach consensus regarding the next block of transactions to add to the Bitcoin blockchain. For each new block, certain people called “miners” race with one another to find a solution to a cryptographic puzzle. The first miner to find a solution gets to propose the new block of transactions to the entire network. As a reward, the winning miner of the block gets newly created bitcoin. Thus, mining is also the process by which new bitcoin are introduced into the system.

5: What is the main difference between bitcoin and NFTs?

Non-fungible tokens (NFTs) are blockchain tokens that are not in general mutually interchangeable. In contrast, bitcoin is a fungible token, meaning that one bitcoin can be readily exchanged for another bitcoin, much in the same way one Canadian dollar can be exchanged for another Canadian dollar.

6: Who controls Bitcoin’s software?

Bitcoin is an open source project, with no official entity controlling the Bitcoin network. Anyone can review Bitcoin’s code and propose changes. There are many compatible versions of Bitcoin network software, but a distribution of the software known as “Bitcoin Core” is currently the most widely adopted and provides the de facto standard for the Bitcoin protocol.

7: Where can investors buy bitcoin?

Examples of ways investors can buy bitcoin include going on a cryptocurrency trading platform or buying a bitcoin ETF. There are pros and cons to each method of access. For example, bitcoin ETFs have the advantage of being able to be held in a registered account (e.g., TFSA or RRSP). However, while investors can buy and sell bitcoin 24/7 on a cryptocurrency trading platform, investors can only trade bitcoin ETFs during regular market hours.

8: Are cryptocurrencies taxable in Canada?

The CRA generally treats cryptocurrency like a commodity for purposes of the Income Tax Act. Any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances. Similarly, if earnings qualify as business income or as a capital gain, then any losses are treated as business losses or capital losses.

9: Is cryptocurrency traceable?

Transactions on public blockchains like Bitcoin, although pseudonymous, are transparent and publicly viewable. Anyone can see all transactions linked to any address on the Bitcoin blockchain.

10: What is a crypto wallet?

Crypto wallets store private keys, the passwords that give you access to your cryptocurrencies. Crypto wallets can be either “hot wallets,” meaning they are connected to the Internet, or “cold wallets,” meaning they are offline. Hot wallets are generally more susceptible to being hacked than cold wallets, so the best practice is to use a cold wallet for the long-term storage of cryptocurrencies.