Cryptocurrencies: What are they and How does Digital Money Work?
Cryptocurrencies: What are they and How does Digital Money Work?
Designed to work as a medium of exchange, a cryptocurrency is a digital currency. It uses the elements of cryptography to proceed with secure and verified transactions and control the creation of additional units of a cryptocurrency. Cryptocurrencies can be found in a limited entry within a database that cannot be changed unless some conditions are met. Along with other popular Cryptocurrencies, the most prevalent is that of Bitcoin. Let us first understand what cryptocurrencies are and how they work. Keep reading on to learn how digital currency can shape the future and how you can invest in cryptocurrencies smartly.
History of Cryptocurrencies:
Since the advancements in technology from the ’90s, several attempts have been made to create a digital currency. Systems such as Flooz, DigiCash, and Beenz have all been prevalent, but they faced a lot of failures. The main reasons for their failure have been financial problems and added friction between investors and employees.
Most of these systems were based on trust in intermediaries, which indicated that the companies behind them verified and backed up each transaction. Creating a platform to authorize digital cash did not go well because of the failure of such companies.
An anonymous programmer with the alias Satoshi Nakamoto had introduced Bitcoin in the year 2009. The bitcoin system was then considered to be a peer-to-peer electronic cash system. It did not seem to have any servers involved with a central authority or decentralized in simple terms.
Earlier, a payment network had a big issue to resolve regarding “double-spending.” It is a fraudulent technique in which the same amount was spent twice in the market. The traditional answer was to go to a trusted broker with a central server, who stored records of balances and transactions. This tactic smartly gave a single authority to control all of your funds and personal data.
In a decentralized network such as Bitcoin, all participants will work through a Blockchain system. This is an online public ledger of transactions that can happen within a specified network widely available for everyone to use. With this, each individual on the network can look at the balance of each account.
All Bitcoin transactions are a file consisting of the sender and recipient, the wallet address and the number of coins transferred. The sender will need to sign the transaction with his private key, and he is finally sent to the network once it is confirmed by its users dedicated to this task, who are known as “miners.”
Transactions within a cryptocurrency network can be solved only by miners to solve a crypto puzzle. They can handle transactions, mark them as legitimate, and broadcast them across the network. It then gets added to each node on the network as a database, after which the transaction is confirmed. The transaction then becomes indisputable and irreversible, and a miner receives a financial reward in the form of a bitcoin.
A cryptocurrency network solely relies on the agreement of each participant to make all balances seem legitimate. If sometimes the nodes on a specific network do not decide on a single balance, the system will break down evidently. Nonetheless, several preconfigured and programmed rules on the network can control this from happening.
The name of a cryptocurrency has been so because of the consensus maintained through the secured crypto source.
What can you do with Cryptocurrencies?
1. Buy Goods
Earlier, it was quite impossible to find a merchant that accepted cryptocurrencies as a medium of exchange. But this situation does not exist anymore and has become very different as several traders accept payment in Bitcoin. They can vary from online sellers such as Newegg to Overstock and comprise several local shops and hotels. Bitcoins can be used to pay for restaurants, flights, jewellery, in-application payments, electronics, and much more.
Other digital currencies like Litecoin, Ripple, Ethereum, etc., are not as widely accepted yet. Digital currencies like Ripple and Litecoin are not prevalent yet. However, still, things look a bit different as Apple has authorized 10 unique cryptocurrencies that can be used to pay for items in the Apple store.
Cryptocurrency users who use other currencies apart from Bitcoin can invariably exchange their coins for Bitcoin. Through gift cards, you can buy anything with a cryptocurrency, and therefore, several websites accept more than 20 different types of cryptocurrencies.
Markets such as Bitify and OpenBazaar, only accept cryptocurrencies.
You can also read:” What can I buy with Bitcoins ?”
Several people acknowledge that trading in cryptocurrency is one of the best investment opportunities available today. You will come across several success stories of people who have become millionaires due to their Bitcoin investments. It is the most recognized digital currency that has been presented to the world to date. In November 2017, the bitcoin price had interestingly surpassed $ 19,000.
The second most favoured cryptocurrency is Ethereum, and it has seen the most rapid rise a digital currency has ever shown. Since May 2016, the value of Ethereum has increased by at least 2,700 percent. Again, its market capitalization has skyrocketed by more than 10,000 percent since the last decade.
Investing in a cryptocurrency can also be risky as its market value can fluctuate rapidly. As cryptocurrencies have not been regulated yet, they still run at a risk of becoming illegal in countries and legal jurisdictions. There is an added fear that the exchanges could be easily hacked. Bitcoin should be your first choice to invest in any cryptocurrency. In the year 2017, the share of Bitcoin dropped in the crypto market from 90 percent to 40 percent. As of now, there are several other options available with added focus on privacy. Some are less decentralized than Bitcoin, while some blatantly copy them.
Kraken, BitFinex, BitStamp, and several online exchanges have already started to trade in Litecoin, Ethereum, Monero, and Ripple. There are other ways to acquire crypto, such as trading face-to-face with a trader or using a Bitcoin ATM.
Despite providing wallet storage services, It is more suitable to store your purchases in an offline wallet on your hard drive or invest in a hardware wallet. This is the securest way to reserve your coins, and it gives you full control over your assets.
You need to be alert and keep an eye on the fluctuating value of cryptocurrencies and the updates around them. Coinmarketcap is an all-inclusive solution for tracking most existing cryptocurrencies’ price, volume, circulation supply, and market cap.
You will be required to include those in your annual tax reports, and this can change depending on the jurisdiction you stay in. In terms of taxes, cryptocurrencies are feted very differently from each country. In the United States, the Internal Revenue Service ruled that Bitcoin and other digital currencies would be taxed as property, not as currency. For investors, this implies that long-term accumulative gains and losses from cryptocurrency trading are taxed at each investor’s applicable capital gains rate. This means that it can survive at a maximum of 15 percent.
The most important part of any cryptocurrency network is the miners who trade and mine for investment. The miners are providing a bookkeeping service for their respective communities. They bring the power of their computers to solve complicated cryptographic puzzles, which are required to confirm trade and record it in this distributed public ledger known as the Blockchain.
An interesting fact about mining is that the predicament of the puzzles is constantly growing. This is closely related to the number of people trying to solve it. So the more popular a specific cryptocurrency becomes, the more people try to mine it, and thus the more difficult the process to obtain it becomes.
Several people have made enormous fortunes by mining Bitcoins. Previously, you could profit from mining using just your computer or even a powerful laptop. Bitcoin mining is currently possible, and it can only be profitable if you are willing to invest in industrial-grade mining hardware. This, in return, creates a huge dent in your electricity in addition to the price of all the necessary tools.
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.
You might wonder how miners make a profit? The more computing power they collect, the more opportunities they get to solve cryptographic puzzles. Once a miner successfully solves the puzzle, they will receive a reward as a transaction fee.
Gradually, as a cryptocurrency begins to attract more interest, mining becomes more difficult, and the number of coins received as a reward declines. For instance, when Bitcoin was first created, the reward for thriving mining was 50 bitcoin, and now, the reward is 12.5 Bitcoins. This happened because the Bitcoin network was created to have only 21 million coins in circulation.
As per records, in 2017, almost 17 million Bitcoins had been mined and distributed across the world. Nonetheless, as the rewards get more undersized, each Bitcoin mined will become more and more valuable.
These factors make mined cryptocurrencies an incredibly competitive race that rewards first-time users. Yet, depending on where you stay, the proceeds made from mining bitcoins may be subject to taxes and money transmission regulations. In the United States, FinCEN issued guidance. The mining of cryptocurrencies and their exchange for fiat currencies can be regarded as money communication. This means that miners may need to comply with special laws and regulations related to mining activities.
You can also read: How to mine Bitcoin: everything you need to know.
4. Accept as Payment (for Business)
Accepting cryptocurrencies as a form of payment may be a resolution if you are on the lookout for potential clients for your new startup. The rise in cryptocurrencies is sure to increase, and the number of crypto-ATMs located globally is also growing rapidly. Coin ATM Radar currently includes approximately 1,800 ATMs in 58 countries.
You need to inform your customers that your company accepts cryptocurrencies. Placing a sign on your cash register should work wonders as well. Payments can be obtained using hardware terminals, touch screen applications, or simple wallet addresses by using QR codes.
You can use diverse services to accept cryptocurrency payments. One such example we can use is CoinPayments, as it presently accepts more than 75 different digital currencies, and they charge only 0.5 percent commission per transaction. Other notable services comprise Cryptonator, CoinGate, and BitPay, only BitPay accepting Bitcoin.
The United States recognize the virtual currencies of Bitcoin as exchangeable forms of currency. Accepting them as a form of payment is just like accepting cash, gold, or gift cards.
US-based companies that allow trading in cryptocurrencies must record a sales reference to file a tax report. They should record the amount received in a particular currency and the transaction date. If sales taxes are payable, the amount due is calculated based on the average exchange rate at the time of its sale.
With the constant advancement in cryptocurrencies, law enforcement agencies and legal authorities worldwide are seeking to understand its true essence. They are looking for a way to fit the transition into the country’s existing legal framework.
A fresh and new paradigm was generated with the advent of bitcoin in the cryptomarket. Self-reliant digital currencies that do not exist in any physical form are not controlled by any governing body or entity and have generated much disagreement among historic regulators.
Authorities around the globe are keen to talk about how attractive cryptocurrencies are to traders of illegal goods and services. Furthermore, they are concerned about its use in money laundering and tax evasion techniques.
As of November 2017, Bitcoin and other digital cryptocurrencies were banned only in Bangladesh, Bolivia, Ecuador, Kyrgyzstan, and Vietnam, with China and Russia proposing to ban them.
The Most Common Cryptocurrencies:
1. Bitcoin – The first cryptocurrency to have ever existed.
2. Ethereum – a fully programmable Turing coin that permits developers to build different distributed applications and technologies that wouldn’t work with Bitcoin.
3. Ripple – Unlike most cryptocurrencies, it does not need a Blockchain to reach consensus across the network to carry out transactions. Rather than that, a consensus process is implemented, making it faster than Bitcoin and vulnerable to hacker attacks.
4. Bitcoin Cash – This is a fork of Bitcoin funded by the largest Bitcoin mining company and is the manufacturer of ASIC chips for Bitcoin mining. It has only existed for a couple of months, but it has skyrocketed to the top five cryptocurrencies in terms of market capitalization.
5. NEM – Similar to other cryptocurrencies that use a Proof of Work algorithm, NEM uses Proof of Importance. This is something that requires users to possess certain amounts of coins already to obtain new ones. It encourages users to exhaust their funds and track transactions to decide how important a particular user is to the overall NEM network.
6. Litecoin – A cryptocurrency named Litecoin was created to be the ‘digital silver’ compared to the ‘digital gold’ that is the Bitcoin currency. It is widely regarded to be an extension of Bitcoin, but unlike its predecessor, it can generate blocks that are four times faster and hold the maximum number of coins at 84 million.
7. IOTA – The advanced accounting technology is called ‘Tangle,’ which needs the sender in a transaction to perform a Proof of Work that approves two transactions. Hence, IOTA has withdrawn devoted miners from the process.
8. NEO – NEO is a network of smart contracts that permits the development of financial contracts as well as third-party distributed applications. It has the same objective of that as Ethereum. It was generated in China, which may give it some advantages due to a better relationship with Chinese regulators and their local businesses.
9. Dash – It is a two-tier network. The first tier is of the miners that secure the network and record all the crypto transactions. The second consists of “master nodes” that convey transactions across the nodes and enable the InstantSend and PrivateSend transactions. InstantSend is significantly faster than Bitcoin, while the latter is completely anonymous.
10. Qtum – It is a mixture of Bitcoin and Ethereum technologies that are aimed at retail applications. The network has the reliability of Bitcoin while permitting smart contracts and distributed applications, and it works just like the Ethereum network.
11. Monero – A cryptocurrency with private transaction capabilities and one of the most active communities due to its open network and ideals that pay attention to deals focused on privacy.
12. Ethereum Classic – An original version of Ethereum. The separation 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?
Similar to other traditional currencies, each token or currency needs to be stored carefully, and they need a different approach to deal with it. Technically, you would not need to store your cryptocurrency units, but rather, you can use the private key to sign transactions that must be securely stored.
There are several types of cryptocurrency wallets that 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” or offline wallets stored on your hard drive and online wallets, which can be connected with exchanges or with independent platforms.
You can also read Bitcoin Wallets for Beginners: Everything You Need to Know.
How to Buy Cryptocurrencies?
When you look to purchase bitcoins, you will see different types of tokens available in the market. To simplify, there are currently almost 1,800 Bitcoin ATMs in 58 countries. You can also buy bitcoin using gift cards, cryptocurrency exchanges, mutual funds, and you can even purchase it directly.
When compared to other cryptocurrencies that are less popular in Bitcoin, the purchase options are not entirely diverse. Nonetheless, there are exchanges where you can obtain 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, how popular it is, and where is it located.
We invite you to read: How to buy Bitcoin: Best practices, where to buy, tips.
Benchmarks in Cryptocurrencies and Opinion Leaders to Follow
- Don Tapscott – Media theorist, author of several books on Blockchain and cryptocurrencies.
- Vitalik Buterin – Creator of Ethereum.
- Gilles Babinet – A French multi-entrepreneur, the Digital Champion of France.
- Vinny Lingham – CEO / Co-Founder of Civic Key.
- Michael Mainelli – Financial scientist promoting social advancement through better finance and technology.
- Jim Marous – Co-editor of The Financial Brand and owner and editor of the Digital Banking Report.
- Brett King – Moven Founder / CEO, Bestselling Author, Innovator of the Year.
- Charlie Lee – Creator of Litecoin.
- Brock Pierce – Founder of more than 10 Fintech companies.
- Sally Eaves – CTO and Thought Leader in Emerging Technology, Online Media, Social Innovation, etc.
- Roger Ver – The world’s first investor in Bitcoin initiatives, such as bitcoin.com, blockchain.com, BitPay, Kraken, Purse.io, etc.
- Erik Voorhees – CEO of ShapeShift .
- Tuur Demeester – Economist and Investor, Editor-in-Chief of Adamant Research.
- Bruce Porter Jr. – American entrepreneur.
- Dinis Guardia – CEO / Founder of Intelligent HQ.
Where to Discuss Cryptocurrencies?
- Cryptocurrency Talk
- Bitcoin talk
- Bitcoin Wealth Club
- BTC Warriors
- Bitcoin Subreddit
- Ethereum Subreddit
- Litecoin Subreddit
- Cryptocurrency Subreddit
- 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 cool. “. [ Source]
4. Eric Schmidt, CEO of Google:
“Bitcoin is a remarkable crypto achievement, and 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 flourished at the level of a new currency, but the payment system is something that it lacks. It isn’t easy to use, and that is the big challenge on the Bitcoin side.” [ Source]