A cryptocurrency is a digital currency designed to function as a medium of exchange. It uses cryptography to secure and verify transactions, as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that nobody can change unless specific conditions are met.
There were many attempts to create a digital currency during the technological boom of the 90s, with systems such as Flooz, Beenz and DigiCash, which emerged in the market, but eventually failed. Among the reasons for their failures were fraud, financial problems and even friction between company employees and their bosses.
All these systems were based on trust in intermediaries, which meant that there were companies behind them that verified and facilitated transactions. Due to the failures of these companies, the creation of a digital cash system was considered a long lost cause.
Then, in early 2009, an anonymous programmer or a group of programmers under the alias of ” Satoshi Nakamoto ” introduced Bitcoin , which was described as an ‘peer-to-peer’ electronic cash system. . It was a completely decentralized system. That is, it had no servers involved or a central control authority.
One of the most important problems that any payment network had to solve was “double spending,” a fraudulent technique in which the same amount was spent twice. The traditional solution was to go to a trusted intermediary, a central server, who kept records of balances and transactions. However, this method always gave all the control of its funds and all its personal data to a single authority.
Now, in a decentralized network like Bitcoin, each participant does this work through a system called Blockchain, a public book of all transactions that occur 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 the recipient (wallet addresses) and the number of coins transferred. The transaction must also be signed by the sender with his private key and is finally transmitted to the network once it is confirmed by its users dedicated to this task, called “miners”. Within a cryptocurrency network, only miners can confirm transactions by solving a cryptographic puzzle. They take transactions, mark them as legitimate and disseminate them through the network. Then, each node in the network adds it to its database. Once the transaction is confirmed, it becomes irrefutable and irreversible and a miner receives an economic reward: a BTC amount.
In essence, any cryptocurrency network relies on the absolute consensus of all participants to give legitimacy to balances and transactions. If the network nodes do not agree on a single balance, the system would basically be broken. However, there are many preconfigured and programmed rules on the network that prevents this from happening.
Cryptocurrencies are named that way because the consensus maintenance process is secured with a cryptographic source.
What can you do with cryptocurrencies?
In the past, trying to find a merchant that accepted cryptocurrencies was extremely difficult, if not, impossible. Today the situation is completely different. There are currently many merchants that accept Bitcoin as a form of payment. These vendors range from online retailers such as Overstock and Newegg to small local stores, bars and restaurants. Bitcoins can be used to pay for hotels, flights, jewelry, applications, computer parts and even a university degree.
Other digital currencies such as Litecoin, Ripple, Ethereum, etc. They are not yet widely accepted. However, things have changed: r Apple has authorized at least 10 different cryptocurrencies as a viable form of payment on its App Store.
Cryptocurrency users other than Bitcoin can always exchange their currencies for BTC. There are also websites selling gift cards or gift cards such as Gift Off, which accepts around 20 different cryptocurrencies. Through gift cards, you can basically buy anything with a cryptocurrency.
There are also markets such as Bitify and OpenBazaar, which only accept cryptocurrencies.
Many people believe that cryptocurrencies are the best investment opportunity today e. In fact, there are many stories of people who have become millionaires thanks to their investments in Bitcoin. BTC is the most recognized digital currency to date. In November 2017, the price of a bitcoin exceeded USD 19,000.
Ethereum, the second most popular cryptocurrency, has recorded the fastest increase that a digital currency has ever shown. Since May 2016, its value increased by at least 2,700 percent. In addition, its market capitalization soared by more than 10,000 percent since mid-2013.
However, investing in cryptocurrencies implies a very high risk. Its market value fluctuates like no other asset. In addition, as they are not regulated yet, there is always a risk that it will be illegal in certain jurisdictions and any cryptocurrency exchange can be hacked. If you decide to invest in cryptocurrencies, Bitcoin is obviously the most popular. However, in 2017, its participation in the crypto-market declined dramatically from 90 percent to only 40 percent. There are currently many options available, some currencies focus on privacy, others are less open and decentralized than Bitcoin and others simply copy them.
Along with Bitcoin, numerous exchanges have already started accepting other cryptocurrencies. Kraken , BitFinex , BitStamp and many others already market Litecoin, Ethereum, Monero , Ripple, among others. There are also other ways to acquire cryptocurrencies, such as marketing face-to-face with a seller or using a Bitcoin ATM .
Once you have purchased your cryptocurrency, you need to store it securely. Although major exchanges offer wallet services, it is more convenient if you store your assets in an offline wallet on your hard drive or even if you invest in a hardware wallet. . This is the safest way to store your coins and gives you full control over your assets.
As with any other investment, you should pay close attention to the market value of cryptocurrencies and the news related to them. Coinmarketcap is a unique solution to track the price, volume, circulation supply and market limit of most existing cryptocurrencies.
Depending on the jurisdiction in which you live, once you have made a profit or loss when investing in cryptocurrencies, you may have to include it in your tax report. In terms of taxes, cryptocurrencies are treated very differently from one country to another. In the United States, the Internal Revenue Service ruled that Bitcoin and other digital currencies will be taxed as property, not as currency. For investors, this means that accumulated long-term gains and losses from cryptocurrency trading are taxed at the applicable rate of capital gains of each investor, which is at a maximum of 15 percent.
Miners are the most important part of any cryptocurrency network. And like commerce, mining is an investment. Basically, the miners are providing a bookkeeping service for their respective communities. They bring the power of their computers to solve complicated cryptographic riddles, which is necessary to confirm a transaction and record it in this distributed public book we call Blockchain.
One of the interesting things about mining is that the difficulty of riddles is constantly increasing, which is closely related to the number of people trying to solve it. So, the more popular a certain cryptocurrency becomes, the more people try to extract it and, therefore, the more difficult the process becomes.
Many people have made fortunes by mining Bitcoins. Previously you could get substantial benefits from mining using only your computer or even a powerful enough laptop. These days, Bitcoin mining can only be profitable if you are willing to invest in industrial grade mining hardware. This, of course, generates huge electricity bills in addition to the price of all necessary equipment.
Litecoin, Dogecoin and Feathercoin are among the best cryptocurrencies for beginners in terms of cost-effectiveness. For example, at the current value of Litecoins, you can earn r from 50 cents to $ 10 per day using only consumer grade hardware.
But how do miners get benefits? The more computing power they accumulate, the more opportunities they will have to solve the cryptographic puzzles. Once a miner manages to solve the puzzle, he receives a reward and a transaction fee.
As a cryptocurrency attracts more interest, mining becomes more difficult and the amount of coins received as a reward decreases. For example, when Bitcoin was first created, the reward for successful mining was 50 BTC. Now, the reward is 12.5 Bitcoins. This happened because the Bitcoin network is designed so that there are only a total of 21 million coins in circulation.
In November 2017, almost 17 million Bitcoins had been extracted and distributed. However, as the rewards are going to be smaller and smaller, every bitcoin extracted will be increasingly valuable.
All these factors make mined cryptocurrencies an extremely competitive race that rewards the first users. However, depending on where you live, the profits earned from mining may be subject to taxes and money transfer regulations. In the United States, FinCEN issued a guide whereby the extraction of cryptocurrencies and their exchange for fiat currencies can be considered as money transmission. This means that miners may need to comply with special laws and regulations related to these types of activities.
Accept as payment (for business)
If you own a company and are looking for new potential customers, accepting cryptocurrencies as a form of payment can be a solution for you. The interest in cryptocurrencies has never been greater and will surely continue to increase. Along with the growing interest, the number of crypto-ATMs located throughout the world is also growing. Coin ATM Radar currently includes almost 1,800 ATMs in 58 countries.
The first thing you should do is inform your customers that your company accepts cryptocurrencies. Simply placing a sign in your cash register should suffice. Payments can be accepted using hardware 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 cryptocurrencies. For example, CoinPayments currently accepts more than 75 different digital currencies and charges only 0.5 percent commission per transaction.Other popular services include Cryptonator , CoinGate and BitPay , the latter only accepts Bitcoins.
In the United States, Bitcoin and other cryptocurrencies have been recognized as a convertible virtual currency, which means that accepting them as a form of payment is exactly the same as accepting cash, gold or gift cards.
For tax purposes, companies based in the United States that accept cryptocurrencies must record a sales reference, the amount received in a particular currency and the date of the transaction. If sales taxes are payable, the amount due is calculated based on the average exchange rate at the time of sale.
Legality of cryptocurrencies
As cryptocurrencies become increasingly popular, law enforcement agencies, tax authorities and legal regulators around the world try to understand their essence and how they should fit into existing regulations and legal frameworks.
With the introduction of Bitcoin, the first cryptocurrency, a completely new paradigm was generated. The decentralized, self-sustaining digital currencies, which do not exist in any physical form or form and that are not controlled by any entity have generated controversy among the historical regulators.
Authorities around the world are concerned about how attractive cryptocurrencies are to merchants of illegal goods and services. In addition, they are concerned about its use in money laundering and tax evasion plans.
As of November 2017, Bitcoin and other digital currencies were banned only in Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Vietnam, with China and Russia about to ban them as well.
The most common cryptocurrencies
- Bitcoin – The first cryptocurrency that started everything.
- Ethereum – a complete programmable Turing coin that allows developers to create different distributed applications and technologies that would not work with Bitcoin.
- Ripple – Unlike most cryptocurrencies, it does not use a Blockchain to reach a consensus across the network for transactions. Instead, an iterative consensus process is implemented, which makes it faster than Bitcoin, but also makes it vulnerable to hacker attacks.
- Bitcoin Cash – A fork of Bitcoin backed by the largest Bitcoin mining company and manufacturer of ASIC chips for Bitcoin mining. It has only existed for a couple of months, but it has already shot up the top five cryptocurrencies in terms of market capitalization.
- NEM – Unlike most other cryptocurrencies that use a Proof of Work algorithm, it uses Proof of Importance, which requires that users already own certain amounts of coins in order to obtain new ones. It encourages users to spend their funds and track transactions to determine how important a particular user is to the NEM network in general.
- Litecoin – A cryptocurrency that was created with the intention of being the ‘digital silver’ compared to the ‘digital gold’ that is Bitcoin. It is also a fork of Bitcoin, but unlike its predecessor, it can generate blocks four times faster and have four times the maximum amount of coins at 84 million.
- IOTA – The advanced accounting technology of this cryptocurrency is called ‘Tangle’ and requires that the sender in a transaction perform a Proof of Work that approves two transactions. Therefore, IOTA has eliminated dedicated miners from the process.
- NEO – It is a network of smart contracts that allows developing all kinds of financial contracts and distributed third-party applications. It has many of the same goals as Ethereum, but it was developed in China, which can give it some advantages due to a better relationship with Chinese regulators and local businesses.
- Dash – It is a two-level network. The first level is the miners who secure the network and record the transactions, while the second level consists of “master nodes” that retransmit transactions and enable the type of transaction InstantSend and PrivateSend. The first is significantly faster than Bitcoin, while the second is completely anonymous.
- Qtum – It is a fusion of Bitcoin and Ethereum technologies aimed at commercial applications. The network has the reliability of Bitcoin, while allowing the use of smart contracts and distributed applications, it works similar to the Ethereum network.
- Monero – A cryptocurrency with private transaction capabilities and one of the most active communities, due to its open ideals and focused on privacy.
- Ethereum Classic – An original version of Ethereum. The division occurred after a decentralized autonomous organization built on the original Ethereum was pirated.
Cryptocurrency market capitalization
(statistics extracted on May 15, 2019)
How to store cryptocurrencies?
Unlike most traditional currencies, cryptocurrencies are digital, which implies a completely different approach, especially when it comes to storing them. Technically, you don’t store your cryptocurrency units; instead, it is the private key that you use to sign transactions that must be stored securely.
There are several types of cryptocurrency wallets that adapt to different needs. If your priority is privacy, you may want to opt for a paper or hardware wallet. Those are the safest ways to store your crypto funds. There are also “cold” (offline) wallets that are stored on your hard drive and online wallets, which may be affiliated with exchanges or with independent platforms.
How to buy cryptocurrencies?
There are many different options when it comes to buying Bitcoins. For example, there are currently almost 1,800 Bitcoin ATMs in 58 countries. In addition, you can buy BTC using gift cards, cryptocurrency exchanges, investment funds and you can even market face to face.
When it comes to other less popular cryptocurrencies, the purchase options are not so diverse. However, there are exchanges where you can acquire several cryptocurrencies in exchange for fiat currencies or Bitcoins. Face-to-face trade is also a popular way to acquire coins. The purchase options depend on particular cryptocurrencies, their popularity and their location.