By now almost everyone has heard of Bitcoin, the most popular cryptocurrency.
Most people stop learning about Bitcoin after hearing complicated techy jargon words such as distributed ledger technology, blockchain, and distributed computing. Luckily, you do not need to understand how cryptocurrencies work in order to understand why they are important. This article skips the technological inner workings and delves straight into the most crucial things to keep in mind when the B-word is used in conversation.
The most famous cryptocurrency, Bitcoin, was created in 2009. However, cryptographers have been experimenting with cryptocurrencies over the past four decades.
In 1983, an American inventor named David Chaum designed an electronic cash system called DigiCash that was based on cryptographic algorithms. In 1997, a British cryptographer named Adam Back created HashCash that used the proof-of-work scheme to prevent email spam. In 1998, b-money and bit gold were released by Wei Dai and Nick Szabo, respectively.
The list of firms that accept Bitcoin is constantly growing.
Dell, Microsoft, Virgin Galactic, and Tesla are just some of the firms that accept Bitcoin as payment. However, there are several small and more grass-root firms that also accept Bitcoin, including Etsy, Wordpress, Wikipedia, and the Grass Hill Alpacas farm in Haydenville, MA.
Several non-profit charities also use Bitcoin in order to making donating easier. The BitGive Foundation supports several campaigns including earthquake relief in Nepal and clean water projects in Kenya.
At the time of this writing, Bitcoin is the most famous and the most valuable cryptocurrency. Each Bitcoin is worth approximately $2400 USD. However, several cryptocurrencies were created by copying the open-source code for Bitcoin and then making a minor change. Dogecoin was originally released as a joke cryptocurrency; however, Dogecoin’s market capitalization in June was close to $340 million.
Cryptocurrencies are privately competing currencies that compete with other types of money and payment systems. The terms electronic moneyand digital currency are used interchangeably with the term cryptocurrency.
Unlike physical currencies, such as gold and U.S. dollars, cryptocurrencies do not exist physically or even digitally. Instead, cryptocurrencies are an accounting ledger that keeps track of how much money each account user owns. Cryptocurrencies are intriguing for economists because each one has a unique monetary policy.
Although Bitcoin is on top, there are several cryptocurrencies that are trying to take Bitcoin’s market share.
Ethereum currently has the second highest market capitalization worth approximately $28 billion. Unlike Bitcoin, Ethereum is a Turing-complete virtual machine that enables “smart contracts.” The third largest coin, Ripple, is a settlement system that was advertised towards banks, and several banks including UBS and Santander experimented with this cryptocurrency.
Investors Follow the Latest Initial Coin Offerings and Token Generating Events
In 2017, there has been approximately one new Initial Coin Offering (ICO) or Token Generating Event (TGE) every week. During the second week of June, Bancor raised $150 million in three hours. Before I invest in any coin, I make sure to read the coin’s whitepaper and to read about the coin’s developers. This helps me to avoid fly-by-the-night scammers.
Coinbase is the largest exchange in the U.S.
A state-issued ID or driver’s license is required to open an account. Coinbase charges 1.49% of each Bitcoin purchase if you use your bank account to buy Bitcoin via ACH transfer. If you buy with a credit card, the fee is 3.99%. Even though Coinbase is the largest exchange, I prefer to use Gemini, which is the exchange owned by the Winklevoss Brothers. In Europe, the most liquid exchange is Kraken. Keep in mind that regulated exchanges are obliged to share all of their customer data with the government. For cryptocurrency enthusiasts that want more privacy, Localbitcoins.com and Bitcoin ATMs are an option.
There are two main ways to store cryptocurrency: hot and cold.
A “hot wallet” refers to any type of wallet that is stored on an electronic device that is connected to the internet. A cold wallet is a wallet that is stored on a piece of paper or an electronic device that is not connected to the internet. Since the former are connected to the internet, they are easier for thieves to hack compared to the latter. Therefore, only small amounts of money should be stored on a hot wallet just in case it gets hacked.
There are several reputable companies that offer wallets and storage solutions. For a hot wallet, I recommend iOS users to download Breadwallet. For Android users, I recommend Mycelium. For a cold wallet, I like to generate my own paper wallets at bitaddress.org or I like to use Xapo’s cold storage vault.
Bitcoin has several characteristics of money including scarcity, durability, fungibility, and divisibility. However, mainstream monetary theory suggests that money is a medium of exchange, a unit of account, and a store of value. Bitcoin does not make the best medium of exchange, since transaction fees have increased from close to a nickle to almost $4. Due to the fluctuations in bitcoin’s price, bitcoin is difficult to use as a unit of account or a store of value.
Although cryptocurrencies do not fit the economic definition of money, many people are still using Bitcoin and other cryptocurrencies as a way of sending value around the globe.
Due to the features of Bitcoin that resemble money, anti-money laundering (AML) and know-your-customer (KYC) laws apply in many states in the U.S. Also, U.S. Security law may apply because several cryptocurrencies have security-like features. Recently, some cryptocurrencies are blocking the IP addresses of U.S. based investors in order to ensure that U.S. laws do not apply.
n a 2015 report by CoinDesk, over 4,000 responses were collected and analysed on the topic, “Who Really Uses Bitcoin.” Recently, more and more young males living in Asia have begun trading cryptocurrencies as well.
According to the survey: 90% of Bitcoin users are male 56% are married or in a serious relationship 55% are from either North or South America 61% do not consider themselves actively religious
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