A cryptocurrency is a digital currency designed to function 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 met. There are thousands of cryptocurrencies, the most popular is Bitcoin, but here we are going to tell you about what cryptocurrencies are in general and how they work. Read on to learn more about the digital money of the future and how to understand how it works so that you can use them in a better way and learn how to invest in cryptocurrencies wisely.
History:Cryptocurrencies: what they are and how digital money works
There were many attempts to create a digital currency during the tech boom of the 90s, with systems like Flooz, Beenz, and DigiCash all coming to market but ultimately failing. Among the reasons for its failures were fraud, financial problems and even friction between company employees and their bosses.
All of these systems were based on trust in intermediaries, which meant that there were companies behind them that verified and facilitated transactions. Due to the failures of these companies, creating a digital cash system was long considered a lost cause.
Then, in early 2009, an anonymous programmer or a group of programmers under the alias ” Satoshi Nakamoto ” introduced Bitcoin , which was described as a ‘peer-to-peer electronic cash system. . It was a completely decentralized system. In other words, it had no servers involved or a central control authority.
One of the biggest problems any payment network had to solve was “double spending,” a fraudulent technique in which the same amount was spent twice. The traditional solution was to go to a trusted intermediary, a central server, who kept records of balances and transactions. However, this method always gave a single authority all control of your funds and all your personal data.
Now, in a decentralized network like Bitcoin, each participant does this work through a system called Blockchain , a public ledger of all transactions that occur within the network, available to everyone. Therefore, everyone on the network can view the balance of each account.
Each transaction is a file consisting of the public keys of the sender and recipient (wallet addresses) and the amount of coins transferred. The transaction must also be signed by the sender with his private key and is finally transmitted to the network once it is confirmed by its users dedicated to this task, called “miners”. Within a cryptocurrency network , only miners can confirm transactions by solving a crypto puzzle. They take transactions, mark them as legitimate and spread them over the network. Then each node on the network adds it to its database. Once the transaction is confirmed, it becomes irrefutable and irreversible and a miner receives a financial reward: an amount of BTC.
In essence, any cryptocurrency network relies on the absolute consensus of all participants to give legitimacy to balances and transactions. If the nodes on the network do not agree on a single balance, the system would basically break down. However, there are many preconfigured and programmed rules on the network that prevent this from happening.
Cryptocurrencies are so named because the consensus maintenance process is secured with a crypto source.
What can you do with cryptocurrencies?
In the past, trying to find a merchant that accepted cryptocurrencies was extremely difficult, if not impossible. Today the situation is completely different. Currently there are many merchants that accept Bitcoin as a form of payment. These sellers range from online retailers like Overstock and Newegg to small local shops, bars, and restaurants. Bitcoins can be used to pay for hotels, flights, jewelry, apps, computer parts, and even a college degree.
Other digital currencies like Litecoin , Ripple , Ethereum , etc. they are not yet so widely accepted. However, things have changed: r Apple has authorized at least 10 different cryptocurrencies as a viable form of payment in its App Store.
Many people believe that cryptocurrencies are the best investment opportunity today e. In fact, there are many stories of people who have become millionaires thanks to their investments in Bitcoin. BTC is the most recognized digital currency to date. In November 2017, the price of a bitcoin surpassed $ 19,000.
Ethereum, the second most popular cryptocurrency, has seen the fastest rise a digital currency has ever shown. Since May 2016, its value has increased by at least 2,700 percent. Furthermore, its market capitalization has skyrocketed by more than 10,000 percent since mid-2013.
However, investing in cryptocurrencies involves a very high risk. Its market value fluctuates like no other asset. Also, as they are not regulated yet, there is always the risk that it will become illegal in certain jurisdictions and any cryptocurrency exchange could be hacked. If you decide to invest in cryptocurrencies, Bitcoin is obviously the most popular. However, in 2017, its share of the crypto-market dropped dramatically from 90 percent to just 40 percent. Currently there are many options available, some currencies focus on privacy, others are less open and decentralized than Bitcoin and others simply copy them.
Along with Bitcoin, numerous exchanges have already started accepting other cryptocurrencies. Kraken , BitFinex , BitStamp, and many others already trade Litecoin, Ethereum, Monero , Ripple, among others. There are other ways to acquire crypto as well, such as trading face-to-face with a seller or using a Bitcoin ATM .
Once you have purchased your cryptocurrency, you need to store it safely. Although the major exchanges offer wallet services , it is more convenient if you store your assets in an offline wallet on your hard drive or even if you invest in a hardware wallet. . This is the safest way to store your coins and gives you full control over your assets.
As with any other investment, you should pay close attention to the market value of cryptocurrencies and the news related to them. Coinmarketcap is a one- stop solution for tracking the price, volume, circulation supply, and market cap of most existing cryptocurrencies.
Miners are the most important part of any cryptocurrency network. And like trade, mining is an investment. Basically, the miners are providing a bookkeeping service for their respective communities. They bring the power of their computers to solve complicated cryptographic puzzles, which is necessary to confirm a transaction and record it in this distributed public ledger that we call the Blockchain.
One of the cool things about mining is that the difficulty of the puzzles is constantly increasing, which is closely related to the number of people trying to solve it. So the more popular a certain cryptocurrency becomes, the more people try to mine it, and thus the more difficult the process becomes.
Many people have made fortunes by mining Bitcoins. Previously you could make substantial profits from mining using just your computer or even a powerful enough laptop. These days, Bitcoin mining can only be profitable if you are willing to invest in industrial-grade mining hardware. This, of course, creates huge electricity bills in addition to the price of all the necessary equipment.
Litecoin, Dogecoin, and Feathercoin are among the best cryptocurrencies for beginners in terms of profitability-cost. For example, at the current value of Litecoins, you can earn from 50 cents to $ 10 per day using only consumer grade hardware.
But how do miners make a profit? The more computing power they can accumulate, the more opportunities they have to solve cryptographic puzzles. Once a miner manages to solve the puzzle, they receive a reward and a transaction fee.
As a cryptocurrency attracts more interest, mining becomes more difficult and the number 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 is 12.5 Bitcoins. This happened because the Bitcoin network is designed so that there are only a total of 21 million coins in circulation.
As of November 2017, almost 17 million Bitcoins had been mined and distributed. However, as the rewards are going to get smaller and smaller, each Bitcoin mined will become more and more valuable.
All of these factors make mined cryptocurrencies an extremely competitive race that rewards first-time users. However, depending on where you live, the profits made from mining may be subject to taxes and money transmission regulations. In the United States, FinCEN issued a guide according to which the mining of cryptocurrencies and their exchange for fiat currencies can be considered as money transmission. This means that miners may need to comply with special laws and regulations related to these types of activities.
Depending on the jurisdiction you live in, once you’ve made a profit or loss from investing in cryptocurrencies, you may need to include it on your tax report. In terms of taxes, cryptocurrencies are treated very differently from country to country. In the United States, the Internal Revenue Service has ruled that Bitcoin and other digital currencies will be taxed as property, not as currency. For investors, this means that long-term accumulated gains and losses from cryptocurrency trading are taxed at each investor’s applicable capital gains rate, which stands at a maximum of 15 percent.
Users of cryptocurrencies other than Bitcoin can always exchange their coins for BTC. There are also gift card or gift card sales websites like Gift Off , which accepts around 20 different cryptocurrencies. Through gift cards, you can basically buy anything with a cryptocurrency.
There are also markets such as Bitify and OpenBazaar , which only accept cryptocurrencies.