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

Buy goods

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.

Read more in the article “What can I buy with Bitcoins?”

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.

Mine

Miners are the single most important part of any cryptocurrency network, and much
like trading, miningis an investment. Essentially, miners are providing a bookkeeping
service for their respective communities. They contribute their computing power to
solving complicated cryptographic puzzles, which is necessary to confirm a transaction
and record it in a distributed public ledger called the Blockchain.

One of the interesting things about mining is that the difficulty of the puzzles is
constantly increasing, correlating with the number of people trying to solve it. So, the
more popular a certain cryptocurrency becomes, the more people try to mine it, the
more difficult the process becomes.

A lot of people have made fortunes by mining Bitcoins. Back in the days, you could make
substantial profits from mining using just your computer, or even a powerful enough
laptop. These days, Bitcoin mining can only become profitable if you’re willing to invest
in an industrial-grade mining hardware. This, of course, incurs huge electricity bills on
top of the price of all the necessary equipment.

Currently, Litecoins, Dogecoins and Feathercoins are said to be the best

cryptocurrencies in terms of being cost-effective for beginners. For instance, at the
current value of Litecoins, you might earn anything from 50 cents to 10 dollars a day
using only consumer-grade hardware.

But how do miners make profits? The more computing power they manage to
accumulate, the more chances they have of solving the cryptographic puzzles. Once a
miner manages to solve the puzzle, they receive a reward as well as a transaction fee.

As a cryptocurrency attracts more interest, mining becomes harder 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 stands at 12.5 Bitcoins. This
happened because the Bitcoin network is designed so that there can only be a total of 21
mln coins in circulation.

As of November 2017, almost 17 mln Bitcoins have been mined and distributed.
However, as rewards are going to become smaller and smaller, every single Bitcoin
mined will become exponentially more and more valuable.

All of those factors make mining cryptocurrencies an extremely competitive arms race
that rewards early adopters. However, depending on where you live, profits made from
mining can be subject to taxation and Money Transmitting regulations. In the US, the
FinCEN has issued a guidance, according to which mining of cryptocurrencies and
exchanging them for flat currencies may be considered money transmitting. This means
that miners might need to comply with special laws and regulations dealing with this
type of activities.

Read more in the article “How to Mine Bitcoin: Everything You Need to Know”.

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.

Legality of cryptocurrencies
As cryptocurrencies are becoming more and more mainstream, law enforcement
agencies, tax authorities and legal regulators worldwide are trying to understand the
very concept of crypto coins and where exactly do they fit in existing regulations and
legal frameworks.

With the introduction of Bitcoin, the first ever cryptocurrency, a completely new
paradigm was created. Decentralized, self-sustained digital currencies that don’t exist in
any physical shape or form and are not controlled by any singular entity were always
set to cause an uproar among the regulators.

A lot of concerns have been raised regarding cryptocurrencies’ decentralized nature and
their ability to be used almost completely anonymously. The authorities all over the
world are worried about the cryptocurrencies’ appeal to the traders of illegal goods and
services. Moreover, they are worried about their use in money laundering and tax
evasion schemes.

As of November 2017, Bitcoin and other digital currencies are outlawed only in
Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Vietnam, with China and Russia being on
the verge of banning them as well. Other jurisdictions, however, do not make the usage
of cryptocurrencies illegal as of yet, but the laws and regulations can vary drastically
depending on the country.

Read more: Is Bitcoin Legal

 Most common cryptocurrencies
 Bitcoin — The first ever cryptocurrency that started it all.
 Ethereum — A Turing-complete programmable currency that lets developers build
different distributed apps and technologies that wouldn’t work with Bitcoin.
 Ripple — Unlike most cryptocurrencies, it doesn’t use a Blockchain in order to reach a
network-wide consensus 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 that is supported by the biggest Bitcoin mining
company and a manufacturer of ASICs Bitcoin mining chips. It has only existed for a
couple of months but has already soared to the top five cryptocurrencies in terms of
market cap.
 NEM — Unlike most other cryptocurrencies that utilize a Proof of Work algorithm, it
uses Proof of Importance, which requires users to already possess certain amounts of
coins in order to be able to get new ones. It encourages users to spend their funds and
tracks the transactions to determine how important a particular user is to the overall
NEM network.
 Litecoin — A cryptocurrency that was created with an intention to be the ‘digital silver’
compared to Bitcoin’s ‘digital gold.’ It is also a fork of Bitcoin, but unlike its predecessor,
it can generate blocks four times faster and have four times the maximum number of
coins at 84 mln.
 IOTA — This cryptocurrency’s breakthrough ledger technology is called ‘Tangle’ and it
requires the sender in a transaction to do a Proof of Work that approves two
transactions. Thus, IOTA has removed dedicated miners from the process.
 NEO — It’s a smart contract network that allows for all kinds of financial contracts and
third-party distributed apps to be developed on top of it. It has many of the same goals
as Ethereum, but it’s developed in China, which can potentially give it some advantages
due to improved relationship with Chinese regulators and local businesses.
 Dash — It’s a two-tier network. The first tier is miners that secure the network and
record transactions, while the second one consists of ‘masternodes’ that relay
transactions and enable InstantSend and PrivateSend type of transaction. The former is
significantly faster than Bitcoin, whereas the latter is completely anonymous.
 Qtum — It’s a merger of Bitcoin’s and Ethereum’s technologies targeting business
applications. The network boasts Bitcoin’s reliability, while allowing for the use of smart
contracts and distributed applications, much how it works within the Ethereum
network.
 Monero — A cryptocurrency with private transactions capabilities and one of the most
active communities, which is due to its open and privacy-focused ideals.
 Ethereum Classic — An original version of Ethereum. The split happened after a
decentralized autonomous organization built on top of the original Ethereum was
hacked.