Thanks to the bear market of 2018 and early 2019, many cryptocurrency enthusiasts only in it for the speculation have left the building. Yet, many people remain holding on strong or even adding to positions as signs start to turn bullish.
If you did, then congratulations for your patience.
Now that some of the hype has calmed down, new people are entering the market/crypto-economy. If that's you, or there's some part of the crypto-economy you don't understand very well, then this post is for you.
15 of the most common cryptocurrency questions answered. And if I don't know the answer or someone else has a much better answer than me, then I will link you to that answer so let's get started.
What is Cryptocurrency?
Cryptocurrency is a currency that has cryptography (encrypted code) in it to protect it. When a currency is only moved or circulated online, some additional protections are needed with technology the same way physical security is necessary with large amounts of physical cash. These digital assets can be used in financial transactions since they are secured with the cryptography to make them safer.
Who Invented Cryptocurrency?
The widely recognized inventor of digital cash eCash, the pre-cursor to Bitcoin, is David Chaum. He heads the Elixxir project. Many people believe that his work and Nick Szabo's on cryptography and digital gold were vitally important to the creation of Bitcoin in 2008 by Satoshi Nakamoto. No one knows who Satoshi is and he left the project so it could be managed by a consensus of users, developers, and miners. Some believe Nick is Satoshi, others believe long-time departed developer Hal Finney was Satoshi, and some, like me, believe that Satoshi is a name representing a small group of programmers who contributed to Bitcoin's beginnings.
You can read the original Bitcoin white paper from late 2008 at the link.
Where is Cryptocurrency Legal?
Everywhere! Well, not exactly. First of all, legal to use is not the same as legal tender. Legal tender means that the money can be used to pay debts both public and private or things like government registration fees and taxes. See the Vietnam example below....Usually, governments give legal tender status to a currency, and surprise, it's the currency they control. The US Government recognizes only the US Dollar as legal tender. However, some jurisdictions including the state of Ohio now allow for the paying of state taxes and fees with Bitcoin so some of this is changing.
Wikipedia states that the outright ban countries (which does not include countries that have some restrictions like Canada with its banking ban of Bitcoin companies) are: Algeria, Egypt, Morocco, Bolivia, Colombia, Ecuador, the UAE (possibly), Saudi Arabia, Iran, Bangladesh, Nepal, Pakistan, China, Taiwan, Cambodia, Indonesia, and Vietnam (for payments, but you can trade and hold it for your own account).
Many countries have some restriction on cryptocurrency usage or confusing compliance laws like here in the US where the IRS, CFTC, SEC, and the Dept of Treasury all classify Bitcoin differently.
How Many Bitcoins Will Ever Be Created?
Bitcoin is created through a process called mining and they are released every 10 minutes. Every 4 years, the number of Bitcoin released (known as the block reward) is cut in half. In May 2020, the block reward will cut in half from 12.5 BTC released every 10 min to 6.25 released every 10 min.
Here's a little graph of it courtesy of IHodl:
At this point, 16.5 million of the 21 million total Bitcoin have been created. This reduction in supply is a reason to think Bitcoin will increase in price if demand stays the same. And, if you look at the chart, leading up to the 'halvening' (the cut of the block reward in half) the last 2 times we've seen a price increase.
FYI, it will be sometime around 2140 when the very last Bitcoin is created so we'll be long gone by then.....
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In cryptocurrency, where does the money go?
This is one of the more difficult questions to answer on this list. Not that the answer is so tough, but it's so different from gov't issued currencies where your money sits on a ledger in a bank. Your BTC or Ethereum or Litecoin or DASH is stored in a wallet with both a public key and a private key (the keys are encrypted). When A sends a payment to B, the money does not move. A broadcasts a message to the network that they have 1 BTC, which the network confirms. A sends that Bitcoin to B and now B has it in his wallet. That message is broadcast to the network as well. This prevents A from spending the 1 BTC twice or double spending, which is a potential issue with digital currencies but not with physical cash. After all, if you don't have the dollar anymore, you don't have it.
This is an outstanding explanation of Bitcoin wallets and how transactions are broadcast across the Bitcoin network. This broadcasting feature with wallets is used by all cryptocurrencies.
Is Bitcoin Real?
Only westerners ask this question. What I mean is those of us who live in the land of a stable home currency have the luxury of asking this question. People in places like Venezuela or Zimbabwe don't have that luxury and Bitcoin and other cryptocurrencies, especially DASH in Venezuela, are used as a store of value against their hyper-inflated home currencies. People can preserve their wealth and their standard of living with cryptocurrencies there.
I've written about this in detail in my Bitcoin case study from 2016 and how DASH is the choice for making payments for the Venezuelans while Bitcoin is their store of value used as a savings account. So you better believe it's real. What is it worth at any given time? That's up for debate but there are people around the world who are much better off now that they don't have to hold Bolivars or other hyperinflated currencies.
How Do I Get Bitcoins? How do you buy cryptocurrency?
There are 2 common answers for that based on whether you are getting them in person or online.
- In person: Localbitcoins.com is the best choice. You can trade peer to peer in person cash for Bitcoin. Now if you are a big buyer/investor, then you may be able to buy through an OTC (Over the Counter) transaction where you can do a private purchase outside the scope of the exchanges. If this is you, please email me Stu AT p2plendingexpert.com and I can help you with an OTC transaction.
- Online: You want to use a reputable Bitcoin exchange. Exchange here is literal as you are exchanging your fiat money (USD, GBP, EUR) for Bitcoin. Find an exchange that serves you and your market and start with one of the Real 10. The Real 10 are the most honest, reputable and compliant Bitcoin exchanges. You can google the term or check out my Crypto News Over Nonsense newsletter where this was one of the 2 big stories I covered that week.
Important Note: Any Bitcoin or other cryptocurrencies you are holding and not trading you want to move OFF the exchange as quickly as possible to a secure wallet. There are many excellent secure hardware wallets, software or mobile wallets or you can use my choice, the Edge wallet. The Bitcoin network doesn't get hacked but exchanges do. Secure your Bitcoin.
What is the best multi cryptocurrency wallet?
I have a few that I recommend including Edge (see above). I also like Jaxx (software), Trezor (hardware), Ledger (hardware), Abra (software), Xapo, or a paper wallet for long term storage if you can take good care of it. Do your due diligence and please hold any long term crypto in a wallet of your own.
Which cryptocurrency has the most developers?
According to a recent Electric Capital study, Ethereum has the most developers on its network (99) with Bitcoin 2nd at 47. This is the number of typical developers working on the code or core protocol each month.
Can cryptocurrency be hacked?
So far, in 10 years, the Bitcoin network has never been hacked. Crypto exchanges can and do get hacked. It just happened to Bithumb. Ethereum is a part of the most famous crypto hack, the DAO (Decentralized Autonomous Organization) hack. The DAO is supposed to be the tech-based, crypto-based corporation structure of the future. It still has potential although this project didn't work out. An attempt to set one up on Ethereum ended up in disaster with a hack, and then a hard fork that led to the 2 Ethereums: Ethereum (ETH) and Ethereum Classic (ETC) that we have now.
3.6 million ETH were stolen and the result was a hard fork of the software to leave the stolen ETH dormant unable to be spent. A good review and analysis of this event are here on this Medium blog.
See my message above about protecting your crypto by keeping all but amounts you intend to trade in the short term off exchanges in a wallet you control. Here's one of my favorite non-Bitcoin projects:
Can Cryptocurrency be taxed?
You bet it can, and if you are an American (or many other countries), it already is. The IRS treats cryptocurrency like property or stock, meaning it is an asset with a capital gain or capital loss once you sell it. This means you have to track your purchase and sale prices. This includes when you sell your BTC to buy ETH. This includes whether you are trading it or accepting for goods and services.
This kind of tax policy makes it difficult for people to use as a medium of exchange (payments) since each purchase and sale price has to be tracked. So far, the leading Bitcoin payments company BitPay encourages most firms that have typical USD expenses to pay to convert their BTC immediately into USD to remove that currency risk.
Where do I start with cryptocurrency?
Aside from this blog of course.......Coindesk is pretty good as a news source and Cryptotwitter is active daily. You should be reading up to learn about the market. It's hard though, don't get me wrong. It's part cryptography, part programming, part political science, part economics and finance. It's difficult to understand. If you are in one of the 30 countries aside from the US that Coinbase supports then the easiest way to get started is
- Open an account with Coinbase (or Kraken, Bitflyer, Bitstamp or Gemini)
- Buy your first whole or part BTC, LTC, ETH or other supported cryptocurrencies
- Move the longer term investment (non-trading) portion to a wallet you control (see recommendations above)
And that's it.
And if you need more news and analysis to help you make investment decisions, I understand. That's why I created Crypto News Over Nonsense. I go deep with analysis of 2-5 stories per week. Go check it out and try it for 2 weeks free before you buy. Only $7/mo or $55 per year
Will cryptocurrency replace fiat currency?
I truly do NOT think so. Governments can exert too much control over their citizens with the issuance of currency. However, just like there is a market for gold now, there is and will continue to be a market for cryptocurrencies that are separate from or maybe even related to the 'conventional' economy.
The US dollar, in particular, is strong and is the reserve currency for the world. And as of today, a crypto-economy is being built and Bitcoin is the reserve currency of the crypto-economy. Part of that is an opinion by me but part isn't. If you don't believe me, pick your favorite non-Bitcoin project and see if you can buy it directly with USD or EUR. I bet that you can't. You will need to buy BTC or ETH (if it's an Ethereum ERC token) first before you can buy the token of your choice. And there's LOTS of power in being the reserve currency.
Can cryptocurrency be traced?
Yes, with exceptions. With bitcoin, the bitcoin itself is unique as is the wallet address (in alphanumeric code) from the sending and receiving addresses. So Bitcoin and most cryptocurrencies are not anonymous. At best, they are pseudo-anonymous, partly so. There is a set of coins, tokens, and projects working on privacy that include Monero, Zcash, DASH (with PrivateSend), and Verge.
If this is important to you, then you should check out these projects.
Can Cryptocurrency be banned?
It sure can, at least in the eyes of some governments, they think it can. Aside from the banned list (see above), South Korea tried it, sorta, and it only made people want it more. South Korea is one of the world's top 5 markets for cryptocurrency.
Cointelegraph had some good coverage of the saga of the sorta kinda ban in SK and the result: a ban on citizens owning ICOs and a ban on government officials owning cryptocurrency. That appears to be all of it for now. As far as banning goes, the 2 most interesting markets to watch are China (banned but a top market for crypto) and India (not banned officially but leaders are making it difficult for citizens to own, hold or use it).
For examples of Bitcoin as a store of value, look at hyperinflation countries and crisis countries like Venezuela and Zimbabwe.
For examples of building the crypto-economy, look at Malta, Switzerland and the UK as they have the clearest, friendliest crypto laws so far.
There are rumors that a couple of countries including Argentina are considering making Bitcoin legal tender, which would be an argument for Bitcoin as a unit of account.
As a medium of exchange, I would look at LTC, DASH, and maybe XRP and see what parts of the world they are active in to gauge their effectiveness. These 3 features: unit of account, store of value, and medium of exchange are what makes something money for people. Watching how people use cryptocurrencies in these ways is important if we want to see adoption numbers increase.