What is cryptocurrency, a must-read guide for beginners

​Cryptocurrency is a digital or virtual currency intended to be used as a medium of exchange. It uses encryption technology to protect and verify transactions and control the creation of new units of specific cryptocurrencies. Essentially, a cryptocurrency is a restricted entry in the database, and no one can change it unless certain conditions are met.

Authoritative interpretation What is cryptocurrency, a must-read guide for beginners

history?

In the technology boom of the 90s, many attempts have been made to create digital currencies. Systems such as Flooz, Beenz and DigiCash appeared on the market but inevitably failed. There are many reasons for their failure, such as fraud, financial problems, and even friction between company employees and bosses.

It is worth noting that all these systems use a "trusted third party" approach, which means that the company behind them will verify and facilitate transactions. Due to the failure of these companies, the establishment of a digital cash system has long been considered the cause of failure.

Then, in early 2009, an anonymous programmer or group of programmers under the alias Satoshi Nakamoto launched Bitcoin. Satoshi Nakamoto described it as a "point-to-point electronic cash system." It is completely decentralized, which means there are no servers involved and no central control. The concept is very similar to a peer-to-peer network used for file sharing.

One of the most important issues that any payment network must solve is double spending. This is a fraudulent technique and it spends the same amount twice. The traditional solution is a trusted third party-a central server-to keep balances and transaction records. However, this method usually always requires a permission to control your funds and have all your personal details.

In a decentralized network like Bitcoin, every participant needs to complete this work. This is done through the blockchain-the blockchain is the public ledger of all transactions that occur within the network, which is available to everyone. Therefore, everyone in the network can see the balance of each account.

Each transaction is a file containing the public keys (wallet addresses) of the sender and recipient and the number of coins transferred. The sender also needs to use its private key to cancel the transaction. All these are just basic cryptography. Eventually, the transaction is broadcast on the network, but it needs to be confirmed first.

In a cryptocurrency network, only miners can confirm transactions by solving cryptographic puzzles. They accept the transaction, mark it as legitimate and spread it on the network. After that, every node of the network adds it to its database. Once the transaction is confirmed, the transaction becomes unforgeable and irreversible, and miners will receive rewards and transaction fees.

In essence, any cryptocurrency network is based on the absolute consensus of all participants on the balance and legality of transactions. If the nodes of the network are inconsistent on a single balance, the system will basically collapse. However, there are many rules that are pre-established and programmed into the network to prevent this from happening.

The reason for using cryptocurrency is that the process of maintaining consensus can be ensured through strong encryption technology. This, together with the above factors, makes third parties and blind trust as a concept completely redundant.

What can you do with cryptocurrency?

1. Purchase goods

In the past, trying to find merchants who could accept cryptocurrency was very difficult, if not impossible. However, things are completely different now.

Many merchants online and offline accept Bitcoin as a payment method. They range from large online retailers such as Overstock and Newegg to small local shops, bars and restaurants. Bitcoin can be used to pay for hotels, airline tickets, jewelry, applications, computer parts, and even college degrees.

Other digital currencies such as Litecoin, Ripple, Ethereum, etc. have not yet been widely accepted. However, things are getting better and better. Apple has authorized at least 10 different cryptocurrencies on the App Store as viable payment methods.

Of course, users of cryptocurrencies other than Bitcoin can exchange their coins for BTC at any time. In addition, there are gift card sales sites such as Gift Off, which accept about 20 different cryptocurrencies. With gift cards, you can basically buy anything with cryptocurrency.

Finally, markets like Bitify and OpenBazaar only accept cryptocurrencies.

1. Investment

Authoritative interpretation What is cryptocurrency, a must-read guide for beginners

Many people believe that cryptocurrency is the hottest investment opportunity currently available. Indeed, there are many stories about people becoming millionaires by investing in Bitcoin. Bitcoin is by far the most well-known digital currency. Just last year, a Bitcoin was worth 800 US dollars. In November 2017, the price of one bitcoin exceeded $7,000.

Ethereum may be the second most valuable cryptocurrency, and it has recorded the fastest increase in digital currency history. Since May 2016, its value has increased by at least 2,700%. Since mid-2013, the total market value of all cryptocurrencies has soared by more than 10,000%.

However, it is worth noting that cryptocurrency is a high-risk investment. Their market value fluctuates like other assets. In addition, it is not regulated to a certain extent, there is always the risk of banning them in some jurisdictions, and any cryptocurrency exchange may be hacked.

If you decide to invest in cryptocurrency, Bitcoin is clearly still the main cryptocurrency. However, in 2017, its share in the crypto market has dropped sharply from 90% to only 40%. There are currently many options. Some coins are more focused on Bitcoin than privacy, some coins are less open and decentralized than Bitcoin, and some just copy it directly.

Although buying Bitcoin is easy-there are many exchanges where BTC can be traded-other cryptocurrencies are not easily available. However, this situation is gradually improving as major exchanges (such as Kraken, BitFinex, BitStamp) and many other exchanges start to sell Litecoin, Ethereum, Monero, Ripple, etc. There are several other different ways of coin insertion, for example, you can trade face-to-face with the seller or use a Bitcoin ATM.

Once the cryptocurrency is purchased, a storage method is needed. All major exchanges provide wallet services. However, although this may seem convenient, it is better to store assets in offline wallets on hard drives, or even invest in hardware wallets. This is the safest way to store coins, and it gives you complete control of your assets.

As with any other investment, you need to pay close attention to the market value of cryptocurrencies and any news related to them. Coinmarketcap is a one-stop solution for tracking the price, quantity, circulating supply and market value of most existing cryptocurrencies.

Depending on the jurisdiction you live in, once you make a profit or loss from investing in cryptocurrency, you may need to include it in your tax report. In terms of taxation, countries treat cryptocurrencies in very different ways. In the United States, the Internal Revenue Service stipulates that Bitcoin and other digital currencies should be taxed as property rather than currency. For investors, this means that long-term gains and losses arising from cryptocurrency transactions should be taxed at the capital gains tax rate applicable to each investor, with a maximum tax rate of 15%.

1. Mine

Authoritative interpretation What is cryptocurrency, a must-read guide for beginners

Miners are the most important part of any cryptocurrency network, and like transactions, mining is an investment. Essentially, miners provide bookkeeping services for their respective communities. They contributed their computing power to solve complex cryptographic puzzles, which is essential for confirming transactions and recording them in a distributed public ledger called a blockchain.

One of the interesting things about mining is that the difficulty of the puzzle continues to increase, related to the number of people trying to solve the puzzle. Therefore, the more popular a certain cryptocurrency becomes and the more people try to mine it, the more difficult the process becomes.

Many people get rich by mining Bitcoin. In the past, you could make considerable profits from mining using only a computer or even a powerful laptop. Nowadays, Bitcoin mining can only start profitable when you are willing to invest in industrial-grade mining hardware. Of course, this will generate huge electricity bills on top of the price of all necessary equipment.

Currently, as far as beginners are concerned, Litecoin, Dogecoin and Feathercoin are considered the best cryptocurrencies. For example, according to the current value of Litecoins, using only consumer-grade hardware, your daily income may be between 50 cents and 10 dollars.

But how do miners make money? The stronger the computing power they accumulate, the greater the chance of solving cryptographic puzzles. Once miners manage to solve the puzzle, they will receive rewards and transaction fees.

As cryptocurrencies attract more interest, mining has become more and more difficult, and the number of coins obtained as a reward has decreased. For example, when Bitcoin is first created, the reward for successful mining is 50 BTC. Now, the reward is 12.5 bitcoins. This happened because the Bitcoin network was designed so that a total of only 21 million coins can be circulated.

As of November 2017, nearly 17 million Bitcoins have been mined and distributed. However, as the reward gets smaller and smaller, every bitcoin mined will become more and more valuable exponentially.

All these factors make mining cryptocurrency a highly competitive arms race, rewarding early adopters. However, depending on where you live, the profits generated by mining may be subject to taxation and remittance regulations. In the United States, FinCEN has issued a guideline under which mining cryptocurrency and exchanging it for fixed currency can be regarded as currency transmission. This means that miners may need to comply with special laws and regulations regarding such activities.

1. Accept payment (for business)

Authoritative interpretation What is cryptocurrency, a must-read guide for beginners

If you happen to own a business and are looking for potential new customers, then accepting cryptocurrency as a payment method may be the solution for you. People's interest in cryptocurrencies has never been so high, and it will only increase. With increasing interest, the number of encrypted ATMs located all over the world is increasing. The coin ATM radar currently lists nearly 1,800 ATMs in 58 countries/regions.

First, you need to let customers know that your business accepts cryptocurrency. Just sign next to the cash register. You can then use a hardware terminal, a touch screen application or a simple wallet address to accept payment via QR code.

You can use many different services to accept payments in cryptocurrency. For example, CoinPayments currently accepts more than 75 different digital currencies, and each transaction only charges 0.5% commission. Other popular services include Cryptonator, CoinGate and BitPay, the latter only accepting Bitcoin.

In the United States, Bitcoin and other cryptocurrencies have been recognized as convertible virtual currencies, which means that accepting them as a payment method is exactly the same as accepting cash, gold or gift cards.

For tax purposes, U.S. companies that accept cryptocurrency need to record sales references, the amount charged in a specific currency, and the date of the transaction. If business tax is payable, the payable amount is calculated based on the average exchange rate at the time of sale.

The legality of cryptocurrency?

As cryptocurrencies become more and more mainstream, law enforcement agencies, tax authorities and legal regulators around the world are trying to understand the concept of cryptocurrencies and where they fit into existing regulations and legal frameworks.

With the advent of Bitcoin, the first cryptocurrency, a whole new paradigm was created. There is no decentralization in any physical shape or form and not under the control of any single entity. Self-sustaining digital currencies will always cause turmoil in regulators.

There are many concerns about the decentralized nature of cryptocurrencies and their ability to be used almost completely anonymously. Authorities around the world are worried about the attractiveness of cryptocurrency to traders of illegal goods and services. In addition, they are worried about using it for money laundering and tax evasion programs.

As of November 2017, only Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Vietnam have banned the use of Bitcoin and other digital currencies, and China and Russia will soon ban them. However, other jurisdictions have not made the use of cryptocurrency illegal, but the laws and regulations may vary from country to country.

The most common cryptocurrency?

Bitcoin — the first cryptocurrency that started all this.

Ethereum—a Turing-complete programmable currency that allows developers to build different distributed applications and technologies that are not applicable to Bitcoin.

Volatility-Unlike most cryptocurrencies, it does not use blockchain to reach consensus on transactions within the network. Instead, an iterative consensus process is implemented, which makes it faster than Bitcoin but also vulnerable to hacker attacks.

Bitcoin Cash — A Bitcoin fork supported by the largest Bitcoin mining company and ASIC Bitcoin mining chip manufacturer. It has only existed for a few months, but has soared to the top five cryptocurrencies in terms of market capitalization.

NEM — Unlike most other cryptocurrencies that use proof-of-work algorithms, it uses proof of importance, which requires users to already own a certain number of coins to obtain new coins. It encourages users to spend their funds and track transactions to determine the importance of a particular user to the entire NEM network.

Litecoin-a cryptocurrency that aims to become "digital silver" compared to Bitcoin's "digital gold". It is also a fork of Bitcoin, but unlike its predecessor, it can generate four times as many blocks faster and has four times the number of coins with a maximum number of 84 million.

IOTA — This breakthrough ledger technology for cryptocurrencies is called "entanglement," and it requires the sender of a transaction to perform a proof of work to approve two transactions. Therefore, IOTA has removed dedicated miners from the process.

NEO-This is a smart contract network that allows various financial contracts and third-party distributed applications to be developed on top of it. It has many of the same goals as Ethereum, but it was developed in China, and it is likely to bring some advantages to it due to the continuous improvement of relations with Chinese regulators and local companies.

Dash-This is a two-tier network. The first layer is a miner who ensures network security and records transactions, and the second layer is a "master node" that relays transactions and enables InstantSend and PrivateSend type transactions. The former is much faster than Bitcoin, while the latter is completely anonymous.

Qtum-It is a merger of Bitcoin and Ethereum technologies for commercial applications. The network is known for the reliability of Bitcoin, while allowing the use of smart contracts and distributed applications, which works very similarly in the Ethereum network.Monero-a cryptocurrency with private transactions and one of the most active communities, due to its ideals of openness and focus on privacy.

Ethereum Classic — the original version of Ethereum. After a decentralized autonomous organization built on the original Ethereum was hacked, the split occurred.

How to store it?

Unlike most traditional currencies, cryptocurrencies are digital, which requires a completely different approach, especially when storing it. Technically, you do not store your cryptocurrency units. Instead, it is the private key used to sign transactions that require secure storage.

There are several different types of cryptocurrency wallets that can meet different needs. If your priority is privacy, then you may want to choose a paper or hardware wallet. These are the safest ways to store cryptocurrency funds. There are also "cold" (offline) wallets stored on your hard drive and online wallets, which can be linked to exchanges or independent platforms.

How to buy?

There are many different options for Bitcoin. For example, there are currently nearly 1,800 Bitcoin ATMs in 58 countries. In addition, you can use gift cards, cryptocurrency exchanges, investment trusts to buy BTC, and even face-to-face transactions.

When it comes to other less popular cryptocurrencies, the purchase options are not that diverse. However, there are still many exchanges where you can buy various cryptocurrencies for fixed currencies or Bitcoin. Face-to-face transactions are also a popular way to obtain coins. The purchase options depend on the specific cryptocurrency, its popularity, and your location.