What Are Cryptocurrencies: The Complete Beginners Guide

What Are Cryptocurrencies: The Complete Beginners Guide

Cryptocurrencies are virtual currencies that were created to work as a new channel of exchange.

Cryptocurrencies use a system called cryptography which secures and verifies transactions and manages the creation of new units of a specific cryptocurrency.

Cryptocurrencies are entries contained in a database that no one can change unless specific requirements are met.

The History of Cryptocurrencies

The technological jump in the 90’s led to the idea of creating a virtual currency by using systems like DigiCash, Flooz, and Beenz.

This idea inevitably failed due to various reasons like fraud and misunderstandings within the members of each company.

Each system used a trusted third-party approach, which means that the companies behind the systems were directly verifying and facilitating the transactions.

Since all these companies have had their failures, the creation of digital cash was deemed a lost cause for a long time.

Eventually, in 2009, an unknown programmer or possibly a team of programmers who used the nickname Satoshi Nakamoto released Bitcoin.

Satoshi defined Bitcoin as a ‘peer-to-peer virtual cash system.’

Cryptocurrency Explained

Let’s take a brief look at how cryptocurrency works.

Since Bitcoin uses a decentralized system, there was no need for using a server or a central controlling power.

This system is closely like peer-to-peer networks used for sharing files.

By far, one of most relevant problems that payment networks face is double-spending.

This is caused by a fraudulent activity of paying twice the amount required.

Traditionally, the solution was using a trusted third-party also known as a central server that keeps records of someone’s transactions and balances.

However, this means that a central power has control over your details and your funds.

With Bitcoin using a decentralized network, every user is needed to do the task.

The task is done with the use of the BlockChain which is a ledger of every single transaction that occurred in the network, and the information is accessible by everyone.

Hence, everyone within the network can see everyone’s balance.

What Can You Do with Cryptocurrencies?

  • Buy Goods

Back in the day, finding a merchant that accepted cryptocurrencies as a payment method was exceedingly rare, or even impossible.

However, times have changed, and people have become more open-minded to the idea.

There are many merchants, both online and offline, that accept BTC’s as a payment method.

These range from popular online merchants like Newegg and Overstock to local shops, restaurants, coffee shops, and bars.

Bitcoin can also be used for paying for flights, hotels, jewelry, electronics, apps and even a degree.

Other virtual currencies like Ethereum, Ripple, and Litecoin and many others are not as accepted as Bitcoin yet.

However, as things change, these options have become more acknowledged, with Apple authorizing 10 various cryptocurrencies as an accepted payment method in its app store.

As expected, users of different cryptocurrencies can exchange their coins for BTC.

Also, online merchants that sell gift cards, such as Gift Off, accept over 20 different kinds of cryptocurrencies.

Through these gift cards, you can buy anything using cryptocurrencies.

Lastly, marketplaces like Openbazaar and Bitify accept only cryptocurrencies as a payment method.

  • Invest

Lots of people have heard that cryptocurrencies are the biggest investment opportunity that’s currently available.

There are a ton of stories of lucky people becoming instant millionaires because of their investment in Bitcoin.

Bitcoin is by far the most recognizable virtual currency which was valued at $800 last year and climbed up to $7,000 in November 2017 making it the most expensive cryptocurrency to date.

Ethereum, which comes second in line as a high-value cryptocurrency, has been recorded as having the fastest increase that virtual currency has ever experienced.

As of May 2016, ETH’s value increased by 2,700 percent.

It’s market cap increased by more than 10,000 percent since 2013.

However, it should be noted that cryptocurrencies are a risky investment.

Their market prices fluctuate, unlike another asset does. Also, cryptocurrency is partially unregulated so there is always a chance of getting prohibited in other places, and they can also be possibly hacked.

If you finally decided to invest in a cryptocurrency, Bitcoin should be at the top of the list.

However, in 2017, Bitcoin experienced a dramatic fall in the crypto-market share, from 90 percent to only 40 percent.

There’s quite some options that are currently available, with some of the coins being focused on privacy, and others that are not as open and decentralized like Bitcoin and some are just shamelessly copying it.

It’s very easy to acquire Bitcoins.

There are many different exchanges that offer BTC trades.

However, other coins are not as easy to acquire.

Major exchanges like Kraken, BitStamp, Bitfinex and many others are slowly rolling out different coin trades such as Ethereum, Ripple, Litecoin, Monero, and many more.

There are also alternative options for acquiring coins, for example, you can do peer-to-peer trading with someone who’s selling the coins, or you can use a trusted Bitcoin ATM.

When you’ve successfully bought a coin, the next thing to think about is the way to store your investment.

Most exchanges, especially the major ones, offer coin wallet services.

It may seem to be the most convenient way, but it is always best to store your coins in an offline wallet on your hard drive or invest in a physical hardware wallet.

This is by far the best way to store your assets since this reduces the chances of getting affected by hacking attacks that often happen in online exchanges.

Not only does it keep your assets safe, but it also gives you full control over them.

Like any other investment, you should always keep a close eye on the market value of your cryptocurrencies and to any news relating to them.

CoinMarketCap is one of the options if you want a one-stop site for price tracking, supply circulation, the volume of most cryptocurrencies that exist today.

The jurisdiction where you live in may require tax reports once you’ve started to invest in cryptocurrencies, whether you’ve earned a profit or suffered a loss.

Taxation laws on cryptocurrencies may vary from place to place. In the United States, the IRS has ruled cryptocurrencies as property.

This means that for investors, accumulated profits and losses from investing in cryptocurrencies will be taxed based on the investor’s capital profit rate, which remains at 15 percent maximum.

  • What is cryptocurrency mining/what is a blockchain?

Miners are an essential part of any cryptocurrencies blockchain, and just like trading, mining is also an investment.

Miners provide bookkeeping services in each of their assigned communities.

They are the ones that provide the computing power to solve sophisticated cryptographic puzzles, which is essential in confirming each transaction made and logged it into a public ledger known as the block chain.

One incredibly interesting thing about cryptocurrency mining is that each puzzle’s difficulty is constantly increasing, coordinating with the volume of the miners solving it.

The more an individual cryptocurrency becomes popular, the more miners try to mine it, hence making each puzzle more difficult to solve.

Loads of people have made a fortune just by mining Bitcoins.

Back then, mining from your computer could already help you make a substantial profit.

Nowadays, mining Bitcoin can give you profit if you invest in an incredibly expensive industrial-grade mining rig.

Not only is this setup expensive, but it can also make your electric bill skyrocket.

Coins like Litecoin, Feathercoin, and Dogecoin are rumored to be the most cost-effective cryptocurrencies for beginner miners.

For example, at Litecoins current market value, you might be able to earn 50 cents to even a dollar a day with even mediocre hardware.

Making a profit depends on the processing power that your computer can produce. Once the miner has managed to solve a whole puzzle, they will be able to receive a generous reward and a fee for the transaction.

Once a cryptocurrency gains more attention, earnings from mining become less profitable since the reward for successfully mining decreases.

For instance, successfully mining entailed a reward of 50 BTC a few years ago.

Nowadays, the reward for successfully mining is much lower. This is because of the network’s design which limits the number of coins in circulation at only 21 million BTC.

Since November 2017, over 17 million BTC’s have been mined and distributed. However, the rewards have decreased dramatically since the value of each coin has become increasingly high.

These factors make cryptocurrency mining a competition that has rewarded early participants.

Where you live can still affect your profit due to taxation and transmission regulations.

In the United States, FinCEN has issued guidance which says mining cryptocurrencies and trading them for cash is considered as money transmission.

This subjects miners to special laws and unique regulations for this type of activity.

Accept as Payment

If you’re a business owner looking for new potential customers, getting in the loop and accepting cryptocurrencies as a payment method could be the solution for you.

There’s been a growing interest in cryptocurrencies, and it will only keep on growing as time goes by.

Along with the growing audience, crypto ATMs has also been popping up all over the world.

According to a Cryptocurrencies Coin ATM Locator, there are currently 1,800 ATMs in more than 58 countries worldwide.

The first thing you should do is to inform your customers that your business accepts cryptocurrencies as a payment method by putting up a sign on your door and by the cash register.

You can accept these payments by using apps or simply by using wallet addresses and QR codes.

There are various services that can be used in accepting cryptocurrencies as payments. For instance, CoinPayments is an application that accepts over 75 cryptocurrencies and only charges 0.5 percent commission per transaction. Other apps like CoinGate, Cryptonator, and BitPay also accept cryptocurrency payments.

In the United States, cryptocurrencies are recognized as a convertible digital currency, which means that accepting it as payment is the same as accepting gold, cash, or gift cards.

For tax reasons, US-based businesses that are accepting cryptocurrencies need records and receipts of the amount received in an individual currency and the transaction date.

If the taxes on the sales are payable, the amount owed is determined by the average market price at the time of the sale.

Cryptocurrencies Legality

As the popularity of cryptocurrencies increases, the more law enforcement agencies, legal regulators, and tax agencies all over the world are trying to understand the concept of these coins and where they belong at a legal standpoint.

When Bitcoin was created, a whole new paradigm was made.

Decentralized and self-managed currencies that aren’t controlled by anyone were a new concept to regulators which caused an uproar among them.

Plenty of concerns were brought to their attention regarding cryptocurrencies, and the nature.

This alarmed the authorities worldwide since the untraceable coins could be used in illegal transactions due to their anonymity as a mode of payment.

They are concerned about cryptocurrencies use for tax evasion and money laundering schemes.

In November 2017, Cryptocurrencies were outlawed in Bolivia, Kyrgyzstan, Bangladesh, Ecuador and Vietnam with Russia and China being on the brink of completely banning these currencies as well.

Other countries, however, have not made the use of cryptocurrencies illegal yet but regulations and laws may vary in each country.

Cryptocurrencies Storage

Unlike our conventional currencies, cryptocurrencies are virtual which means a completely new approach is needed when storing them.

Technically, you don’t store the coin itself when you think about storing cryptocurrencies.

What you store is your private key, which is the signature you use for transactions.

Different cryptocurrency wallets can cater to this need.

If privacy is your number one priority, investing in a hardware wallet is the best way to go, or even a piece of paper to store your keys.

Those options are by far the best ones if you’re concerned with your privacy.

There’s also the choice of cold wallets.

In this case, the coins are stored in an offline wallet located on your hard drive, and online wallet which is directly affiliated with cryptocurrency exchanges.

How to Buy Cryptocurrencies

There are loads of options you have when buying cryptocurrencies.

For example, you can buy directly from Bitcoin ATMs.

You can also, buy from various cryptocurrency exchanges, using gift cards, investment trusts and you can also make the face-to-face trade.

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