Cryptocurrencies are virtual or digital currencies designed to serve 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. Essentially, cryptocurrencies are limited entries in a database that no one can change unless certain conditions are met.
The history of digital currencies
There were many attempts to create a digital currency during the tech boom of the 1990s, with systems like Flows, Beans, and DigiCash coming to market but ultimately failed. There were many, many reasons for its failure, such as fraud, financial problems and even friction between corporate employees and their bosses.
Notably, all of these systems used a trusted third-party approach, meaning that the companies behind them validated and facilitated transactions. Because of the failures of these companies, the creation of 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 that 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 any payment network must solve is double spending. It is a fraudulent method of spending the same amount twice. The traditional solution was a trusted third party – a central server – that kept records of balances and transactions. However, this method always involves an authority that essentially controls the funds and has all the personal details.
But in a decentralized network like Bitcoin, every participant needs to do the job. This is done via Blockchain technology – a public ledger of all transactions made at any time within the network, available to everyone. Therefore, everyone in the network can see the balance of each account.
Each transaction is a file consisting of the public keys of the sender and recipient (wallet addresses) and the amount of money transferred. The transaction must also be signed by the sender with the private key. All this is simply basic cipher. Eventually, the transaction is broadcast to the network, but it needs to be confirmed first.
Within the digital currency network, only miners can confirm transactions by solving a cryptographic puzzle. They take transactions, mark them as legitimate and then publish them across the network. Then, each node of the network adds it to its own database. Once confirmed, the transaction is tamper-proof and irreversible and the miner receives a bonus, in addition to the transaction fee.
Essentially, any cryptocurrency network is based on the absolute consensus of all participants regarding the legality of balances and transactions. If the network nodes differ on the same balance, the system will basically break. However, there are a lot of rules that have been preprogrammed and built into the network that prevent this from happening.
Cryptocurrencies are also called cryptocurrencies because the consensus preservation process is ensured by strong cryptography. This, along with the factors mentioned above, makes third parties and blind trust as a concept completely redundant.
What can be done with digital currencies
In the past, trying to find a merchant who accepts digital currency was very difficult, if not impossible. But at the moment the situation is completely different.
There are plenty of merchants – both online and offline – that accept Bitcoin as a form of payment. They range from large online retailers such as Overstock and New Egg to small local stores, bars and restaurants. Bitcoins can be used to pay for hotels, flights, jewelry, apps, computer parts, and even to get a college degree.
Other digital currencies like Litecoin, Ripple, Ethereum, etc. are not accepted on the same scale yet. Things are changing for the better though, with Apple granting permission for at least 10 different cryptocurrencies as an approved method of payment on the App Store.
Of course, users of cryptocurrencies other than Bitcoin can always exchange their coins for Bitcoin. Furthermore, there are gift card sites like Gift Off, which accepts about 20 different cryptocurrencies. With gift cards, you can buy basically anything with digital currency.
Finally, there are markets like Bitify and Open Bazaar that only accept cryptocurrencies.
Many people believe that digital currencies are the most important investment opportunity currently available. In fact, there are many stories of people who became millionaires through their investments in Bitcoin. Bitcoin is the most recognizable digital currency to date, and just last year the value of one bitcoin was $800. In November 2017, the price of one bitcoin exceeded $7,000.
While Ethereum, probably the second most valuable cryptocurrency, recorded the fastest rise of any cryptocurrency ever. Since May 2016, its value has increased by at least 2,700 percent. And 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 digital currencies are a high-risk investment. As with any other asset, its market value fluctuates. Moreover, they are partially unregulated, there is always the risk of 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 in the cryptocurrency market dropped dramatically from 90 percent to just 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 copying it.
And while it is very easy to buy Bitcoin – there are many exchanges out there that trade Bitcoin – other cryptocurrencies cannot be obtained as easily. Although this situation is slowly improving with major exchanges such as Kraken, Bitfinex, Bitstamp and many more starting to sell 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 sellers or use an ATM for bitcoin.
Once you have purchased your digital currency, you need a way to store it. All major exchanges offer portfolio services. But, while it may seem convenient, it is better to store your assets in an offline wallet on your hard drive, or even invest in an electronic wallet. This is the most secure way to store your coins while allowing you to have complete 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 it. CoinMarketCap is the easiest solution to track the price, volume, trading supply and market capitalization of most existing cryptocurrencies.
Depending on the jurisdiction you live in, once you make a profit or lose your cryptocurrency investment, you may need to include it on your tax return. In terms of taxation, cryptocurrencies are treated very differently from country to country. In the United States, the Internal Revenue Service has ruled that Bitcoin and other digital currencies should be taxed as property, not currency. For investors, this means that long-term cumulative gains and losses from cryptocurrency trading are taxed on each investor’s applicable capital gain rate, which is a maximum of 15%.
Miners are the most important part of any digital currency network, and much like trading, mining is an investment. Essentially, miners provide an account management service to the respective communities. They contribute their computing power to solving complex cryptographic puzzles, which is necessary to confirm the transaction and record it in a distributed public ledger called the blockchain.
One of the interesting things about mining is that the difficulty of the puzzles is constantly increasing, and it correlates with 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. Back in the days, you could make big profits from mining with your own 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 might earn anything from 50 cents to $10 per day using only consumer hardware.
But how do miners make profits? The more computing power they can gather, the higher their chances of solving cryptic puzzles. Once a miner can solve the puzzle, he gets a reward as well as a transaction fee.
As digital currency attracts more attention, mining becomes more difficult 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 BTC. Now, the reward is 12.5 BTC. This happened because the Bitcoin network is designed so that there are no more than 21 million coins in circulation.
As of November 2017, approximately 17 million Bitcoins have been mined and distributed. However, as the rewards dwindle, every Bitcoin mined will become exponentially exponential in value.
All these factors make cryptocurrency mining a very competitive arms race that will reward 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, the Financial Crimes Enforcement Network has issued a directive, according to which mining and exchanging digital currencies 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.
Acceptance as a means of payment (for business)
If you own a business and if you are looking for potential new clients, accepting cryptocurrency as a form of payment might be a solution for you. The interest in cryptocurrencies has never been higher than it is now 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 approximately 1,800 ATMs in 58 countries.
First and foremost, you need to let your customers know that your business accepts cryptocurrencies. Simply putting a checkmark next to your store’s checkout box will do the trick. Payments can then be accepted using computer terminals, touch screen applications, or simple wallet addresses through QR codes.
There are many different services that you can use to be able to accept payments in digital currencies. For example, Coin Payments currently accepts over 75 different cryptocurrencies, and charges only 0.5 percent commission per transaction. Other popular services include Kryptonator, Coingate, and BitPay, with the latter accepting only Bitcoin.
In the US, Bitcoin and other digital currencies have been recognized as a convertible virtual currency, which means accepting it as a form of payment just like accepting cash, gold or gift cards.
For tax purposes, businesses in the United States that accept cryptocurrency must record a reference to sales, amount received in a particular currency, and transaction date. If sales taxes are payable, the amount due is calculated based on the average exchange rate at the time of the sale.
The legality of digital currencies
As digital currencies become more and more popular, law enforcement agencies, tax authorities, and legal regulatory bodies around the world are trying to understand the concept of cryptocurrencies themselves and where they can fit in perfectly with existing regulations and legal frameworks.
With the introduction of Bitcoin, the first ever digital currency, a whole new paradigm was created. Self-decentralized digital currencies that do not exist in any physical form or form and are not subject to any single entity have always caused a stir among regulators.
Many concerns have been raised about the decentralized nature of digital currencies and their ability to be used almost completely anonymously. Authorities around the world have been concerned about the attractiveness of digital currencies to merchants 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 on the verge of banning them as well. However, other jurisdictions do not yet make the use of digital currencies illegal, but laws and regulations can vary greatly depending on the country.
Most Popular Cryptocurrency
- Bitcoin – the first digital currency that started it all.
- Ethereum – a near-completion programmable currency that allows developers to build various distributed applications and technologies that will not work with Bitcoin.
- Litecoin is a digital currency that was created with the intention of being “digital silver” compared to describing Bitcoin as “digital gold.” It is also a fork of Bitcoin, but unlike its predecessor, it can generate blocks four times faster and has four times the maximum number of coins with a number of 84 Million.
- Dash – is a two-level network. The first level is the miners who secure the network and log 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.
- Monero – a digital currency with private transaction capabilities and is one of the most active communities, due to its openness and the advantages of focusing on privacy.
- Ethereum Classic – The original version of Ethereum. The split occurred after a decentralized autonomous organization built on the foundation of the original Ethereum network was taken over.
There are many other digital currencies, which are estimated at more than 1,600 digital currencies
How to store digital currencies
Unlike most traditional currencies, cryptocurrencies are digital, which entails an entirely different approach, particularly when it comes to storing them. Technically, you do not store your units of cryptocurrency; It’s just the private key you use to sign transactions that need to be stored securely.
There are several different types of digital currency wallets that cater to 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 crypto money. There are also ‘cold’ (offline) wallets that are stored on the hard drive and online wallets, which can either be affiliated with exchanges or with independent platforms.
How to buy crypto
There are a lot of different options when it comes to buying bitcoin. For example, there are currently approximately 1,800 Bitcoin ATMs in 58 countries. Moreover, you can buy bitcoin using gift cards, via crypto exchanges, mutual funds and you can even trade face to face.
But when it comes to other less popular cryptocurrencies, the buying options are not that varied. However, there are still many exchanges where you can get various cryptocurrencies in exchange for fiat or bitcoin. Face-to-face trading is also a popular way to get coins. The buying options depend on the particular cryptocurrency and its popularity as well as your location.
The future of digital currencies
Bill Gates, Microsoft co-founder, investor and philanthropist:
“Bitcoin exists because it shows how cheap it can be. Bitcoin is better than currency in that it doesn’t have to be physically in the same place, and of course, for large transactions, regular currency can become very unfavorable.
Richard Branson, founder of Virgin Galactic and over 400 other companies:
“Well, I think it works. There may be other coins like it that might be better. But in the meantime, there is a big industry around Bitcoin. - People have made fortunes with Bitcoin, and some of them have lost money. It is volatile, but people make money from Bitcoin. volatility too.
Al Gore, former Vice President of the United States:
“When bitcoin is being monetized, that interface has to remain under some regulatory safeguard. And I think the fact that within the bitcoin world there is an algorithm that replaces the function of government… [that] is actually pretty cool.”
Eric Schmidt, CEO of Google:
“[Bitcoin] is a major breakthrough in the crypto world… The ability to create something non-repeatable in the digital world is incredibly valuable… and a lot of people will build businesses based on that.”
Peter Thiel, co-founder of PayPal:
“Paypal had these goals of creating a new currency. We failed at that, and just created a new payment system. I think Bitcoin has succeeded at the level of a new currency, but the payment system is somewhat incomplete. It is very difficult to use, and that is the challenge Big on the Bitcoin side