What are Cryptocurrencies: a beginner’s guide

Cryptocurrencies are virtual or digital currencies designed to act as a medium of exchange.

It uses cryptography to secure and verify transactions as well as to control the creation of new units of any given digital currency.

Cryptocurrencies are limited entries in a database that no one can change unless specific conditions are met.

History of cryptocurrencies

There were many attempts to create a digital currency during the technology boom of the 1990s, with systems such as Flows, Beans, and DigiCash coming to the market but ultimately failing.

There were many, many reasons for its failure, such as fraud, financial problems, and even friction between company employees and their bosses.

It is worth noting that all of these systems used a trusted third-party approach, which means that the companies behind them have verified and facilitated transactions.

Because of these companies’ failures, creating a digital cash system was seen as a hopeless case for a long time.

Then, in early 2009, an anonymous programmer or group of programmers under the pseudonym Satoshi Nakamoto introduced Bitcoin.

Satoshi described it as a “peer electronic cash system.” It is a completely decentralized system, meaning there are no servers involved and no central controlling authority. This concept closely resembles peer-to-peer file-sharing networks.

However, one of the most important problems that any payment network must solve is double-spending. It is a fraudulent method of spending the same amount twice.

The traditional result was a trusted third party- a central garçon- that kept records of balances and deals.

However, this method always involves an authority who essentially controls the funds and has all the personal details.

But in a decentralized network like Bitcoin, every participant needs to do this task. This is done through blockchain technology – a public ledger of all transactions taking place at any time within the network, which is available to everyone. Therefore, everyone in the network can see the balance of each account.

Each transaction is a file consisting of the sender and recipient’s public keys (wallet addresses) and the amount of money transferred.

The transaction must also be signed by the sender with the private key. This is all simply basic encryption. Eventually, the transaction is broadcast into the network, but it needs to be confirmed first.

Within a digital currency network, miners can only confirm transactions by solving a cryptographic puzzle.

They take transactions, mark them as legitimate, and then spread them across the network. After that, each node of the network adds it to its database.

Once the transaction is confirmed, it is unforgeable and irreversible and the miner receives a reward, in addition to the transaction fees.

Essentially, any digital currency network is based on the absolute consensus of all participants regarding the legality of balances and transactions. If the network nodes disagreed on a single balance, the system would essentially break.

However, there are a lot of rules that have been pre-programmed and built into the network that prevent this from happening.

Digital currencies are also called cryptocurrencies because the consensus process is ensured with strong cryptography. This, combined with the factors mentioned above, makes third parties and blind trust as a concept completely redundant.

What can be done with Cryptocurrencies?

1. Purchase goods

In history, trying to find a website that accepts cryptocurrency was extremely delicate, if not insolvable. But at the moment the situation is fully different.

There are many merchants – both online and offline – who accept Bitcoin as a form of payment.

They range from large online retailers such as Overstock and New Egg to small local shops, bars, and restaurants.

Bitcoins can be used to pay for hotels, flights, jewelry, apps, computer parts, and even for a college degree.

Other cryptocurrencies like Litecoin, Ripple, Ethereum, etc. are not yet accepted on the same widespread scale.

Things are changing for the better, though, with Apple granting permission to at least 10 different digital currencies as an approved means of payment on the Apple Store.

Of course, users of non-Bitcoin cryptocurrencies can always exchange their currencies for Bitcoin.

Furthermore, there are gift card sites like Gift Off, which accepts about 20 different cryptocurrencies. With gift cards, you can buy anything with digital currency.

Eventually, there will be commerce like Bitify and OpenBazaar that only accept cryptocurrencies.

2. Investment

Many people believe that cryptocurrencies are the hottest investment opportunities currently available.

There are many stories of people becoming millionaires through their investments in Bitcoin.

Bitcoin is considered the most popular digital currency to date, and in November 2017, the price of one Bitcoin exceeded $7,000.

Ethereum, which is probably the second most valuable digital currency, recorded the fastest rise that any digital currency has ever seen.

Since May 2016, its value has increased by at least 2700%. When it comes to all cryptocurrencies combined, the market capitalization has increased by more than 10,000 percent since mid-2013.

However, it should be noted that cryptocurrencies are high-risk investments. Its market value fluctuates, as is the case with any other asset.

Moreover, it is partly unregulated, there is always a risk of it being criminalized in some jurisdictions and any cryptocurrency exchange can be hacked.

If you decide to invest in cryptocurrencies, it is clear that Bitcoin is still dominant. However, in 2017, its share of the cryptocurrency market dropped dramatically from 90 percent to only 40 percent.

There are many options currently available, with some coins focusing on privacy, others being less open and decentralized than Bitcoin and some just being copies of it.

While it is very easy to buy Bitcoin – there are many exchanges out there that trade Bitcoin – other cryptocurrencies cannot be obtained as easily.

However, this situation is slowly improving as major exchanges like Kraken, Bitfinex, Bitstamp, and many others start selling Litecoin, Ethereum, Monero, Ripple, and others.

There are also a few other different ways of being a currency, for example, you can trade face-to-face with vendors or use Bitcoin ATMs.

Once you purchase your cryptocurrency, you need a way to store it. All major exchanges offer wallet services.

But, while it may seem convenient, you’re better off storing your assets in an offline wallet on your hard drive or even investing in an e-wallet.

This is the most secure way to store your coins while allowing you to have full control over your assets.

As with any other investment, you need to pay close attention to the market value of cryptocurrencies and any news related to them.

CoinMarketCap is the easiest solution to track the prices, volume, trading supply, and market capitalization of most existing cryptocurrencies.

3. Mining

Miners are the most important part of any cryptocurrency network, and much like trading, mining is an investment.

Essentially, miners provide an account management service to the relevant communities. They contribute their computing power to solve complex cryptographic puzzles, which are necessary to confirm a transaction and record it in a distributed public ledger called a blockchain.

One of the interesting things about mining is that the difficulty of the puzzles is constantly increasing, and is related to the number of people trying to solve them.

Therefore, the more popular a particular digital currency becomes, the more people want to mine it, and the process becomes more difficult.

Many people have made fortunes from Bitcoin mining. In the old days, you could make big profits from mining using your computer, or even a powerful enough laptop.

These days, Bitcoin mining can only become more profitable if you are willing to invest in industrial-grade mining equipment. This, of course, incurs huge electricity bills on top of the price of all the necessary equipment.

Currently, Litecoin, Dogecoin, and Feathercoin are said to be the best cost-effective cryptocurrencies for beginners.

For example, at the current value of Litecoin, you could earn anything from 50 cents to $10 per day using only consumer devices.

But how do miners make profits? The more computing power they can muster, the greater their chances of solving cryptographic puzzles.

Once a miner solves the puzzle, he or she receives a reward as well as a transaction fee.

As the cryptocurrency attracts more attention, mining becomes harder and the amount of coins received as a reward decreases.

For example, when Bitcoin was first created, the reward for a successful mining operation was 50 Bitcoin. Now, the reward is 12.5 BTC.

This happened because the Bitcoin network is designed so that the total number of coins does not exceed 21 million coins in circulation.

As of November 2017, approximately 17 million Bitcoins have been mined and distributed. However, as the rewards diminish, each Bitcoin mined will exponentially increase in value.

All of these factors make cryptocurrency mining a highly competitive arms race that rewards early adopters. However, depending on where you live, the profits you make from mining can be subject to taxes and money transfer regulations.

In the United States, FinCEN has issued guidance, according to which mining cryptocurrencies and exchanging them for fiat currencies may be considered a transfer of funds.

This means that miners may need to comply with special laws and regulations that address this type of activity.

4. Acceptance as a method of payment (for business)

If you own a business and if you are looking for potential new clients, accepting cryptocurrencies as a form of payment may be a solution for you.

Interest in cryptocurrencies has never been higher and will only continue to increase. Along with the growing interest, the number of cryptocurrency ATMs located around the world is also growing. Coin ATM Radar currently lists nearly 1,800 ATMs in 58 countries.

First and foremost, you need to let your customers know that your business accepts cryptocurrencies. Simply placing a sign next to your store’s checkout box will do the trick.

Payments can then be accepted using computer terminals, touchscreen applications, or simple wallet addresses through QR codes.

There are many different services you can use to be able to accept payments in digital currencies. For example, CoinPayments currently accepts over 75 different cryptocurrencies and only charges a 0.5 percent commission per transaction. Other popular services include Cryptonator, Coinget, and BitPay, with the latter only accepting Bitcoin.

In the United States, Bitcoin and other cryptocurrencies are recognized as convertible virtual currencies, which means they are accepted as a form of payment just like cash, gold, or gift cards.

For tax purposes, US businesses that accept cryptocurrencies must record a reference to the sales, the amount received in a particular currency, and the date of the transaction.

Still, the quantum due is calculated grounded on the average exchange rate at the time of trade, In deals levies are outstanding.

Legality of Cryptocurrencies

As cryptocurrencies have become more and more widespread, law enforcement agencies, tax authorities and legal regulators around the world are trying to understand the concept of cryptocurrencies themselves and where they can fit perfectly into existing regulations and legal frameworks.

With the introduction of Bitcoin, the first-ever digital currency, a completely new paradigm was created. Decentralized, autonomous cryptocurrencies that do not exist in any physical form or form and are not governed by any single entity were always going to cause a stir among regulators.

Many concerns have been raised about the decentralized nature of cryptocurrencies and their ability to be used almost completely anonymously.

Authorities around the world have been concerned about the attractiveness of digital currencies for traders of illicit goods and services. Moreover, they are concerned about its use in money laundering and tax evasion schemes.

As of November 2017, Bitcoin and other cryptocurrencies are only banned in Bangladesh, Bolivia, Ecuador, Kyrgyzstan, and Vietnam, with China and Russia about to ban them as well.

However, other jurisdictions do not make the use of cryptocurrencies illegal yet, but laws and regulations can vary greatly depending on the country.

The most popular digital currencies

  • Bitcoin: The first digital currency that started it all.
  • Ethereum: A near-complete, programmable currency that allows developers to build various applications and distributed technologies that would not work with Bitcoin.
  • Ripple: Unlike most cryptocurrencies, it does not use blockchain to reach large-scale network consensus for transactions. Instead, an iterative consensus process is implemented, which makes it faster than Bitcoin but also makes it vulnerable to hacking attacks.
  • Bitcoin Cash: is a hard fork of Bitcoin and is backed by the largest Bitcoin miner and ASIC chip manufacturer for Bitcoin mining. It has only been in existence for two months and has already risen to the top five digital currencies in terms of market capitalization.
  • NEM: Unlike most other cryptocurrencies that use a Proof of Work algorithm, it uses Proof of Severity, which requires users to already own certain amounts of coins to be able to acquire new coins. It encourages users to spend their money and tracks transactions to determine how important a particular user is to the overall NEM network.
  • Litecoin: is a digital currency created to be “digital silver” compared to Bitcoin which is described as “digital gold”. It is also a hard fork of Bitcoin, but unlike its predecessor, it can generate blocks four times faster and has four times the maximum number of coins at 84 million.
  • IOTA: The advanced ledger technology of this digital currency is called “Tangle” and it requires the sender of any transaction to create a proof of work that approves two transactions. Thus, IOTA removed dedicated miners from the process.
  • NEO:  is a smart contract network that allows all types of financial contracts and distributed third-party applications to be developed on top of it. It has many of the same goals as Ethereum but was developed in China, which may give it some advantages due to an improved relationship with Chinese regulatory bodies and local companies.
  • Dash: It is a two-level network. The first level is the miners who work to secure the network and record transactions, while the second consists of “master nodes” that relay transactions and enable “instant send” and “private send” type transactions. The former is much faster than Bitcoin, while the latter is completely anonymous.
  • Qtum: It is a fusion of Bitcoin and Ethereum technologies targeting business applications. The network prides itself on having the reliability of Bitcoin while allowing the use of smart contracts and distributed applications, much like within the Ethereum network.
  • Monero:  is a digital currency with private transaction capabilities and is one of the most active communities, due to its openness and privacy-focused advantages.
  • Ethereum Classic: An original version of Ethereum. The split occurred after a decentralized autonomous organization built on top of the original Ethereum network was taken over.

How to store Crypto

Unlike most traditional currencies, cryptocurrencies are digital, which entails a completely different approach, especially when it comes to storing them.

Technically, you are not storing your units of digital currency; It’s just the private key you use to sign transactions that need to be stored securely.

Several different types of cryptocurrency wallets meet different needs. If your priority is privacy, you may want to choose an electronic or paper wallet. These are the safest ways to store your cryptocurrency funds.

There are also ‘cold’ (offline) wallets that are stored on a hard drive and online wallets, which can either be affiliated with exchanges or with independent platforms.

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