What is Crypto (Crypto-Currency)?
A few years ago, most people would frown upon hearing the word “Bitcoin” or “cryptocurrency.” Fast forward to today, and almost every investor would describe this thing as a global phenomenon. As cryptocurrencies are fast gaining global adoption, more and more people are being encouraged to learn more about what cryptocurrency is all about. This guide summarizes everything a beginner must know about cryptocurrencies as well as the impact they could bring into the global financial and economic system.
By definition, a cryptocurrency is an Internet-based virtual currency designed to be used as a medium of exchange. It has cryptographical functions that verify and secure financial transactions. The units of cryptocurrencies are being stored in a blockchain, and the limit is unchangeable unless particular conditions had been met. Essentially, these virtual currencies leverage Blockchain technology in terms of transparency, decentralization, and immutability.
Tracing back the roots of cryptocurrency
Back in the 90s, when the tech revolution was in its infancy, many developers had attempted to create a digital currency. Rise of digital technology transformed our life by the way we transfer and share data and information. If we can transfer information globally within seconds, we should be able to send and receive the values the same way we transfer the data. Several systems had been created, such as DigiCash, Beenz, and Flooz. While the technologies were rolled out in the market, the networks all failed shortly after. According to the tech firms behind the systems, financial problems, fraud, and developers’ disagreements are some of the reasons why the developments never became fruitful.
Notably, these companies all relied on a third party to verify and facilitate financial transactions. They were just digitized version of the tools of same old system. The failures had been a hot topic in the industry, and for a while, the creation of a digital currency system seemed hopeless.
However, everything changed in 2009. A mysterious programmer behind the pseudonym Satoshi Nakamoto introduced Bitcoin, a revolutionary electronic cash system that relies on a peer-to-peer network. It comes with no central authority or server, which makes it fully decentralized protocol, a complete leap from the traditional perception of the financial system. In an initial announcement back in 2008, Nakamoto claimed that the main goal is to create something many people had tried to and failed on in the past, virtual cash.
One of the most significant problems associated with all digital payment network is the risk of double-spending. When we send a file over the Internet, we only send a copy of a file. When you send money it’s very important that you don’t have a copy in your hand. To avoid double spending, all conventional payment networks opt to rely on a trusted third party (bank). It acts as a central server wherein the records of the transactions and balances are being stored. However, we know the drawback and downside of the centralized monetary and banking system. The central authority possesses the access and full control over the funds and personal information of the public.
In contrast with a decentralized system such as Bitcoin, the job is assigned to every single player of the network. The task is carried out via a public ledger known as Blockchain. All the transactions that take place within the system would be recorded, and the information is accessible to everyone. Thus, there is transparency, and every participant would be able to see the account balance of one another.
A file represents every transaction. The public keys of the sender and the recipient, as well as the amount of coins involved, are recorded on this file. The sender is required to sign the transaction using his/her private key. Then, the transaction would be broadcasted within the network while it is awaiting confirmation.
In terms of confirmation within a crypto network, miners who solve cryptographic puzzles are allowed to do so. First, they need to take transactions and verify them as legitimate before eventually spreading them across the network. Then, the network’s nodes add the transaction to the Blockchain. Once the network confirms the transaction, it becomes irreversible and unforgeable by another human.
In any crypto network, the legitimacy of the transactions and balances is based on all participants’ absolute consensus. If a single node of the network attempt to modify the ledger to double spend, the node will be completely ignored by the network.
There are many new versions of digital currencies appeared after Bitcoin was introduced. The digital cashes are called cryptocurrencies because they come with strong cryptographic functions. The consensus-based process, as well as the elements mentioned above, completely take third parties out of the picture.
What are the standard functions of cryptocurrencies?
A few years back, trying to purchase goods using cryptocurrency is next to impossible. Merchants are reluctant to accept digital currencies as a form of payments, regardless of their growing popularity. But today, the tides have completely turned. A significant number of merchants now accept Bitcoin and other cryptocurrencies as a form of payment in exchange for goods. From notable online retailers such as Newegg and Overstock and down to local restaurants, bars, and shops, a growing number of establishments is fast embracing the alternative payment system. Furthermore, Bitcoin holders can now book flights and hotels, purchase pieces of jewelry, car parts, and other things, and pay using their crypto assets.
However, it’s worth noting that not all existing cryptocurrencies enjoy the same adoption rate as Bitcoin. The creators behind digital currencies such as Ethereum, Ripple, and Litecoin are aware that there is still much work to be done.
The good thing is, there is an option for crypto holders to exchange their digital assets for Bitcoin. This website accepts different cryptocurrencies. As of the latest update, there are over 20 cryptocurrencies in their list. Crypto holders can also turn to decentralized Particl Open Market place, or OpenBazaar and Bitify, marketplaces that accept cryptocurrencies as the sole form of payment.
Aside from being used in purchasing goods, cryptocurrencies present themselves as one of the best forms of investments in today’s generation. Many people have claimed that their wealth came from their cryptocurrency investments. As expected, Bitcoin is the most popular cryptocurrencies, and it is the world’s leading in terms of market dominance. While there had been a series of price fluctuations, Bitcoin continues to show its ability to bounce back after a significant price drop.
Ethereum holds the second spot in terms of value. However, it boasts the record of being the fastest rising digital currency in the world. Tracing back to May 2016, the price increase of this digital currency is recorded at 2,750%. In terms of market cap, all existing cryptocurrencies had a combined value increase of thousands of percentages from earlier years.
Despite the record-breaking figures, investors must be aware that crypto investments come with high risks as well. They are associated with inevitable price fluctuation, which means their market value is not stable. It’s also worth noting that a large part of the industry remains unregulated and investors are always in danger of getting outlawed. Moreover, crypto exchanges are ideal targets for hackers.
If you are thinking of investing in cryptocurrencies, then it’s understandable if you are looking on Bitcoin since it is the most dominant one. It’s worth noting that cryptocurrency market suffered a significant fluctuation. It is highly recommended to invest the amount that you can afford to lose, and hold them for long term.
Since its inception, several cryptocurrencies and privacy coins had been launched in the market. Altcoins (all coins other than Bitcoin) do feature non-monetary distinctive features and apps to solve problems to support various industries. Please see more detailed information on Altcoins and Blockchain here.
Obtain and store
Numerous crypto exchanges had dramatically made it easier for everyone to purchase Bitcoin. However, the same does not apply to other existing cryptocurrencies. However, significant exchanges like Binance, Bittrex, BitFinex, BitStamp, Kraken and hundreds other exchanges are doing their part to promote other digital currencies such as Ethereum, Litecoin, DogeCoin, NEO, ICON and TEZOS . Interested buyer can also trade with a seller face-to-face via Localbitcoin or turn to a Bitcoin ATM.
After buying your cryptocurrency, you need to use a wallet service where you can store your asset. Fortunately, significant exchanges offer this kind of service. However, if you’re after security, is it highly recommended to store your cryptocurrency in an offline wallet. While a digital wallet sounds convenient, an offline wallet such as Trezor or Ledger highly recommended instead of storing wallet access info on your hard drive.
Of course, a Bitcoin investment is similar in any other type of investment in terms of market observation. It would be best if you were up-to-date about what is happening in the market, how they perform, among others. Fortunately, there are existing platforms such as CoinMarketCap that allow you to track the cryptocurrencies’ price, market cap, the number of coins in circulation as well as the volume.
You must also take into account where you live. Whether you gained or lose, some jurisdictions require investors to include such information in their tax report. Countries widely vary with one another in terms of crypto taxation. In the United States and Canada, Bitcoin and other cryptocurrencies are taxed as property. This taxation system means that the crypto assets acquired by investors through trading are taxed based on appropriate capital gains rate. Currently, it stands at a 15% maximum rate in USA.
If trading is widely considered as a form of investment, then so is mining. Crypto miners are considered as the most important pillar of any crypto network. In essence, they serve as the bookkeepers for bitcoin network. They solve complex cryptographic puzzles which require significant computing power. It is an essential component of Bitcoin ecosystem and the network security.
As more and more people perform crypto mining, the complexity or the difficulty of the problem-solving increases as well. Miners tend to switch between coins depending on mining difficulty and reward ratio of the coins. Simply, the more miners there are, the more complex the mining difficulty becomes.
In the early days of Bitcoin, a miner could reap substantial profits from merely using a computer or a laptop. Many people back then claimed that they had accumulated great wealth from mining. In present times, this activity seems profitable only to those who invest significant investment for topnotch mining equipment. On top of it, a miner has to deal with huge expenses for the electricity.
Essentially, the more computing power a miner deploy, the more chances the miner has to solve the complex mathematical problems for the reward. Once successfully solved, the miner would receive a reward in Bitcoin.
As the crypto mining industry is dramatically gaining attention, the cryptographic problem solving are becoming exponentially challenging due to the competitions in the industry. Also, the mining rewards decrease periodically. As for Bitcoin mining reward for instance, In its infancy, Bitcoin miners were rewarded with 50 BTC per Block. Today, it stands at 12.5 BTC per block. This massive decrease is a result of the Bitcoin network’s structure to eliminate inflation. To countermeasure the current global monetary system, Bitcoin was designed by the creator to prevent inflation or human abuse of money printing.
After May 2020, the Block reward will be reduced to half again to 6.25 BTC. It halves every 4 years. Unlike fiat currency like USD, Bitcoin is designed to increase its value as the time goes by. Only 21 million coins are permitted to be in circulation ever.
The abovementioned factors make crypto mining industry a competitive marketplace that leis slightly geared towards early adopters. However, your profits would still be subjected to the taxation law of the place you live in, as well as the regulations regarding money transfer. In the United States, the mining and trading of cryptocurrencies for fiat currencies are categorized by the FinCEN as money transmitting. It means that crypto miners are under an obligation to comply with the regulations set under this category.
The interest in cryptocurrencies is on an upward trend in exponential rate. It shows no sign of declining. So, if you are in businessman seeking for new customers, then accepting digital currencies as a medium of payment might help you achieve that goal. While it might sound a little weird a few years back, it is now possible for a large number of crypto holders to use their digital assets to pay for goods and services –thanks to the inception of crypto ATMs. According to the data of Coin ATM Radar, there are over 1800 crypto ATMs installed in 58 countries.
In the United States, digital currencies have long been considered as convertible currencies. Accepting them as a medium of payment works the same as gold, gift cards, or cash. Meanwhile, in terms of taxation, you would need a reference of sales record that shows the exact amount of the currency received as well as the transaction date. The sales tax would be calculated based on the average exchange rate at the moment of sale.
What are the laws that surround cryptocurrencies?
As cryptocurrencies are entering their golden era, regulators, lawmakers, and tax authorities from across the world are trying to make sense of what crypto is all about, its concept, and its uses and where exactly should they stand in terms of legal frameworks and regulations.
The creation and release of Bitcoin had paved the way for a new paradigm. Regulators are finding it hard to believe that a shapeless, self-sustaining, and decentralized currency could function as real money. Furthermore, what makes it even harder for them to accept is the fact that Bitcoin is not under the control of a singular entity, just like fiat had always been.
Among the top issues that concern regulators are the decentralized nature of digital currencies. Due to this feature, users can use them anonymously. Lawmakers are also reluctant of embracing such assets as they can be easily used for tax evasions, money laundering, terrorist financing, and more. Jurisdictions that support cryptocurrencies have different laws and regulations. However, it is not a secret that most regulatory frameworks over these digital assets are unstable, while a large part of the industry remains unregulated.
What are the most popular cryptocurrencies?
- Bitcoin (BTC) – Released in 2009, Bitcoin is the world’s first-ever cryptocurrency. It recorded an all-time high of $19,783.06 on December 17, 2017.
- Bitcoin Cash (BCH) – This cryptocurrency is a Bitcoin fork and is supported by the world’s leading Bitcoin mining company. Though it is considered as one of the newest in the list, Bitcoin Cash had already made it to the top five largest cryptocurrencies by market cap.
- Ethereum (ETH) – A programmable digital currency that is made of Turing-completeness, Ethereum enables developers to build a variety of distributed technologies and applications that are not compatible with Bitcoin.
- Ethereum Classic (ETC) – This cryptocurrency is Ethereum’s original version. A split occurred when a hacker attacked the decentralized autonomous organization that was built on top of the primary Blockchain.
- Litecoin (LTC) – This cryptocurrency is also a Bitcoin fork. It was created with the primary goal of being digital silver, whereas Bitcoin is digital gold. In terms of speed, it is four times faster than its predecessor. Also, at 84 mln, Litecoin is four times bigger than Bitcoin in terms of the number of coins.
- Ripple (XRP) – Ripple differs from most currency because it does not rely on a Blockchain to reach a network-wide consensus for crypto transactions. Instead, it uses an iterative consensus system, making it significantly faster than the Bitcoin network. However, the same process makes Ripple more vulnerable to hackers.
- XLM (XEM) – Instead of using a Proof of Work algorithm like most currencies do, XEM utilizes Proof of Importance. This system has a limit set for crypto holders. Only when they reach the required amounts of coins would they be able to purchase new ones. Furthermore, PoI encourages XEM holders to spend their coins and then monitors the transaction to find out the impact and importance of a particular to the entire network.
- IOTA (MIOTA) – Based on Tangle’s ledger technology, IOTA requires the sender to perform a Proof of Work that would confirm and approve two transactions. The system completely removes dedicated miners out of the picture.
- NEO (NEO) – This smart contract network allows third-party entities to build all types of financial contracts and distributed apps on top of it. Although it is developed in China, it has in many ways has the same objectives as Ethereum.
- Qtum (QTUM) – This cryptocurrency is the result of Bitcoin and Ethereum combining their respective technologies aimed for business applications. Qtum’s reliability can be compared to that of Bitcoin. It also allows the usage of distributed applications and smart contracts.
- Monero (XMR) – This cryptocurrency is one of those dubbed as privacy coins. It is one of the most popular of its kind mainly because of its privacy-focused features.
- Dash (DASH) – It is a cryptocurrency that is based on a two-tier protocol. The first tier is composed of miners who are responsible for securing the network and for recording transactions. The second tier is made up of master nodes that enable two types of transaction, the InstantSend, and PrivateSend.
How do you store cryptocurrencies?
Storing cryptocurrencies entail an entirely different approach compared to fiat currencies. Technically, it’s not the units of your cryptocurrency that need the utmost protection and security. Instead, it is your private key, the details that you use in signing transactions.
Currently, there are a plethora of digital wallets that a user can choose from. If your utmost concern is your privacy, then it is recommended to choose a hardware wallet. There are also cold wallets, or the one that you can use offline, which give you the option to affiliate with independent platforms or major exchanges.