Digital currencies are virtual or digital currencies 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 from any given digital currency. Essentially, cryptocurrencies are limited entries in a database that no one can alter unless certain conditions are met.
Date
There were many attempts to create a digital currency during the technology boom of the 1990s, with systems such as Flows, Beans and DigiCash appearing on the market but ultimately failing. There were many, many reasons for its failure, such as fraud, financial problems, and even friction between company employees and their superiors.
It is worth noting that all of these systems used a trusted third-party approach, which means that the companies behind them have validated and facilitated the transactions. Because of these firms' failures, the creation of a digital cash system was seen as a hopeless situation for a long time.
Then, in early 2009, an unknown programmer or a group of programmers under the pseudonym 'Satoshi Nakamoto' introduced 'Bitcoin'. Satoshi described it as a 'peer-to-peer electronic cash system'. It is a completely decentralized system, meaning that there are no servers involved and no central authority controlling. The concept is closely analogous to peer-to-peer file sharing networks.
However, one of the most important problems that any payment network has to solve is double spending. It is a fraudulent method of spending the same amount twice. The traditional solution was a trusted third party - a central server - that kept records of balances and transactions. However, this method always involves an authority that basically controls the funds and has all the personal details.
But in a decentralized network like Bitcoin, every participant needs to do the job. This is done via 'Blockchain' technology - a public ledger of all transactions that take place at any time within the network, available to everyone. Therefore, everyone in the network can see the balance of each account.
Each transaction is a file consisting of the sender and recipient public keys (wallet addresses) and the amount of money transferred. The transaction must also be signed by the sender with the private key. All of this is simply basic encryption. Ultimately, the transaction is broadcast on the network, but it needs confirmation first.
And within a digital currency network, only miners can confirm transactions by solving a cryptocurrency puzzle. They take transactions, mark them as legitimate and then spread them across the network. Then, each node of the network adds it to its own database. Once the transaction is confirmed, it is fraudulent and irreversible and the miner gets a reward, in addition to a transaction fee.
Basically, any digital currency network is based on the absolute consensus of all participants regarding the legitimacy of balances and transactions. If the network nodes differ on one balance, the system will essentially break. However, there are a lot of rules that have been pre-programmed and built into the network that prevent this from happening.
Digital currencies are also called cryptocurrencies because the process of preserving consensus is guaranteed by strong encryption. This, combined with the aforementioned factors, makes third-parties and blind trust as a concept completely redundant.
What can be done with digital currencies
Buy goods
In the past, trying to find a merchant who would accept the digital currency was extremely difficult, if not impossible. But at the moment the situation is completely different.
There are many merchants - both online and offline - who accept Bitcoin as a form of payment. They range from large online retailers such as Overstock and New Egg to small local shops, bars and restaurants. Bitcoins can be used to pay for hotels, flights, jewelry, applications, computer parts, and even a college degree.
Other digital currencies like Litecoin, Ripple, Ethereum, etc. are not accepted on the same broad scale yet. Things are changing for the better though, with Apple granting permission to at least 10 different digital currencies as an approved method of payment on the Apple Store.
Of course, users of non-Bitcoin cryptocurrencies can always exchange their currencies for Bitcoin. Moreover, there are sites that sell gift cards such as 'Gift Off', which accepts around 20 different digital currencies. With gift cards, you can buy basically anything with digital currency.
There are many merchants - both online and offline - who accept Bitcoin as a form of payment. They range from large online retailers such as Overstock and New Egg to small local shops, bars and restaurants. Bitcoins can be used to pay for hotels, flights, jewelry, applications, computer parts, and even a college degree.
Other digital currencies like Litecoin, Ripple, Ethereum, etc. are not accepted on the same broad scale yet. Things are changing for the better though, with Apple granting permission to at least 10 different digital currencies as an approved method of payment on the Apple Store.
Of course, users of non-Bitcoin cryptocurrencies can always exchange their currencies for Bitcoin. Moreover, there are sites that sell gift cards such as 'Gift Off', which accepts around 20 different digital currencies. With gift cards, you can buy basically anything with digital currency.
Finally, there are markets like Betify and OpenBazaar that only accept digital currencies.
Investment
Many people believe that digital currencies are the most important investment opportunity currently available. In fact, there are many stories of people becoming millionaires through their Bitcoin investments. Bitcoin is the most premium digital currency to date, and until last year only one Bitcoin had a value of $ 800. In November 2017, the price of one Bitcoin exceeded $ 7,000.
While Ethereum, which is probably the second most valuable digital currency, recorded the fastest rise in any digital currency ever. Since May 2016, its value has increased by at least 2,700 percent. And when it comes to all digital currencies combined, the market capitalization has increased by more than 10,000 percent since mid-2013.
However, it should be noted that cryptocurrencies are high-risk investments. The market value fluctuates as it does with any other asset. Moreover, it is partially unregulated, and there is always a risk of being criminalized in some jurisdictions and any cryptocurrency exchange could be hacked.
If you decide to invest in cryptocurrencies, it is clear that Bitcoin is still dominant. However, in 2017, its share of the cryptocurrency market decreased dramatically, from 90 percent to only 40 percent. There are many options currently available, with some currencies focusing on privacy, others being less open and decentralized than Bitcoin and some just copying that.
And while it is very easy to buy Bitcoin - there are many exchanges out there that trade Bitcoin - other cryptocurrencies cannot be obtained just as easily. Although this situation is slowly improving with the start of major exchanges such as 'Kraken', 'Bitfinex', 'Betstamp' and many others, selling Litecoin, Ethereum, Monero, Ripple and others. There are also a few different other ways of being a currency, for example, you can trade face to face with sellers or use Bitcoin ATMs.
Once you have purchased your digital currency, you need a way to store it. All major exchanges offer wallet services. But, while it may seem appropriate, it is still better if you store your assets in an offline wallet on your hard drive, or even invest in an e-wallet. This is the safest way to store your coins while allowing you complete control over your assets.
As with any other investment, you need to pay close attention to the cryptocurrency's market value and any news related to it. CoinMarketCap is the easiest solution to track prices, volume, trade supply and market value of most existing digital currencies.
Depending on the jurisdiction in which you live, once you achieve profits or lose your investment in cryptocurrencies, you may need to include it in your tax return. In terms of taxation, digital currencies are treated very differently from country to country. In the United States, the Internal Revenue Service has ruled that Bitcoin and other digital currencies should be taxed as property and not as currency. For investors, this means that the long-term gains and losses accumulated from trading the digital currency are taxed at each investor's capital gain rate, which is a maximum of 15%.
While Ethereum, which is probably the second most valuable digital currency, recorded the fastest rise in any digital currency ever. Since May 2016, its value has increased by at least 2,700 percent. And when it comes to all digital currencies combined, the market capitalization has increased by more than 10,000 percent since mid-2013.
However, it should be noted that cryptocurrencies are high-risk investments. The market value fluctuates as it does with any other asset. Moreover, it is partially unregulated, and there is always a risk of being criminalized in some jurisdictions and any cryptocurrency exchange could be hacked.
If you decide to invest in cryptocurrencies, it is clear that Bitcoin is still dominant. However, in 2017, its share of the cryptocurrency market decreased dramatically, from 90 percent to only 40 percent. There are many options currently available, with some currencies focusing on privacy, others being less open and decentralized than Bitcoin and some just copying that.
And while it is very easy to buy Bitcoin - there are many exchanges out there that trade Bitcoin - other cryptocurrencies cannot be obtained just as easily. Although this situation is slowly improving with the start of major exchanges such as 'Kraken', 'Bitfinex', 'Betstamp' and many others, selling Litecoin, Ethereum, Monero, Ripple and others. There are also a few different other ways of being a currency, for example, you can trade face to face with sellers or use Bitcoin ATMs.
Once you have purchased your digital currency, you need a way to store it. All major exchanges offer wallet services. But, while it may seem appropriate, it is still better if you store your assets in an offline wallet on your hard drive, or even invest in an e-wallet. This is the safest way to store your coins while allowing you complete control over your assets.
As with any other investment, you need to pay close attention to the cryptocurrency's market value and any news related to it. CoinMarketCap is the easiest solution to track prices, volume, trade supply and market value of most existing digital currencies.
Depending on the jurisdiction in which you live, once you achieve profits or lose your investment in cryptocurrencies, you may need to include it in your tax return. In terms of taxation, digital currencies are treated very differently from country to country. In the United States, the Internal Revenue Service has ruled that Bitcoin and other digital currencies should be taxed as property and not as currency. For investors, this means that the long-term gains and losses accumulated from trading the digital currency are taxed at each investor's capital gain rate, which is a maximum of 15%.
Mining
Miners are the most important part of any cryptocurrency network, and just like trading heavily, mining is an investment. Essentially, miners provide an account management service to the respective communities. They contribute their computing power to solving complex cryptographic puzzles, which is necessary to confirm the transaction and record it in a distributed public ledger called the Blockchain.
And one of the interesting things about mining is that the difficulty of the puzzles is constantly increasing, and it is related to the number of people trying to solve them. Therefore, the more popular a particular digital currency increases, the more people want to mine it, and the process becomes more difficult.
Lots of people have made fortunes from Bitcoin mining. And in the days gone by, you could have made big profits from mining with your own computer, or even a sufficiently powerful laptop computer. And these days, Bitcoin mining can only become more profitable if you are willing to invest in industrial grade mining equipment. This, of course, incurs huge electricity bills on top of the price of all necessary equipment.
Currently, Litecoin, Dogecoin and Feather Coin are said to be the best cost-effective cryptocurrencies for beginners. For example, at the current value of Litecoin, you might earn anything from 50 cents to 10 dollars a day using only consumer devices.
But how do miners make money? The more computing power they can collect, the greater their chances of solving cryptic puzzles. Once a miner solves the puzzle, they receive a reward as well as a transaction fee.
As the digital currency attracts more attention, mining becomes more difficult and the amount of coins received as a reward decreases. For example, when Bitcoin was first created, the reward for a successful mining operation was 50 Bitcoins. Now, the reward is 12.5 Bitcoin. This happened because the Bitcoin network was designed with a total of no more than 21 million coins in circulation.
As of November 2017, approximately 17 million Bitcoins were mined and distributed. However, as the rewards dwindle, every bitcoin mined will become exponentially in value.
All these factors make cryptocurrency mining a highly competitive arms race that rewards early adopters. However, depending on where you live, the profits you make from mining can be subject to taxes and money transfer regulations. In the United States, the Financial Crime Network issued a directive according to which cryptocurrency mining and exchange for fiat currencies would be considered a transfer of money. This means that miners may need to comply with special laws and regulations that address this type of activity.
And one of the interesting things about mining is that the difficulty of the puzzles is constantly increasing, and it is related to the number of people trying to solve them. Therefore, the more popular a particular digital currency increases, the more people want to mine it, and the process becomes more difficult.
Lots of people have made fortunes from Bitcoin mining. And in the days gone by, you could have made big profits from mining with your own computer, or even a sufficiently powerful laptop computer. And these days, Bitcoin mining can only become more profitable if you are willing to invest in industrial grade mining equipment. This, of course, incurs huge electricity bills on top of the price of all necessary equipment.
Currently, Litecoin, Dogecoin and Feather Coin are said to be the best cost-effective cryptocurrencies for beginners. For example, at the current value of Litecoin, you might earn anything from 50 cents to 10 dollars a day using only consumer devices.
But how do miners make money? The more computing power they can collect, the greater their chances of solving cryptic puzzles. Once a miner solves the puzzle, they receive a reward as well as a transaction fee.
As the digital currency attracts more attention, mining becomes more difficult and the amount of coins received as a reward decreases. For example, when Bitcoin was first created, the reward for a successful mining operation was 50 Bitcoins. Now, the reward is 12.5 Bitcoin. This happened because the Bitcoin network was designed with a total of no more than 21 million coins in circulation.
As of November 2017, approximately 17 million Bitcoins were mined and distributed. However, as the rewards dwindle, every bitcoin mined will become exponentially in value.
All these factors make cryptocurrency mining a highly competitive arms race that rewards early adopters. However, depending on where you live, the profits you make from mining can be subject to taxes and money transfer regulations. In the United States, the Financial Crime Network issued a directive according to which cryptocurrency mining and exchange for fiat currencies would be considered a transfer of money. This means that miners may need to comply with special laws and regulations that address this type of activity.
Acceptance as a method of payment (for business)
If you own a business and are looking for potential new clients, accepting cryptocurrencies as a form of payment may be a solution for you. Interest in digital currencies has never been higher and will only continue to increase. Along with the increased interest, the number of digital currency ATMs located around the world is also growing. Coin ATM Radar currently lists approximately 1,800 ATMs in 58 countries.
First and foremost, you need to let your customers know that your business accepts cryptocurrencies. Simply ticking the checkout box in your store will do the trick. Payments can then be accepted using computer terminals, touch screen applications, or simple wallet addresses through QR codes.
There are many different services you can use to be able to accept payments in digital currencies. For example, Coin Payments currently accepts more than 75 different digital currencies, and charges a commission of just 0.5 percent per transaction. Other popular services include Cryptonator, Coingate, and Bitby, with the latter accepting only Bitcoin.
In the United States, Bitcoin and other digital currencies have been recognized as a convertible virtual currency, which means that it is accepted as a form of payment just like accepting cash, gold, or gift cards.
For tax purposes, businesses in the United States that accept digital currencies must record a reference of sales, the amount received in the specific currency, and the date of the transaction. If sales taxes are payable, the amount payable is calculated based on the average exchange rate at the time of sale.
Legitimacy of digital currencies
As digital currencies are becoming more and more prevalent, law enforcement agencies, tax authorities and legal regulatory agencies around the world are trying to understand the concept of cryptocurrencies themselves and where they can fit perfectly with existing regulations and legal frameworks.
With the introduction of Bitcoin, the first ever digital currency, an entirely new paradigm was created. Self-decentralized digital currencies that do not exist in any form or physical form and that are not subject to any single entity have always caused a stir among regulators.
Many concerns have been raised about the decentralized nature of digital currencies and their ability to be used almost completely anonymously. Authorities around the world were concerned about the attractiveness of digital currencies to merchants of illicit goods and services. Moreover, they are concerned about its use in money laundering and tax evasion schemes.
As of November 2017, Bitcoin and other digital currencies are only banned in Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Vietnam, with China and Russia close to banning them as well. However, other jurisdictions do not make the use of digital currencies illegal yet, but laws and regulations can vary greatly depending on the country.
First and foremost, you need to let your customers know that your business accepts cryptocurrencies. Simply ticking the checkout box in your store will do the trick. Payments can then be accepted using computer terminals, touch screen applications, or simple wallet addresses through QR codes.
There are many different services you can use to be able to accept payments in digital currencies. For example, Coin Payments currently accepts more than 75 different digital currencies, and charges a commission of just 0.5 percent per transaction. Other popular services include Cryptonator, Coingate, and Bitby, with the latter accepting only Bitcoin.
In the United States, Bitcoin and other digital currencies have been recognized as a convertible virtual currency, which means that it is accepted as a form of payment just like accepting cash, gold, or gift cards.
For tax purposes, businesses in the United States that accept digital currencies must record a reference of sales, the amount received in the specific currency, and the date of the transaction. If sales taxes are payable, the amount payable is calculated based on the average exchange rate at the time of sale.
Legitimacy of digital currencies
As digital currencies are becoming more and more prevalent, law enforcement agencies, tax authorities and legal regulatory agencies around the world are trying to understand the concept of cryptocurrencies themselves and where they can fit perfectly with existing regulations and legal frameworks.
With the introduction of Bitcoin, the first ever digital currency, an entirely new paradigm was created. Self-decentralized digital currencies that do not exist in any form or physical form and that are not subject to any single entity have always caused a stir among regulators.
Many concerns have been raised about the decentralized nature of digital currencies and their ability to be used almost completely anonymously. Authorities around the world were concerned about the attractiveness of digital currencies to merchants of illicit goods and services. Moreover, they are concerned about its use in money laundering and tax evasion schemes.
As of November 2017, Bitcoin and other digital currencies are only banned in Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Vietnam, with China and Russia close to banning them as well. However, other jurisdictions do not make the use of digital currencies illegal yet, but laws and regulations can vary greatly depending on the country.
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