What is Cryptocurrency. Guide for Beginners
A cryptocurrency is a digital or virtual currency designed to work 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 fulfilled.
History
There have been many attempts at creating a digital currency during the 90s tech boom, with systems like Flooz, Beenz and DigiCash emerging on the market but inevitably failing. There were many different reasons for their failures, such as fraud, financial problems and even frictions between companies’ employees and their bosses.
Notably, all of those systems utilized a Trusted Third Party approach, meaning that the companies behind them verified and facilitated the transactions. Due to the failures of these companies, the creation of a digital cash system was seen as a lost cause for a long while.
Then, in early 2009, an anonymous programmer or a group of programmers under an alias Satoshi Nakamoto introduced Bitcoin. Satoshi described it as a ‘peer-to-peer electronic cash system.’ It is completely decentralized, meaning there are no servers involved and no central controlling authority. The concept closely resembles peer-to-peer networks for file sharing.
One of the most important problems that any payment network has to solve is double-spending. It is a fraudulent technique of spending the same amount twice. The traditional solution was a trusted third party - a central server - that kept records of the balances and transactions. However, this method always entailed an authority basically in control of your funds and with all your personal details on hand.
In a decentralized network like Bitcoin, every single participant needs to do this job. This is done via the Blockchain - a public ledger of all transaction that ever happened within the network, available to everyone. Therefore, everyone in the network can see every account’s balance.
Every transaction is a file that consists of the sender’s and recipient’s public keys (wallet addresses) and the amount of coins transferred. The transaction also needs to be signed off by the sender with their private key. All of this is just basic cryptography. Eventually, the transaction is broadcasted in the network, but it needs to be confirmed first.
Within a cryptocurrency network, only miners can confirm transactions by solving a cryptographic puzzle. They take transactions, mark them as legitimate and spread them across the network. Afterwards, every node of the network adds it to its database. Once the transaction is confirmed it becomes unforgeable and irreversible and a miner receives a reward, plus the transaction fees.
Essentially, any cryptocurrency network is based on the absolute consensus of all the participants regarding the legitimacy of balances and transactions. If nodes of the network disagree on a single balance, the system would basically break. However, there are a lot of rules pre-built and programmed into the network that prevents this from happening.
Cryptocurrencies are so called because the consensus-keeping process is ensured with strong cryptography. This, along with aforementioned factors, makes third parties and blind trust as a concept completely redundant.
What can you do with cryptocurrency
In the past, trying to find a merchant that accepts cryptocurrency was extremely difficult, if not impossible. These days, however, the situation is completely different.
There are a lot of merchants - both online and offline - that accept Bitcoin as the form of payment. They range from massive online retailers like Overstock and Newegg to small local shops, bars and restaurants. Bitcoins can be used to pay for hotels, flights, jewelery, apps, computer parts and even a college degree.
Other digital currencies like Litecoin, Ripple, Ethereum and so on aren’t accepted as widely just yet. Things are changing for the better though, with Apple having authorized at least 10 different cryptocurrencies as a viable form of payment on App Store.
Of course, users of cryptocurrencies other than Bitcoin can always exchange their coins for BTCs. Moreover, there are Gift Card selling websites like Gift Off, which accepts around 20 different cryptocurrencies. Through gift cards, you can essentially buy anything with a cryptocurrency.
Finally, there are marketplaces like Bitify and OpenBazaar that only accept cryptocurrencies.
Invest
Many people believe that cryptocurrencies are the hottest investment opportunity currently available. Indeed, there are many stories of people becoming millionaires through their Bitcoin investments. Bitcoin is the most recognizable digital currency to date, and just last year one BTC was valued at $800. In November 2017, the price of one Bitcoin exceeded $7,000.
Ethereum, perhaps the second most valued cryptocurrency, has recorded the fastest rise a digital currency ever demonstrated. Since May 2016, its value increased by at least 2,700 percent. When it comes to all cryptocurrencies combined, their market cap soared by more than 10,000 percent since mid-2013.
However, it is worth noting that cryptocurrencies are high-risk investments. Their market value fluctuates like no other asset’s. Moreover, it is partly unregulated, there is always a risk of them getting outlawed in certain jurisdictions and any cryptocurrency exchange can potentially get hacked.
If you decide to invest in cryptocurrencies, Bitcoin is obviously still the dominant one. However, in 2017 its share in the crypto-market has quite dramatically fallen from 90 percent to just 40 percent. There are many options currently available, with some coins being privacy-focused, others being less open and decentralized than Bitcoin and some just outright copying it.
While it’s very easy to buy Bitcoins - there are numerous exchanges in existence that trade in BTC - other cryptocurrencies aren’t as easy to acquire. Although, this situation is slowly improving with major exchanges like Kraken, BitFinex, BitStamp and many others starting to sell Litecoin, Ethereum, Monero, Ripple and so on. There are also a few other different ways of being coin, for instance, you can trade face-to-face with a seller or use a Bitcoin ATM.
Once you bought your cryptocurrency, you need a way to store it. All major exchanges offer wallet services. But, while it might seem convenient, it’s best if you store your assets in an offline wallet on your hard drive, or even invest in a hardware wallet. This is the most secure way of storing your coins and it gives you full control over your assets.
As with any other investment, you need to pay close attention to the cryptocurrencies’ market value and to any news related to them. Coinmarketcap is a one-stop solution for tracking the price, volume, circulation supply and market cap of most existing cryptocurrencies.
Depending on a jurisdiction you live in, once you’ve made a profit or a loss investing in cryptocurrencies, you might need to include it in your tax report. In terms of taxation, cryptocurrencies are treated very differently from country to country. In the US, the Internal Revenue Service ruled that Bitcoins and other digital currencies are to be taxed as property, not currency. For investors, this means that accrued long-term gains and losses from cryptocurrency trading are taxed at each investor’s applicable capital gains rate, which stands at a maximum of 15 percent.
Accept as payment for business
If you happen to own a business and if you’re looking for potential new customers, accepting cryptocurrencies as a form of payment may be a solution for you. The interest in cryptocurrencies has never been higher and it’s only going to increase. Along with the growing interest, also grows the number of crypto-ATMs located around the world. Coin ATM Radar currently lists almost 1,800 ATMs in 58 countries.
First of all, you need to let your customers know that your business accepts crypto coins. Simply putting a sign by your cash register should do the trick. The payments can then be accepted using hardware terminals, touch screen apps 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 over 75 different digital currencies, charging just 0.5 percent commission per transaction. Other popular services include Cryptonator, CoinGate and BitPay, with the latter only accepting Bitcoins.
In the US, Bitcoin and other cryptocurrencies have been recognized as a convertible virtual currency, which means accepting them as a form of payment is exactly the same as accepting cash, gold or gift cards.
For tax purposes, US-based businesses accepting cryptocurrencies need to record a reference of sales, amount received in a particular currency and the date of transaction. If sales taxes are payable, the amount due is calculated based on the average exchange rate at the time of sale.
Cryptocurrency market cap
(stats retrieved on Nov. 10, 2017)
| Name | Market Cap | Price | Volume | Circulating Supply | Change (24hrs) |
| Bitcoin | $112,735,453,936 | $6760.98 |
$5,136,770,000
| 16,674,425 BTC | -5.43% |
| Ethereum | $29,227,540,706 | $305.58 | $894,988,000 | 95,647,370 ETH | -4.84% |
| Bitcoin Cash | $15,121,119,942 | $901.17 | $4,500,640,000 | 16,779,413 BCH | 37.68% |
| Ripple | $8,088,155,335 | $0.209910 | $140,243,000 | 38,531,538,922 XRP | -3.47% |
| Litecoin | $3,297,343,825 | $61.33 | $294,950,000 | 53,767,732 LTC | -5.75% |
| Dash | $2,601,563,986 | $338.71 | $115,739,000 | 7,680,801 DASH | 3.18% |
| NEO | $1,893,495,500 | $29.13 | $59,589,000 | 65,000,000 NEO | -8.16% |
| NEM | $1,804,086,000 | $0.200454 | $10,806,300 | 8,999,999,999 XEM | -6.32% |
| Monero | $1,675,861,201 | $109.28 | $87,656,500 | 15,335,901 XMR | -8.11% |
| Ethereum Classic | $1,457,787,439 | $14.98 | $299,410,000 | 97,318,182 ETC | 5.69% |
| IOTA | $1,441,775,712 | $0.518712 | $48,539,100 | 2,779,530,283 MIOTA | -5.46% |
| Qtum | $862,271,130 | $11.71 | $132,988,000 | 73,651,804 QTUM |
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 — Scientist financier promoting societal advance through better finance and technology.
- Jim Marous — Co-publisher of The Financial Brand and the owner and publisher of the Digital Banking Report.
- Brett King — Founder/CEO of Moven, 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 emergent technology, online media, social innovation, etc.
- Roger Ver — World’s first investor in Bitcoin startups, including bitcoin.com, blockchain.com, BitPay, Kraken, Purse.io, etc.
- Erik Voorhees — CEO of ShapeShift.
- Tuur Demeester — Economist and investor, Editor in Chief at Adamant Research.
- Bruce Porter Jr. — American entrepreneur.
- Dinis Guardia — CEO/Founder of Intelligent HQ.
Future of cryptocurrency
Bill Gates, co-founder of Microsoft, investor and philanthropist:
Richard Branson, founder of Virgin Galactic and more than 400 other businesses:“Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.
Al Gore, former Vice President of the United States:“Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin. — People have made fortunes off Bitcoin, some have lost money. It is volatile, but people make money off of volatility too.
Eric Schmidt, executive chairman of Google:“When Bitcoin currency is converted from currency into cash, that interface has to remain under some regulatory safeguards. I think the fact that within the Bitcoin universe an algorithm replaces the function of the government …[that] is actually pretty cool.
Peter Thiel, co-founder of PayPal:“[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value…Lot’s of people will build businesses on top of that.
“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 on the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.
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