A cryptocurrency is a
medium of exchange likenormalcurrencies
such as USD, but designed for the purpose of exchanging digital
information through a process made possible by certain principles of
cryptography. Cryptography is used to secure the transactions and to
control the creation of newcoins.
The first cryptocurrency to be created wasBitcoinback
in 2009. Today there are hundreds of other cryptocurrencies, often
referred to asAltcoins.
To put it another way,
cryptocurrency is electricity converted into lines of code with monetary
value. In the simplest of forms,
cryptocurrency is digital currency.
Unlike centralized banking,
likethe Federal Reserve
System, where governments control the value of a currency like USD
through the process of printing fiat money, government has no control
over cryptocurrencies as they arefully
decentralized.
Most cryptocurrencies are
designed to decrease in production over time like Bitcoin, which creates
a market cap on them. That's different from fiat currencies where
financial institutions can always create more, hence inflation. Bitcoin
will never have more than 21 million coins in circulation. The technical
system on which all cryptocurrencies are based on was created by Satoshi
Nakamoto.
While hundreds of different
cryptocurrency specifications exist, most are derived from one of two
protocols; Proof-of-work or Proof-of-stake. All cryptocurrencies are
maintained by a community ofcryptocurrencyminerswho are members of the general public that have set up their
computers orASIC machinesto
participate in the validation and processing of transactions.
History of Cryptocurrency
The first
cryptocurrency was Bitcoin. Bitcoin was created in 2009 by a
pseudonymous developer named Satoshi Nakamoto. Bitcoin uses SHA-256,
which is a set of cryptographic hash functions designed by theU.S
National Security Agency. Bitcoin is a
cryptocurrency that is based on the proof-of-work system.
In April 2011,Namecoin,
the firstaltcoin, was
created to form a decentralized DNS to make internet censorship more
difficult. In October 2011,Litecoinwas
released and became the first successful cryptocurrency to usescryptas
its hash function rather than SHA-256. This gave the general public the
ability to mine for litecoins without the purchase of specific hardware
such as theASIC machinesused
to mine Bitcoin.
Litecoin began receiving
media attention in late 2013 - reaching a market cap of $1 billion.Ripplecoin,
created in 2011, was built on the same protocol as Bitcoin but services
as a payment system - think of it like a Paypal for cryptocurrencies
that supports any fiat currency, cryptocurrency, commodity or even
frequent flier miles.
Cryptocurrencies & Market Capitalization
Bitcoin is the largest
cryptocurrency in both market capitalization, volume, acceptance and
notoriety, but it's not the most valuable coin.NEMstake,
while only having a market cap of $1,116,720, trades at $1,117 a coin.
Looking at the market cap,Litecointakes
second place after Bitcoin withRippleclose
behind.
One coin that you are more
than likely familiar with isDogecoin.
Dogecoin ranks, on average, thirds in trading volume, but has a
relatively low market cap - ranking number six in the largest
cryptocurrency.
What is a Cryptocurrency Hash?
Cryptocurrency mining power
is rated on a scale of hashes per seconds. A rig with a computing power
of 1kH/s is mining at a rate of 1,000 hashes a second, 1MH/s is a
million hashes per second and a GH/s is one billion hashes per second.
Every time a miner successfully solves a block, a new hash is created. A
hash algorithm turns this large amount of data into a fixed-length hash.
Like a code if you know the algorithm you can solve a hash and get the
original data out, but to the ordinary eye it's just a bunch of numbers
crammed together and remains practically impossible to get the original
data out of.
SHA vs. Scrypt
While Bitcoin and a several other coins are mined usingSHA-256,
Litecoin and many other coins, useScrypt.
This are the two major hashing functions, but several different kinds
exists and are used by other cryptpcurrencies such asscrypt-Nandx11.
The different hashing functions were adopted to answer concerns with the
SHA-256. Before, individuals were able to mine Bitcoin with their GPU's,
which require a large amount of energy. But as Bitcoin grew in
popularity, ASIC SHA-256 machine were built which made GPU mining
obsolete.
To give you an idea of
just how powerful these machines are, a mining rig running 4 GPU's would
get a hash rate of around 3.4 MH/s and consume 3600kW/h while an ASIC
machine canmine
6 TH/sand
consume 2200kW/h. This effectively killed GPU mining and left many
individuals worried about the security of the network. With less
individuals being able to profitably mine from their home computer, the
network become less decentralized. Scrypt mining was implemented with
the promise of being ASIC resistant due to the memory problem it
introduced.
Scrypt hashes require lots
of memory, which GPU's are already designed to handle and ASIC machines
were not. However, Scrypt mining require a lot of energy and eventuallyscrypt-ASIC
machineswere designed to address this problem. At this point Litecoin
consideredchanging their
proof-of-work functionto
avoid ASIC mining. Scrypt also taut that their proof-of-work is much
more energy efficient than SHA-256. Bitcoin blocks are solved at a rate
of 1 per 10 minutes while Litecoin blocks are solver at a rate of 1 per
2.5 minutes.
Cryptocurrency
Security
The security of
cryptocurrencies is two part. The first part comes from the difficulty
in finding hash set intersections, a task done by miners. The second and
more likely of the two cases is a"51%"
attack".
In this scenario, a miner who has the mining power of more than 51% of
the network, can take control of the globalblockchainledger
and generate an alternative block-chain. Even at this point the attacker
is limited to what he can do. The attacker could reverse his own
transactions or block other transactions.
Cryptocurrencies are also
less susceptible to seizure by law enforcement or having transaction
holds placed on them from acquirers such asPaypal.
All cryptocurrencies are pseudo-anonymous, and some coins have added
features to create true anonymity.
What is an ERC20 Token?
If you’re reading this page, you’ve
probably heard the term ERC20 Token thrown around, especially in the
wake of the recent boom in ICO funded blockchain start-ups.
ERC stands for Ethereum Request for
Comments. This is an official protocol for proposing improvements to the
Ethereum network. '20’ is the unique proposal ID number.
ERC20 defines a set of rules which need to be met in order for a token
to be accepted and called as 'ERC20 Token'. The standard rules apply to
all ERC20 Tokens since these rules are required to interact with each
other on the Ethereum network. These tokens are blockchain assets that
have value and can be sent and received, like Bitcoin, Litecoin,
Ethereum, or any other cryptocurrency.
Cryptocurrency Legality & Taxes
Bitcoin Taxation
While cryptocurrencies arelegal
in most countries, Iceland and Vietnam being an exception - Iceland
mainly due to their freeze on foreign exchange, they are not free from
regulations and restrictions. China hasbanned
financial institutionsfrom
handling bitcoins andRussia,
while saying cryptocurrency is legal, has made it illegal to purchase
goods with any currency other than Russian rubles.
In the U.S., the IRS has
ruled that Bitcoin is to be treated as property for tax purposes, making
Bitcoin subject to capital gains tax. The Financial Crimes Enforcement
Network (FinCEN) has issued guidelines for cryptocurrencies. The issued
guidelines contain an important caveat for Bitcoin miners: it warns that
anyone creating bitcoins and exchanging them for fiat currency are not
necessarily beyond the reach of the law. It states: "A person that
creates units of convertible virtual currency and sells those units to
another person for real currency or its equivalent is engaged in
transmission to another location and is a money transmitter."
Miners seem to fall into
this category, which could theoretically make them liable for MTB
classification. This is a bone of contention for bitcoin miners, who
have asked for clarification. This issue has not been publicly addressed
in a court of law to date.
Cryptocurrency Services
There are a host of services
offering information and monitoring of cryptocurrencies.CoinMarketcap is
an excellent way check on the market cap, price, available supply and
volume of crypto currencies.Redditis
a great way to stay in touch with the community and follow trends andCryptoCoinCharts is
full of information ranging from a list of crytocoins, exchanges,
information onarbitrage
opportunitiesand more. Our
very own site offers alist
of crypto currenciesand
their change in value in the last 24hrs, week or month.
Liteshack allows visitors to
view the network hash rate of many different coins across six different
hashing algorithms. They even provided a graph of the networks hash rate
so you can detect trends or signs that the general public is either
gaining or losing interest in a particular coin.
A hand website for miner isCoinWarz.
This site can help miners determine which coin is most profitable to
mine given their hash rate, power consumption, and the going rate of the
coins when sold for bitcoins. You can even view each coins current and
pastdifficulty.
How Can I Buy Bitcoins?
OK, so you've learned
the basics about bitcoin, the next step is toget
some bitcoins. But how? This guide will
tell you what you need to know.
You can buy bitcoins from
either exchanges, or directly from other people via marketplaces.
You can pay for them in a
variety of ways, ranging from hard cash to credit and debit cards to
wire transfers, or even with other cryptocurrencies, depending on who
you are buying them from and where you live.
Surprisingly, it's still not
easy to buy bitcoins with your credit card or PayPal, depending on your
jurisdiction.
This is because such
transactions can easily be reversed with a phone call to the card
company (ie 'chargebacks'). Since it's hard to prove any goods changed
hands in a transfer of bitcoins, exchanges avoid this payment method and
so do most private sellers.
However, the options have
recently grown for consumers in some countries.
In the US, Coinbase,
andCircle offer
purchases with credit cards.Bittylicious,CoinCornerand
Coinbase offer this service in the UK, accepting 3D Secure-enabled
credit and debit cards on the Visa and MasterCard networks.
Underbanked consumers
in the US can turn toexpresscoin,
which recently launched to serve this market, accepting money orders,
personal checks and wire transfers.
First, get yourself a bitcoin wallet
Next, you will need
a place to store your new bitcoins. In the bitcoin world, they're called
a 'wallet' but it might be best to think of them as a kind of bank
account.
Depending on the security
levels you want, different wallets will provide different levels of
security. Some act like everyday spending accounts and are comparable to
a traditional leather wallet, while others tout military-grade
protections.
The main options are:
(1) a software wallet stored onthe
hard drive of your computer, (2) an online, web-based service or (3) a
'vault' service that keeps your bitcoins protected offline or multisig
wallet that uses a number of keys to protect the account.
Most have their
vulnerabilities: if you store bitcoins locally on your computer, make
sure you back up your wallet regularly in case the drive becomes
corrupted; and online web wallets employ varying degrees of security
against hackers, from quite good (multi-factor authentication) to quite
poor (ID and password).
For more on storing
bitcoins, see ourguide
on the subject.
Exchanges and Online Wallets
Bitcoin newcomers will find
a variety of exchanges and wallets competing for their business.
Some are full-blown
exchanges for institutional traders, while others are simpler
wallet services with a more limited buying and selling capabilities.
Most exchanges and wallets
will store amounts of digital and/or fiat currency for you, much like a
regular bank account.
Exchanges and wallets are
the best option if you want to engage in regular trading and
speculation, don't need total anonymity and don't mind lengthy
bureaucratic setup procedures that usually involve proof of identity and
supplying detailed contact information.
This is the law in most
countries and no regulated exchange can get around it, as any company
interfacing with the current financial system must meet 'know your
customer' (KYC) and anti-money laundering (AML) requirements.
The best exchange option
also depends where you're located.
For more information, you
can check out this list of major bitcoin exchanges/wallets around the
world, and the payment options they allow.
At this time, the
largest full trading exchanges by volume areBitfinex(Hong
Kong), Bitstamp(US),BTC-e(unknown),Kraken(US),Huobi(China
and Hong Kong),OKCoin(China)
and BTCC (China).
Coinbase is a popular wallet
and exchange service that will also trade US dollars and euros for
bitcoins. The company has web and mobile apps. Originally a US-only
service, Coinbase has recently opened up to a large number of European
countries.
Circle offers users
worldwide the chance to store, send, receive and exchange bitcoins.
Currently only US citizens are able to link bank accounts to deposit
funds, but credit and debit cards are also an option. Apps for iOS and
Android are now available.
Wallet and bitcoin
debit card providerXapohas
also recently entered the fray, offering deposits in fiat currency that
are converted to bitcoin in your account.
Coinjar, an exchange
and wallet provider, is the market leader in Australia. The
Melbourne-based startup raised $500k AUD inventure
fundingand
won an award atFinovate
Europe 2015for
their user experience. The company released a debit card service,
'Coinjar Swipe' in February 2015.
The 'Coinjar Swipe' allows Australians to spend
from Coinjar bitcoin accounts.
Unocoinis
an exchange aimed at the Indian market, allowing users to buy, sell and
store bitcoin. Deposits can be made via any national online bank or
through NEFT/RTGS. Registration with a PANcard
is necessary to use the site's services.
Once you've set up your
account, you'll probably need to link an existing bank account and
arrange to move funds between it and your new exchange account via wire
transfer. This usually entails a fee. Some exchanges allow you to make a
deposit in person to their bank account (that is, via a human teller,
not an ATM).
While people in most
countries can transfer money to overseas accounts, fees are much higher
and you may face more long delays changing your bitcoins back into fiat
currency (should you still wish to do that).
If you are required to link
a bank account to use the exchange, it may only admit banks from that
country.
Exchange
About
Based
Geminioperates
one of the most popular wallets and is an simple way to
buy bitcoin.
Despite the proof of
identity requirements, remember exchanges and wallets don't provide the
same protections banks do.
For example, there is often
no or limited insurance for your account if the exchange goes out of
business or is robbed by hackers, such as was the case with the infamous
failed exchange Mt Gox.
Bitcoin does not have legal
status as a currency in most of the world, and authorities usually do
not know how best to approach thefts. Some larger exchanges have
replaced customer funds after a theft from the exchange itself, but at
this stage they are not legally obliged to do so.
Further, if a theft from
your personal wallet occurs due to a security or password lapse on your
part, you do not have any guaranteed way to recover your funds.
Some existing banks see
digital currency refuse to work with funds that were the result of
digital currency transactions, citing regulatory uncertainty.
Check your bank first to see
if they have taken action against users in the past, and for your
protection, open an account with a bank known to be more
bitcoin-friendly.
Personal Hardware Wallets to Store Your Bitcoin Offline
If you live in a city,
prefer anonymity or don't want bank hassles, the easiest option to
acquire bitcoin is to make a face-to-face trade with a local seller.
LocalBitcoins is the primary
site where such transactions are arranged and prices negotiated. The
site also provides an escrow service as an added layer of protection for
both parties.
There are
security considerations for both buyers and sellers, especially if the
trade is a sizeable one. Always meet in a busy public place, don't meet
in private homes and take all the precautions you'd usually taken when
walking around with large amounts of cash.
Remember, if you're meeting
face-to-face somewhere, you'll need to have access to your bitcoin
wallet. Whether it's a smartphone, tablet or laptop, you'll also need
live Internet access to confirm the transaction.
If one-on-one trades aren't
your thing, check out Meetup.com to see if your area has a bitcoin meet
up group, where you can do it all in a group setting and learn a lot
from the other members in the process.
Depending on the seller, you
may pay a premium of around 5-10% over the exchange price for a
face-to-face trade, for convenience and privacy. A reputable trader will
negotiate the price before a meeting, but many won't want to wait too
long in case bitcoin's value takes a dramatic shift.
Some sellers may let you use
a PayPal account to pay, though most prefer non-reversible cash for the
reasons described earlier.
It's also wise to check
first if such trades are legal in your local area. There is also a
slight danger you'll arouse police suspicion by exchanging cash in a
public place, if they think you're trading something more illicit.
A word or two about 'mining'
What about this mining
thing? I've heard you canmake
your own bitcoins.
You might've heard
about 'mining' your own bitcoins with your PC or a powerfulgraphics
card. That was possible until not so long ago, but time and the
increasing popularity of bitcoin have brought more and more powerful,
mining-specific devices (called ASICs) onto the network, increasing the
difficulty and energy required to mine worthwhile amounts of bitcoin.
Added to that, the number of
bitcoins remaining to be mined diminishes sharply as time progresses.
All this means mining as an individual isn't as cost-effective as it was
just a year ago. Many end up paying more for hardware and electricity
than they ever make back in bitcoin.
Most mining these days is
the domain of large mining groups called 'pools', and companies set up
specifically to mine. You may choose to buy shares in such a pool or
company, but mining is definitely not the hobbyist pursuit it once was.
Anyone who claims you can mine bitcoins with
an ordinary PC or even a graphics card array in 2014 either has
out-of-date information, or may be trying to sell you outdated
equipment. Beware.
Another relatively new
option is 'cloud mining', where to mine bitcoins without investing in
expensive and fast-dating equipment, a person pays to use a company's
data centres to mine on their behalf.
An investment trust
If you don't like the
idea of having to buy and safely store a large quantity of bitcoins, you
can turn to an investment trust, such as theBitcoin
Investment Trust(BIT)
or The Winklevoss ETF.
This trustinvests
exclusively in bitcoins and uses a state-of-the-art protocol to store
them safely on behalf of its shareholders. So far, the fund has been
exclusively for serious (i.e.: very rich) investors, but is to open to
all, hopefully by the fourth quarter of 2014.
TheBitcoin
Superfundis
a new option soon to launch in the UK.
Bitcoin ATMs
Though a relatively new
concept, bitcoin ATMs are growing in number.
More are on the way,
from a number of different vendors includingBitAccess,CoinOutlet,Genesis
Coin,LamassuandRobocoin.
Like a face-to-face exchange
but with a machine, you insert your cash and either scan your mobile
wallet QR code or receive a paper receipt with the codes necessary to
load the bitcoins onto your wallet.
Exchange rates vary, and may
be anything from 3% to 8% on top of a standard exchange price.
Keep up with the
latestbitcoin
ATM newsand
also view the locations worldwide on ourbitcoin
ATM map.
Conclusion
Buying bitcoins is not
always as easy as newcomers expect. The good news is the number of
options is increasing, and it is getting easier all the time.
Some may not even
necessarily require a wallet or Internet access. Other ideas have
included bitcoin debit cards,physical
bitcoin'coins'
with a wallet value pre-loaded, and stored-value cards.
The CoinDesk Bitcoin Calculator tool allows you to convert any amount to
and from bitcoin (up to six decimal places) and your preferred world
currencies, with conversion rates based on the live CoinDesk Bitcoin
Price Index.
No portion of this website may be
reproduced in any way without express permission of the author.
Disclosure: We are a professional
review site that receives compensation from the companies whose
products we review.
We reviewed the affiliate sites listed here. We are independently owned
and the opinions expressed here are our own.
EARNINGS DISCLAIMER:
Every effort has been made to accurately
represent our product and it's potential. Any claims made of actual
earnings or examples of actual results
can be verified upon request. The testimonials and examples used are
exceptional results, don't apply to the average purchaser and are
not intended to represent or guarantee that anyone will achieve the
same or similar results. Each
individual's success depends on his or her background, dedication,
desire and motivation. As with any business endeavor, there is an
inherent risk of loss of capital and there is no guarantee that you
will earn any money.
Do not buy any products through this site unless you have read and
agree to theearnings disclaimer.