What are cryptocurrencies? – Cryptocurrency

Here is a definition from Techopedia

Cryptocurrency is a type of digital currency that is based on cryptography.Cryptocurrency

Cryptocurrency uses cryptography for security, making it difficult to counterfeit.

Money has been used for centuries to facilitate the trade of goods and services. The form of money has varied between cultures, but, essentially, there are three types:

  • Commodity money has value in and of itself (intrinsic value) as well as value in its use as money (e.g., coins from precious metals, salt, tobacco, coffee, and wheat).
  • Representative money has little or no intrinsic value but embodies a right to an underlying item of value (e.g., gold certificates and depository notes that may be swapped against a certain amount of gold or silver).
  • Fiat money is declared to be money by a government and therefore derives value from being legal tender.

In more recent times, bitcoin was launched as a cryptocurrency. Subsequently, numerous other cryptocurrencies, crypto-coins and crypto-tokens have been launched with varying purposes and levels of adoption. The European Central Bank (ECB) defines a virtual currency as ‘a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money’.

Financial reporting

Crypto-assets often have very different terms and conditions. The holder needs to evaluate their individual terms and conditions carefully in order to determine which International Financial Reporting Standard (IFRS) applies. Depending on the standard that applies, the holder may also need to assess its business model in determining the appropriate accounting.

Cryptocurrencies share some characteristics with traditional currencies.

A possible solution – Inventory

IAS 2 Inventories does not require inventories to be in a physical form, but inventory should consist of assets that are held for sale in the ordinary course of business. Inventory accounting might be appropriate if an entity holds cryptocurrencies for sale in the ordinary course of business. An entity that (more or less – make the case!) actively trades the cryptocurrencies, purchasing them with a view to their resale in the near future, and generating a profit from fluctuations in the price or traders’ margin, might consider whether the guidance in IAS 2 for commodity broker-traders should be applied.

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If and when this case is made in some kind of policy statement document initial measurement would be at cost, with subsequent measurement at fair value less costs to sell, with changes in this carrying amount recorded in profit or loss.

Determination of fair value less costs to sell

A method to determine fair value less costs to sell is using a FIAT currency. This method entails valuing the cryptocurrency using an entity’s functional currency (or when different presentation currency), with the most common fiat currency being used are United States Dollars (USD), South Korea Won (KRW), Great Britain Pounds (GBP), Euro (EUR) and Japanese Yen (JPY).

This is the easiest way to calculate the fair value less costs to sell of a  cryptocurrency as an entity will record the value of coins purchased with an entity’s functional currency. For example, if the current price of Bitcoin is USD $10,000 and an entity purchases USD 1,000 worth of Bitcoin, the entity receives 0.10 BTC for USD 1,000. If the price of a Bitcoin goes up 50% to USD 15,000 each, then the entity’s BTC has also increased by 50%, thereby valuing your 0.10 BTC at a great USD 1,500.

There are many cryptocurrencies available in the online market (at a certain moment over 1,500, but it is a volatile immature market) but the majority of them cannot be acquired using any fiat currencies. The only way to measure the majority of these coins is through using Bitcoin (BTC) rates first and then converting these BTC to any of these alternative cryptocurrencies (and vice versa). Hence, Bitcoin can serve as the base currency/valuation tool for other cryptocurrencies and the gateway to the crypto world.

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