Frequently Asked Questions
What is Bitcoin?
What are Cryptocurrencies?
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Cryptocurrencies are a digital form of currency, created and held electronically. No one controls it. Cryptocurrencies are not printed like dollars or euros; they are produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.
Much of the confidence in Cryptocurrencies derives from the fact that they do not require any confidence. Cryptocurrency source code is open source, and the network is completely decentralized. This means that anyone has access to the full source code at any time. Key points are anonymity, security, and the opportunity to earn.
Looking to earn some extra cash or build up your wealth portfolio? Cryptocurrencies are a great option for doing so. When most people think of earning money through cryptocurrencies, they think about mining and investing, but these days there are numerous other methods people can use to generate cryptocurrencies and cash for themselves. For example you could setup your own cryptocurrency website to generate a passive income. Turning your literary skills to cash or you could sell products and services.
Cryptocurrencies are sent and received to secure, cryptocurrency wallets. They are fully protected by digital signatures. This makes the transactions very secure. In fact, cryptocurrency transactions are way more secure than several ancient kinds of banking. As virtual and immaterial as mathematics, since that is really all cryptocurrencies are. It is more than that. Hardware and paper wallets are not bound to those devices of storage. A ten pound note, fistful of dollars, or an ounce of gold has a value intrinsic to the physical form of the value represented. With cryptocurrencies I simply need the equivalent of the serial number of the referenced monetary form. This removes all physical constraints that we inherit from other tactile means of value exchange.
Cryptocurrencies are often described as anonymous currency because it is possible to send and receive cryptocurrency without giving any personally identifying information. However, achieving reasonable anonymity with cryptocurrencies can be quite complicated and perfect anonymity may be impossible. Cryptocurrencies are pseudonymous. Send and receiving cryptocurrency is like writing under a pseudonym. If an author’s pseudonym is ever linked to their identity, everything they ever wrote under that pseudonym will now be linked to them. With cryptocurrencies, your pseudonym is the wallet address to which you receive your cryptocurrency. Every transaction involving that address is stored forever in the respective blockchain. If your address is ever linked to your identity, every transaction will be linked to you. In the original Satoshi whitepaper, it was recommended that Bitcoin users use a new address for each transaction to avoid the transactions being linked to a common owner. This would be the equivalent of writing many books under different pseudonyms. Although this remains a best practice, it is not enough to guarantee full anonymity due to multi-input transactions.
The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. Whilst the majority of countries do not make the usage of cryptocurrencies illegal, its status as money varies, with differing regulatory implications. While some countries have explicitly allowed its use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently.
Regulators around the world are usually skeptical and pessimistic about cryptocurrencies, mostly because of its supposed role in illegal activities and transactions. While it is true that cryptocurrencies have been used for this purpose, the argument against it fails to recognize that cryptocurrencies are mostly used for normal transactions and are not as anonymous as you might think.
In 2015, the EU’s highest court, the European Court of Justice (ECJ), ruled that cryptocurrency transactions “are exempt from VAT (value-added tax) under the provision concerning transactions relating to currency, bank notes and coins used as legal tender.” Thus, according to the ECJ, cryptocurrencies are a currency, and not a property. Although purchasing and selling cryptocurrencies does not incur VAT, cryptocurrency transactions may be subject to other taxes, such as capital gains or income tax. The fiscal treatment of cryptocurrencies for tax purposes differs depending on the EU country.
New cryptocurrencies are generated by a competitive and decentralized process called "mining". This process involves that individuals are rewarded by the network for their services. Cryptocurrency miners are processing transactions and securing the network using specialized hardware and are collecting new cryptocurrency in exchange.
Cryptocurrencies have a value because their supply is limited and people want them. If someone is willing to buy a certain cryptocurrency for $400, then it makes sense for you to value a certain cryptocurrency at $400 because you know that you can sell it to them for $400.
The price of a certain cryptocurrency is not the same as its value. Price is determined by the market in which it trades: by means of supply and demand. This is the same way the price of your second hand car, a bag of apples in the supermarket, an ounce of gold and just about everything else is determined.
Yes. History is littered with currencies that failed and are no longer used, such as the German Mark during the Weimar Republic and, more recently, the Zimbabwean dollar. Although previous currency failures were typically due to hyperinflation of a kind that cryptocurrencies make impossible, there is always potential for technical failures, competing currencies, political issues and so on. As a basic rule of thumb, no currency should be considered absolutely safe from failures or hard times.
Cryptocurrencies have been proven reliable for years since its inception and there is a lot of potential for certain cryptocurrencies to continue to grow. However, no one is in a position to predict what the future will be for all cryptocurrencies.
Cryptocurrency payments are easier to make than debit or credit card purchases, and can be received without a merchant account. Payments are made from a wallet application, either on your computer or smartphone, by entering the recipient's address, the payment amount, and pressing send. To make it easier to enter a recipient's address, many wallets can obtain the address by scanning a QR code or touching two phones together with NFC technology.
Essentially, by using cryptocurrencies users will be contributing to the network, and thus sharing the burden of authorizing transactions. Sharing this work greatly reduces transaction costs, and thus makes transaction costs negligible. Once cryptocurrencies are sent, the transactions cannot be reversed.
Cryptocurrencies are not widely accepted. Cryptocurrencies are still only accepted by a very small group of online merchants. This makes it unfeasible to completely rely on cryptocurrencies as a currency. There is also a possibility that governments might force merchants to not use cryptocurrencies to ensure that user’s transactions can be tracked. Wallets can be lost. If a hard drive crashes, or a virus corrupts data, and the wallet file is corrupted, cryptocurrencies have essentially been lost. There is nothing that can be done to recover it. These coins will be forever orphaned in the system. This can bankrupt a wealthy cryptocurrency investor within seconds with no way for recovery. The coins the investor owned will also be permanently orphaned. Cryptocurrency valuation fluctuates. The values of cryptocurrencies are constantly fluctuating according to demand. This constant fluctuation will cause sites that accept cryptocurrencies to continually change prices. It will also cause a lot of confusion if a refund for a product is being made.
When a user loses his wallet, it has the effect of removing money out of circulation. Lost cryptocurrency still remain in the blockchain. However, lost cryptocurrency remain dormant forever because there is no way for anybody to find the private key / keys that would allow them to be spent again. Because of the law of supply and demand, when fewer cryptocurrencies are available, the ones that are left will be in higher demand and increase in value to compensate.
Cryptocurrency networks can already process a much higher number of transactions per second than it does today. It is, however, not entirely ready to scale to the level of major credit card networks. Work is underway to lift current limitations, and future requirements are well known. Since inception, every aspect of the cryptocurrency networks has been in a continuous process of maturation, optimization, and specialization, and it should be expected to remain that way for some years to come. As traffic grows, more cryptocurrency users may use lightweight clients, and full network nodes may become a more specialized service.
Cryptocurrency protocols itself cannot be modified without the cooperation of nearly all its users, who choose what software they use.Attempting to assign special rights to a local authority in the rules of the global cryptocurrency network is not a practical possibility. Any rich organization could choose to invest in mining hardware to control half of the computing power of the network and become able to block or reverse recent transactions. However, there is no guarantee that they could retain this power since this requires these entities to invest in hardware that matches the amount of miners in the world. It is however possible to regulate the use of cryptocurrencies in a similar way to any other instrument. Just like the dollar, cryptocurrencies can be used for a wide variety of purposes, some of which can be considered legitimate or not as per each jurisdiction's laws.
In this regard, cryptocurrencies are no different than any other tool or resource and can be subjected to different regulations in each country. Cryptocurrency use could also be made difficult by restrictive regulations, in which case it is hard to determine what percentage of users would keep using the technology. A government that chooses to ban cryptocurrencies would prevent domestic businesses and markets from developing, shifting innovation to other countries. The challenge for regulators, as always, is to develop efficient solutions while not impairing the growth of new emerging markets and businesses.
A fast rise in price does not constitute a bubble. An artificial over-valuation that will lead to a sudden downward correction constitutes a bubble. Choices based on individual human action by hundreds of thousands of market participants are the cause for cryptocurrency price fluctuations as the market seeks price discovery. Reasons for changes in sentiment may include a loss of confidence in a certain cryptocurrency, a large difference between value and price not based on the fundamentals of the cryptocurrency economy, increased press coverage stimulating speculative demand, fear of uncertainty, and old-fashioned irrational exuberance and greed.
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money, or the money paid by subsequent investors, instead of from profit earned by the individuals running the business. Ponzi schemes are designed to collapse at the expense of the last investors when there is not enough new participants. Cryptocurrencies are free software projects with no central authority. Consequently, no one is in a position to make fraudulent representations about investment returns. Like other major currencies such as gold, United States dollar, euro, yen, etc. there is no guaranteed purchasing power and the exchange rate floats freely. This leads to volatility where owners of cryptocurrencies can unpredictably make or lose money. Beyond speculation, cryptocurrencies are also payment systems with useful and competitive attributes that are being used by thousands of users and businesses.