What is Cryptocurrency?

Cryptocurrency is a medium of exchange much like fiat currencies. However, cryptocurrency is digital and decentralized; meaning the design behind it is entirely different from normal currencies. It’s designed for the purpose of digital information exchanges through a process that follows certain principles of cryptography. Cryptography is what secures the transactions and controls the creation of new coins. As you may know already, the first cryptocurrency to be created was Bitcoin back in 2009, but it’s far from the only one nowadays, with more than 1300 cryptocurrencies existing as a reaction to bitcoin. These are referred to as altcoins.

As mentioned previously, cryptocurrencies are decentralized, which is one of its most attractive features. What this means is that cryptocurrency isn’t controlled by a third party of any kind, so no banks or governments can control the value of the currency.

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Cryptocurrencies tend to be designed with controlled supply in mind, meaning that the production of coins decreases over time. Bitcoin was the first one, with a market cap of 21 million. This makes cryptocurrency different from fiat currencies where a financial institution can create more money, causing inflation. Satoshi Nakamoto designed bitcoin to cap bitcoins in circulation when it reaches 21 million, meaning it will never go past that, and this system is the baseline for all the cryptocurrencies that came after.

While there are plenty of different cryptocurrency specifications, most are derived from one or two protocols: Proof-of-work or Proof-of-stake. Cryptocurrencies are maintained by a community of miners, who are members of the public that set up their computers or, specialized hardware (ASIC machines) to participate in the validation and processing of transactions.

The history of cryptocurrencies

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The first one was Bitcoin. Bitcoin came into light back in 2009 by a developer that goes under the pseudonym Satoshi Nakamoto. The currency uses SHA-256, a set of cryptographic hash functions designed originally by the U.S National Security agency. Bitcoin is based on the proof-of-work system.

Later in April of 2011, Namecoin came up, which was the first altcoin. However, its purpose was to form a decentralized DNS to make censorship over the internet more difficult. Then, in October of that same year, Litecoin was created, becoming the first successful cryptocurrency to use Scrypt as a hash function instead of SHA-256. This made mining litecoin easier because there was no need to buy specialized hardware like the ASIC machines used for bitcoin mining.

The market cap of cryptocurrencies

In terms of notoriety, volume and market capitalization bitcoin is at the top, but lately, with cryptocurrencies being embraced by a much wider audience, you can see other coins gaining a lot of relevance too, like Ethereum being second and Bitcoin Cash being third in the rank of coins with the largest market capitalization.

What are cryptocurrency hashes?

Mining power is based on a scale of hashes per second, the more hashes per second, the faster can the block be solved. For reference, here is a small comprehensive list of the hash per second scale:

 

  • KH/s: Kilohashes per second. One Kilohash=1,000 hashes.
  • MH/s: Megahashes per second. One Megahash=1,000,000 hashes.
  • GH/s: Gigahashes per second. One Gigahash = 1,000,000,000 hashes.
  • TH/s: Terahashes per second. One Terahash = 1,000,000,000,000 hashes.
  • PT/s: Petahashes per second. One Petahash = 1,000,000,000,000,000 hashes.
BitCoin mining machine

Whenever a block is solved by a miner, a new hash is created. An algorithm then turns this large amount of data into a fixed-length hash. Much 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’ll just look like a bunch of random numbers, making it impossible to get the original data out of.

SHA against Scrypt

BitCoin mining rules

Bitcoin and other coins are mined using SHA-256, while other altcoins, including Litecoin, use Scrypt. These are the most common hashing functions, but far from the only ones, scrypt-N and x11 are also used by other cryptocurrencies. The reason different hashing functions started to be used in altcoins was to answer some of the concerns that showed up with SHA-256. When Bitcoin was just starting, people were able to mine and profit with their GPU’s. However, when it truly got popular, specialized hardware was created, which are ASIC SHA-256 machines, making GPU mining obsolete.

The reason GPU mining became obsolete is because ASIC mining rigs are absurdly powerful, let’s make a comparison: A 4 GPU mining rig can get a hash rate of 3.4MH/s, give or take, and consume up to 3600kW/h, while an ASIC machine has a set hash rate of 6TH/s and consumes 2200kW/h. As you can see, this made GPU mining simply ineffective, even more when you consider that the more bitcoins are mined the harder it gets. Because of this, fewer users were able to mine for profit from their home computer, making the network less decentralized. This is where Scrypt came into play, with a promise of being ASIC resistant due to a memory problem introduced.

Scrypt hashes require lots of memory, which is something that ASIC machines weren’t designed to handle. But GPUs are. However, due to the energy consumption from Scrypt mining, scrypt-ASIC machines were designed.  Scrypt also has a more energy efficient proof-of-work compared to SHA-256, where bitcoin blocks are solved at a rate of 1 per 10 minutes, litecoin ones are solved in 2.5 minutes.

The security of cryptocurrencies

You can divide it in two parts. The first one being the difficulty in finding hash intersections, which is a task done by miners. And the second and more likely of the two is something called a “51% attack”. Basically, if a miner showed up and managed to have the mining power of more than 51% of the network, he could take control of the blockchain and generate an alternative blockchain. However, he’d still be very limited to what he could do. At best, he can reverse some of his transactions or block new ones, but that’s it.

In addition to this, due to the pseudo-anonymity of cryptocurrencies, seizures by law enforcements or transactions being held don’t really happen. There are also some altcoins that are completely anonymous.

Legality and taxes

With the exception of a couple of countries, cryptocurrencies are completely legal. However, they’re not exempt from regulation. China and Russia are known to have a strict policy against cryptocurrencies, with the former banning financial institutions from handling bitcoins and the latter, making it illegal to purchase goods with any currency that isn’t the Russian ruble.

In the U.S, bitcoin is subject to capital gains tax, and the Financial Crimes Enforcement Network issued guidelines for cryptocurrencies. One of them contain something specifically directed at miners, warning that anyone creating bitcoins and exchanging them for fiat currencies are not beyond the reach of the law. Here’s the exact statement:

BitCoin mining rules

“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 fall into this category, which in theory makes them liable for MTB classification. But the truth is, this statement was released years ago already, and no clarification has been given to miners, neither has it been addressed in public in a court of law.

Cryptocurrency services

There are plenty of different services available that offer information and monitoring of cryptocurrencies. CoinMarketCap is good to check out the supply, volume, price and market cap of cryptocurrencies. To keep in touch with the community, follow trends and keeping up to date, Reddit is the way to go. And if you’re interested in mining, Coinwarz will come in handy. It’s a site that helps you determine what the most profitable cryptocurrency to mine is according to your hash rate, power consumptions and the exchange rate of that coin when selling it for bitcoins. It even lets you check both the current and past difficulty of mining a specific coin you’re interested in.

Small disclaimer: These sites are only a few of the many alternatives you can choose from, these are just one of the most popular or common suggestions, for example, if you don’t like Reddit, there are plenty of other communities you can choose from, so keep that in mind.

 

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