June 21, 2022

Ultimate Guide To Cryptocurrencies

CRYPTOCURRENCY MEANING

Cryptocurrency
Photo Courtesy: CFO

A digital or virtual currency designed as a medium of exchange is called cryptocurrency. Cryptocurrency uses cryptography for secured and verified transactions and also helps in creating new units of a particular cryptocurrency. Cryptocurrencies are basically limited database entries that cannot be changed by anyone unless specific conditions are met.

History of Cryptocurrencies

In the 90s there have been many attempts to create digital currency like Flooz, Digicash, Beenz etc. but these failed eventually. There were many reasons for failure like fraud, financial problems and even friction among companies’ bosses and employees.

All of these systems made use of Trusted Third Party approach, which means that the companies behind them facilitated and verified the transactions. As these companies failed, the hope of getting a digital cash system was lost for a long time.

It was in early 2009 that an anonymous programmer or a group of programmers under alias Satoshi Nakamoto came up with Bitcoin. Satoshi introduced it as ‘peer to peer’ electronic cash system.’ It is completely decentralized, which means there are no servers involved and there is no central controlling authority. This concept is similar to peer to peer file sharing on networks.

A payment network needs to solve an important problem in the form of double spending. Traditionally, we used a third party as a central server. It kept records of transactions and balances. This took care that all the information was safe and an authority was taking care of it.

Being a decentralised network, each and every participant has to do the job. This is achieved through Blockchain which is a public ledger of all transactions that occur within a network. So, everyone in the network can watch every account’s balance.

Each transaction is a file that consists of public keys of senders and recipients (address of wallet) and the amount of coins transferred. Using the private key, the transaction needs to be signed off. Although all of it is basic cryptography, the transaction needs to be confirmed first and is broadcasted to the network.

If one wants to do a transaction, the miner needs to solve a cryptographic puzzle within a cryptocurrency network. If the transaction is legitimate, they spread it across the network and after that; every node of the network adds itself to database. If a transaction gets confirmed, it cannot be revoked and the miner gets rewarded plus transaction fees.

Any cryptocurrency network needs consensus of all involved regarding legitimacy of transactions and balances. If the nodes of the network don’t have a single balance, the system usually would break but this does not happen as there are lot of rules that are programmed and pre-built into network that prevents this.

Cryptocurrencies are so called due to the consensus keeping process is ensured with strong cryptography. Due to this and other factors mentioned, the third parties & blind trust are non-existent.

What use is cryptocurrency?

Use of CryptoCurrency
Photo Courtesy: CoinFunda

Shopping

In the past it was very difficult to find a merchant that accepts cryptocurrency. The situation is completely different nowadays. A lot of merchants, both online and offline accept Bitcoins as a form of payment. These include big online retailers like Newegg and Overstock to small local shops, restaurants and bars. Bitcoins can even be used to pay for flights, hotels, apps, computer part, jewellery or a college degree.

Other digital currencies including Ripple, Ethereum, Litecoin etc are not as popular as Bitcoin. Things are changing though, for a start Apple has authorized at least 10 different cryptocurrencies as viable form of payment.

And then there is an option for Bitcoin users to exchange their currency with BTC. Many Gift Card websites accept more than 20 different cryptocurrencies and through these you can buy anything.

Then there are marketplaces like OpenBazaar and Bitify that accept cryptocurrencies only.

Invest-A High Risk Investment

Cryptocurrencies are hottest investment opportunity that is available in the market. There are a lot of stories of becoming millionaires through Bitcoins. Bitcoin is one of the most recognisable digital currency till date and last year 1 BTC was valued $800. In the November of 2017, the price of one Bitcoin was more than $7000.

Ethereum, which is the second most valued cryptocurrency is one of the fastest rising digital currency ever. It’s value has increased at least 2,700 percent since 2016. If we consider data for all the cryptocurrencies, their combined value has increased by 10000 percent since mid-2013.

It should be kept in the mind that cryptocurrencies are high risk investments. Their market value fluctuates very fast unlike any other investment. Also, it being unregulated, there is a risk that they will be outlawed in some jurisdictions and a cryptocurrency exchange can potentially be hacked.

When you invest in a cryptocurrency, bitcoin will be your first choice but since 2017, its market share in cryptocurrencies has fallen from 90 percent to 40 percent. Currently, there are many options available where some coins are privacy focused. Others are less open and decentralised and some are copying bitcoin itself.

It is very easy to buy Bitcoins as there are a lot of exchanges available that trade in BTC but other cryptocurrencies are hard to get. But the situation is improving slowly as major exchanges like BitFinex, BitStamp, Kraken and many others have started to sell LitecoinMonero, Ethereum, Ripple etc. There are also few other ways of coin, for eg, you can trade f2f with seller or use Bitcoin ATM.

When you buy a cryptocurrency, you need to store it. Most major exchanges offer wallet services. Although it is convenient but it’s best if you store your assets in offline wallet on hard drive or invest in hardware wallet. This results in one of the most secure way of storing coins and gives you full access to your assets.

When you make a profit or loss from your cryptocurrency, you may need to include it in your tax report. The taxation rules for cryptocurrency vary from country to country. In US IRS has said that Bitcoins or any other digital currency is to be taxed as property and not currency.

Mine

Mining
Photo Courtesy: SiliconAngle

One of the most important part of a cryptocurrency network are miners. Just like trading, mining is an investment. Miners are basically providing book keeping service for their communities. They make use of their computing power to solve complex cryptographic puzzles. This is required to confirm the transaction and record in a distributed public ledger like Blockchain.

As cryptocurrency becomes more interesting, the mining has become much harder and the amount of reward coins also decrease. For eg. When Bitcoin was first created, the reward for successful mining was 50 BTC bu now it has become 12.5 Bitcoins. This is due to the fact that Bitcoin is designed in such a way that there can be only 21 mln coins in circulation.

Accept As Payment

If you are an owner of a business and looking for new customers, then accepting cryptocurrency as a payment may work for you. The interest in cryptocurrencies is only going to increase further. The number of crypto ATMs are also increasing throughout the world. Acccording to Coin ATM Radar, there are around 10000 ATMs in 71 countries.

You need to make your customers aware that your business accepts cryptocurrencies. You can simply put a sign by your cash register. The payments can then be accepted using hardware terminals, wallets addresses through QR codes or touch screen apps.

There are many different services that can be used in order to accept payments in cryptocurrencies. For e.g., CoinPayments accepts over 1940 digital currencies, charging just 0.5 percent commission per transaction. Some other popular services are cryptonator, CoinGate and BitPay with later accepting only Bitcoins.

US has recognised Bitcoin and other cryptocurrencies as convertible virtual currency, which means accepting them as a payment is equivalent to accepting cash gift cards or gold.

Legality of Cryptocurrency

Legality of Cryptocurrency
Legality of Cryptocurrency

Cryptocurrencies are fast becoming mainstream and law enforcement agencies, tax authorities and legal regulators throughout the world are trying to understand the concept ogf crypto coins and new rules and regulations are being framed in order to legalise and regulate the currency.

There have been concerns regarding decentralised nature of cryptocurrencies. The currency can be used almost unanimously. The authorities throughout the world are worried about cryptocurrencies being used for trading of illegal goods and services. Money laundering and tax evasion is also a concern. That is why the currency has been outlawed by many countries.

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