Cryptocurrencies: What are they and How does Digital Money Work?

56 / 100

Cryptocurrencies: What are they and How does Digital Money Work?

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 no one can change unless specific conditions are met. There are thousands of cryptocurrencies, the most popular is Bitcoin, but here we are going to tell you about what cryptocurrencies are in general and how they work. Read on to learn more about the digital money of the future and how to understand how it works so that in this way you can use them in a better way and you can learn to invest in cryptocurrencies wisely.


There were many attempts to create a digital currency during the tech boom of the 90s, with systems like Flooz, Beenz, and DigiCash all emerging on the market but ultimately failing. Among the reasons for their failures were fraud, financial problems, and even friction between company employees and their bosses.

All of 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, creating a digital cash system was long considered a lost cause.

Then, in early 2009, an anonymous programmer or a group of programmers under the alias ” Satoshi Nakamoto ” introduced Bitcoin, which was described as a ‘peer-to-peer electronic cash system. . It was a completely decentralized system. In other words, it did not have servers involved or central control authority.

One of the biggest problems 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 a single authority all control of your funds and all your personal data.

Now, in a decentralized network like Bitcoin, each participant does this work through a system called Blockchain, a public ledger of all transactions that occur within the network, available to everyone. Therefore, everyone on the network can view the balance of each account.

Each transaction is a file consisting of the public keys of the sender and 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 crypto puzzle. They take transactions, mark them as legitimate, and broadcast them across the network. Then each node on the network adds it to its database. Once the transaction is confirmed, it becomes irrefutable and irreversible and a miner receives a financial reward: an amount of BTC.

In essence, any cryptocurrency network relies on the absolute consensus of all participants to give legitimacy to balances and transactions. If the nodes on the network don’t agree on a single balance, the system would basically break down. However, there are many preconfigured and programmed rules on the network that prevents this from happening.

Cryptocurrencies are so named because the consensus maintenance process is secured with a crypto source.

What can you do with Cryptocurrencies?

1. Buy Goods

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 sellers range from online retailers like Overstock and Newegg to small local shops, bars, and restaurants. Bitcoins can be used to pay for hotels, flights, jewelry, apps, computer parts, and even a college degree.

Other digital currencies like Litecoin, Ripple, Ethereum, etc. are not as widely accepted yet. However, things have changed: r Apple has authorized at least 10 different cryptocurrencies as a viable form of payment in its App Store.

Cryptocurrency users other than Bitcoin can always exchange their coins for BTC. There are also gift card or gift card sales websites 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 like Bitify and OpenBazaar, which only accept cryptocurrencies.

You can also read: ” What can I buy with Bitcoins ?”

2. Invest

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 surpassed $ 19,000.

Ethereum, the second most popular cryptocurrency, has seen the fastest rise a digital currency has ever shown. Since May 2016, its value has increased by at least 2,700 percent. Furthermore, its market capitalization has skyrocketed by more than 10,000 percent since mid-2013.

However, investing in cryptocurrencies involves very high risk. Its market value fluctuates like no other asset. Also, as they are not regulated yet, there is always the risk that it will become illegal in certain jurisdictions and any cryptocurrency exchange could be hacked. If you decide to invest in cryptocurrencies, Bitcoin is obviously the most popular. However, in 2017, its share of the crypto market dropped dramatically from 90 percent to just 40 percent. Currently, there are many options available, some currencies are focused 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 trade Litecoin, Ethereum, Monero, Ripple, among others. There are other ways to acquire crypto as well, such as trading face-to-face with a seller or using a Bitcoin ATM.

Once you have purchased your cryptocurrency, you need to store it safely. Although the 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 one-stop solution for tracking the price, volume, circulation supply, and a market cap of most existing cryptocurrencies.

Depending on the jurisdiction you live in, once you’ve made a profit or loss from investing in cryptocurrencies, you may need to include it in your tax report. In terms of taxes, cryptocurrencies are treated very differently from country to country. 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 long-term cumulative gains and losses from cryptocurrency trading are taxed at each investor’s applicable capital gains rate, which stands at a maximum of 15 percent.

3. Mining

Miners are the most important part of any cryptocurrency network. And like trade, 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 puzzles, which is necessary to confirm a transaction and record it in this distributed public ledger that we call the Blockchain.

One of the cool things about mining is that the difficulty of the puzzles 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 mine it, and thus the more difficult the process becomes.

Many people have made fortunes by mining Bitcoins. Previously you could make substantial profits from mining using just 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, creates huge electricity bills in addition to the price of all the 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 from 50 cents to $ 10 per day using only consumer-grade hardware.

But how do miners make a profit? The more computing power they manage to accumulate, the more opportunities they have to solve cryptographic puzzles. Once a miner manages to solve the puzzle, they receive a reward and a transaction fee.

As a cryptocurrency attracts more interest, mining becomes more difficult and the number 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.

As of November 2017, almost 17 million Bitcoins had been mined and distributed. However, as the rewards are going to get smaller and smaller, each Bitcoin mined will become more and more valuable.

All of these factors make mined cryptocurrencies an extremely competitive race that rewards first-time users. However, depending on where you live, the profits made from mining may be subject to taxes and money transmission regulations. In the United States, FinCEN issued guidance according to which the mining 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.

You can also read: How to mine Bitcoin: everything you need to know

4. Accept as Payment (for Business)

If you own a company and you are looking for new potential clients, the acceptance of cryptocurrencies as a form of payment may be a solution for you. Interest in cryptocurrencies has never been greater and is sure to continue to rise. Along with the growing interest, the number of crypto-ATMs located around the world is also growing. Coin ATM Radar currently includes nearly 1,800 ATMs in 58 countries.

The first thing you should do is inform your customers that your company accepts cryptocurrencies. Just placing a sign on your cash register should do the trick. Payments can be accepted using hardware terminals, touch screen applications, or simple wallet addresses via QR codes.

There are many different services that you can use to be able to accept cryptocurrency payments. 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 accepting Bitcoins.

In the United States, Bitcoin and other cryptocurrencies have been recognized as 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, US-based companies 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.

Cryptocurrency Legality

As cryptocurrencies become increasingly popular, law enforcement agencies, tax authorities, and legal regulators around the world are trying to understand their essence and how they should fit into existing legal frameworks and regulations.

With the introduction of Bitcoin, the first cryptocurrency, a completely new paradigm was generated. Decentralized, self-sustaining digital currencies that do not exist in any physical form or form and are not controlled by any entity have generated controversy among historic regulators.

Authorities around the world are concerned about how attractive cryptocurrencies are to traders of illegal goods and services. In addition, they are concerned about its use in money laundering and tax evasion schemes.

As of November 2017, Bitcoin and other digital currencies were banned only in Bangladesh, Bolivia, Ecuador, Kyrgyzstan, and Vietnam, with China and Russia poised to ban them as well.

The Most Common Cryptocurrencies:

1. Bitcoin – The first cryptocurrency that started it all.

2. Ethereum – a fully programmable Turing coin that allows developers to create different distributed applications and technologies that would not work with Bitcoin.

3. Ripple – Unlike most cryptocurrencies, it does not use a Blockchain to reach 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.

4. Bitcoin Cash – A fork of Bitcoin backed by the largest Bitcoin mining company and manufacturer of ASIC chips for Bitcoin mining. It has only been around for a couple of months, but it has already skyrocketed to the top five cryptocurrencies in terms of market capitalization.

5. NEM – Unlike most other cryptocurrencies that use a Proof of Work algorithm, it uses Proof of Importance, which requires users to 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 overall NEM network.

6. 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 hold four times the maximum number of coins at 84 million.

7. IOTA – The advanced accounting technology of this cryptocurrency is called ‘Tangle’ and it requires the sender in a transaction to perform a Proof of Work that approves two transactions. Hence, IOTA has removed dedicated miners from the process.

8. NEO – It is a network of smart contracts that allows the development of all kinds of financial contracts and third-party distributed applications. It has many of the same goals as Ethereum, but it was developed in China, which may give it some advantages due to a better relationship with Chinese regulators and local businesses.

9. Dash – It is a two-tier network. The first tier is the miners that secure the network and record transactions, while the second consists of “master nodes” that relay transactions and enable the InstantSend and PrivateSend transaction type. The former is significantly faster than Bitcoin, while the latter is completely anonymous.

10. 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.

11. Monero – A cryptocurrency with private transaction capabilities and one of the most active communities, which is due to its open and privacy-focused ideals.

12. Ethereum Classic – An original version of Ethereum. The split happened after a decentralized autonomous organization built on top of the original Ethereum was hacked.

Cryptocurrency Market Capitalization

(statistics extracted on May 15, 2019)

How to Store Cryptocurrencies?

Unlike most traditional currencies, cryptocurrencies are digital, which involves 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 various types of cryptocurrency wallets to suit different needs. If your priority is privacy, you may want to go 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 can be affiliated with exchanges or with independent platforms.

You can also read: Bitcoin Wallets for Beginners: Everything You Need to Know

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. Also, you can buy BTC using gift cards, cryptocurrency exchanges, mutual funds, and you can even trade face-to-face.

When it comes to other less popular cryptocurrencies, the purchase options are not that diverse. However, there are exchanges where you can acquire various cryptocurrencies in exchange for fiat currencies or Bitcoins. Face-to-face trading is also a popular way to acquire coins. The purchase options depend on the particular cryptocurrency, its popularity, and its location.

We invite you to read: How to buy Bitcoin: Best practices, where to buy, tips

Benchmarks in Cryptocurrencies and Opinion Leaders to Follow

1. Don Tapscott – Media theorist, author of several books on Blockchain and cryptocurrencies.

2. Vitalik Buterin – Creator of Ethereum.

3. Gilles Babinet – A French multi-entrepreneur, the Digital Champion of France.

4. Vinny Lingham – CEO / Co-Founder of Civic Key.

5. Michael Mainelli – Financial scientist promoting social advancement through better finance and technology.

6. Jim Marous – Co-editor of The Financial Brand and owner and editor of the Digital Banking Report.

7. Brett KingMoven Founder / CEO, Bestselling Author, Innovator of the Year.

8. Charlie Lee – Creator of Litecoin.

9. Brock Pierce – Founder of more than 10 Fintech companies.

10. Sally Eaves – CTO and Thought Leader in Emerging Technology, Online Media, Social Innovation, etc.

11. Roger Ver – The world’s first investor in Bitcoin initiatives, such as,, BitPay, Kraken,, etc.

12. Erik Voorhees – CEO of ShapeShift .

13. Tuur Demeester – Economist and Investor, Editor-in-Chief of Adamant Research.

14. Bruce Porter Jr. – American entrepreneur.

15. Dinis Guardia – CEO / Founder of Intelligent HQ.

Where to Discuss Cryptocurrencies?

1. CryptoCompare

2. Cryptocurrency Talk

3. Bitcoin talk

4. Coinage

5. Bitcoin Wealth Club

6. BTC Warriors

7. Bitcoin Subreddit

8. Ethereum Subreddit

9. Litecoin Subreddit

10. Cryptocurrency Subreddit

11. Hi Crypto News

Future of Cryptocurrencies

1. Bill Gates, Microsoft co-founder, investor, and philanthropist:

Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than currency as you don’t have to be physically in the same place and of course for large transactions common currencies can be quite inconvenient.” [ SOURCE ]

2. Richard Branson, founder of Virgin Galactic and more than 400 other companies:

Well, I think it is working. There may be other currencies like this that may be even better. But in the meantime, there is a huge industry around Bitcoin.- People have made fortunes with Bitcoin, some have lost money. It is volatile, but people also make money from volatility. ” [ SOURCE ]

3. Al Gore, Former Vice President of the United States:

When Bitcoin currency is converted from currency to cash, that interface should remain under some regulatory safeguards. I think the fact that within the Bitcoin universe an algorithm supersedes the role of government … [which] is really cool.“. [ SOURCE ]

4. Eric Schmidt, CEO of Google:

[Bitcoin] is a remarkable crypto achievement … The ability to create something that is not duplicatable in the digital world has enormous value … A lot of people will build businesses from it.” [ SOURCE ]

5. Peter Thiel, co-founder of PayPal:

PayPal had these goals of creating a new currency. We failed at that, and we just created a new payment system. I think Bitcoin has succeeded at the level of a new currency, but the payment system is something that it lacks. It is very difficult to use, and that is the big challenge on the Bitcoin side. ” [ SOURCE ]