A cryptocurrency is a medium of exchange like normal currencies
such as USD, but designed for the purpose of exchanging digital
information through a process made possible by certain principles of
cryptography. Cryptography is used to secure the transactions and to
control the creation of new coins.
The first cryptocurrency to be created was Bitcoin back
in 2009. Today there are hundreds of other cryptocurrencies, often
referred to as Altcoins.
To put it another way, cryptocurrency is electricity converted into
lines of code with monetary value. In the simplest of forms,
cryptocurrency is digital currency.
Unlike centralized banking, like the
Federal Reserve System, where governments control the value of a
currency like USD through the process of printing fiat money,
government has no control over cryptocurrencies as they are fully
Most cryptocurrencies are designed to decrease in production over time
like Bitcoin, which creates a market cap on them. That's different
from fiat currencies where financial institutions can always create
more, hence inflation. Bitcoin will never have more than 21 million
coins in circulation. The technical system on which all
cryptocurrencies are based on was created by Satoshi Nakamoto.
While hundreds of different cryptocurrency specifications exist, most
are derived from one of two protocols; Proof-of-work
or Proof-of-stake. All cryptocurrencies are maintained by a
community of cryptocurrencyminers who
are members of the general public that have set up their computers or ASIC
machines to participate
in the validation and processing of transactions.
History of Cryptocurrency
The first cryptocurrency was Bitcoin. Bitcoin was created in 2009 by a
pseudonymous developer named Satoshi Nakamoto. Bitcoin uses SHA-256,
which is a set of cryptographic hash functions designed by the U.S
National Security Agency. Bitcoin is a cryptocurrency that is
based on the proof-of-work system.
In April 2011, Namecoin,
the first altcoin,
was created to form a decentralized DNS to make internet censorship
more difficult. In October 2011, Litecoin was
released and became the first successful cryptocurrency to use scrypt as
its hash function rather than SHA-256. This gave the general public
the ability to mine for litecoins without the purchase of specific
hardware such as the ASIC
machines used to mine
Litecoin began receiving media attention in late 2013 - reaching a
market cap of $1 billion. Ripplecoin,
created in 2011, was built on the same protocol as Bitcoin but
services as a payment system - think of it like a Paypal for
cryptocurrencies that supports any fiat currency, cryptocurrency,
commodity or even frequent flier miles.
Cryptocurrencies & Market Capitalization
Bitcoin is the largest cryptocurrency in both market
capitalization, volume, acceptance and notoriety, but it's not the
most valuable coin. NEMstake,
while only having a market cap of $1,116,720, trades at $1,117 a coin.
Looking at the market cap, Litecoin takes
second place after Bitcoin with Ripple close
One coin that you are more than likely familiar with is Dogecoin.
Dogecoin ranks, on average, thirds in trading volume, but has a
relatively low market cap - ranking number six in the largest
What is a Cryptocurrency Hash?
Cryptocurrency mining power is rated on a scale of hashes per seconds.
A rig with a computing power of 1kH/s is mining at a rate of 1,000
hashes a second, 1MH/s is a million hashes per second and a GH/s is
one billion hashes per second. Every time a miner successfully solves
a block, a new hash is created. A hash algorithm turns this large
amount of data into a fixed-length hash. 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's just a bunch of numbers crammed together and
remains practically impossible to get the original data out of.
SHA vs. Scrypt
While Bitcoin and a several other coins are mined using SHA-256,
Litecoin and many other coins, use Scrypt.
This are the two major hashing functions, but several different kinds
exists and are used by other cryptpcurrencies such as scrypt-N and x11.
The different hashing functions were adopted to answer concerns with
the SHA-256. Before, individuals were able to mine Bitcoin with their
GPU's, which require a large amount of energy. But as Bitcoin grew in
popularity, ASIC SHA-256 machine were built which made GPU mining
To give you an idea of just how powerful these machines are, a mining
rig running 4 GPU's would get a hash rate of around 3.4 MH/s and
consume 3600kW/h while an ASIC machine can mine
6 TH/s and consume
2200kW/h. This effectively killed GPU mining and left many individuals
worried about the security of the network. With less individuals being
able to profitably mine from their home computer, the network become
less decentralized. Scrypt mining was implemented with the promise of
being ASIC resistant due to the memory problem it introduced.
Scrypt hashes require lots of memory, which GPU's are already designed
to handle and ASIC machines were not. However, Scrypt mining require a
lot of energy and eventually scrypt-ASIC
machineswere designed to address this problem. At this point
Litecoin considered changing
their proof-of-work function to
avoid ASIC mining. Scrypt also taut that their proof-of-work is much
more energy efficient than SHA-256. Bitcoin blocks are solved at a
rate of 1 per 10 minutes while Litecoin blocks are solver at a rate of
1 per 2.5 minutes.
The security of cryptocurrencies is two part. The first part comes
from the difficulty in finding hash set intersections, a task done by
miners. The second and more likely of the two cases is a "51%"
attack". In this scenario, a miner who has the mining power of
more than 51% of the network, can take control of the global blockchain ledger
and generate an alternative block-chain. Even at this point the
attacker is limited to what he can do. The attacker could reverse his
own transactions or block other transactions.
Cryptocurrencies are also less susceptible to seizure by law
enforcement or having transaction holds placed on them from acquirers
such as Paypal.
All cryptocurrencies are pseudo-anonymous, and some coins have added
features to create true anonymity.
Cryptocurrency Legality & Taxes
While cryptocurrencies are legal
in most countries, Iceland and Vietnam being an exception - Iceland mainly due to their freeze on foreign exchange, they are not
free from regulations and restrictions. China has banned
financial institutions from
handling bitcoins and Russia,
while saying cryptocurrency is legal, has made it illegal to purchase
goods with any currency other than Russian rubles.
In the U.S., the IRS has ruled that Bitcoin is to
be treated as property for tax purposes, making Bitcoin subject to
capital gains tax. The Financial Crimes Enforcement Network (FinCEN)
has issued guidelines for cryptocurrencies. The issued guidelines
contain an important caveat for Bitcoin miners: it warns that anyone
creating bitcoins and exchanging them for fiat currency are not
necessarily beyond the reach of the law. It states: "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 seem to fall into this category, which could theoretically make
them liable for MTB classification. This is a bone of contention for
bitcoin miners, who have asked for clarification. This issue has not
been publicly addressed in a court of law to date.
There are a host of services offering information and monitoring of
cryptocurrencies. CoinMarketcap is
an excellent way check on the market cap, price, available supply and
volume of crypto currencies. Reddit is
a great way to stay in touch with the community and follow trends and CryptoCoinCharts is
full of information ranging from a list of crytocoins, exchanges,
information on arbitrage
opportunities and more.
Our very own site offers a list
of crypto currencies and
their change in value in the last 24hrs, week or month.
Liteshack allows visitors to view the network hash rate of many
different coins across six different hashing algorithms. They even
provided a graph of the networks hash rate so you can detect trends or
signs that the general public is either gaining or losing interest in
a particular coin.
A hand website for miner is CoinWarz.
This site can help miners determine which coin is most profitable to
mine given their hash rate, power consumption, and the going rate of
the coins when sold for bitcoins. You can even view each coins current
and past difficulty.
How Can I Buy Bitcoins?
OK, so you've learned the basics about bitcoin, the next step is to get
some bitcoins. But how? This guide will tell you what you
need to know.
You can buy bitcoins from either exchanges, or directly from other
people via marketplaces.
You can pay for them in a variety of ways, ranging from hard
cash to credit and debit cards to wire transfers, or even with other
cryptocurrencies, depending on who you are buying them from and where
Surprisingly, it's still not easy to
your credit card or PayPal, depending on your jurisdiction.
This is because such transactions can easily be reversed with a phone
call to the card company (ie 'chargebacks'). Since it's hard to prove
any goods changed hands in a transfer of bitcoins, exchanges avoid
this payment method and so do most private sellers.
However, the options have recently grown for consumers in some
In the US, Coinbase,
and Circle offer
purchases with credit cards. Bittylicious, CoinCorner and
Coinbase offer this service in the UK, accepting 3D Secure-enabled
credit and debit cards on the Visa and MasterCard networks.
Underbanked consumers in the US can turn to expresscoin,
which recently launched to serve this market, accepting money orders,
personal checks and wire transfers.
First, get yourself a bitcoin wallet
Next, you will need a place to store your new bitcoins. In the bitcoin
world, they're called a 'wallet' but it might be best to think of them
as a kind of bank account.
Depending on the security levels you want, different wallets will
provide different levels of security. Some act like everyday spending
accounts and are comparable to a traditional leather wallet, while
others tout military-grade protections.
The main options are: (1) a software wallet stored on the
hard drive of your computer, (2) an online, web-based service or
(3) a 'vault' service that keeps your bitcoins protected offline or
multisig wallet that uses a number of keys to protect the account.
Most have their vulnerabilities: if you store bitcoins locally on your
computer, make sure you back up your wallet regularly in case the
drive becomes corrupted; and online web wallets employ varying degrees
of security against hackers, from quite good (multi-factor
authentication) to quite poor (ID and password).
For more on storing bitcoins, see our guide
on the subject.
Exchanges and Online Wallets
Bitcoin newcomers will find a variety of exchanges and wallets
competing for their business.
Some are full-blown exchanges for institutional traders, while others
are simpler wallet services with a more limited buying and selling
Most exchanges and wallets will store amounts of digital and/or fiat
currency for you, much like a regular bank account.
Exchanges and wallets are the best option if you want to engage in
regular trading and speculation, don't need total anonymity and don't
mind lengthy bureaucratic setup procedures that usually involve proof
of identity and supplying detailed contact information.
This is the law in most countries and no regulated exchange can get
around it, as any company interfacing with the current financial
system must meet 'know your customer' (KYC)
and anti-money laundering (AML)
The best exchange option also depends where you're located.
For more information, you can check out this
list of major bitcoin exchanges/wallets around the world, and the
payment options they allow.
At this time, the largest full trading exchanges by volume are Bitfinex (Hong
Kong), Bitstamp (US), BTC-e (unknown), Kraken (US), Huobi (China
and Hong Kong), OKCoin (China)
and BTCC (China).
Coinbase is a popular wallet and exchange service that will also
trade US dollars and euros for bitcoins. The company has web and
mobile apps. Originally a US-only service, Coinbase has recently
opened up to a large number of European countries.
Circle offers users worldwide the chance to store, send, receive
and exchange bitcoins. Currently only US citizens are able to link
bank accounts to deposit funds, but credit and debit cards are also an
for iOS and Android are now available.
Wallet and bitcoin debit card provider Xapo has
also recently entered the fray, offering deposits in fiat
currency that are converted to bitcoin in your account.
Coinjar, an exchange and wallet provider, is the market leader in
Australia. The Melbourne-based startup raised $500k AUD in venture
funding and won an
award at Finovate
Europe 2015 for their
user experience. The company released a debit card service, 'Coinjar
Swipe' in February 2015.
The 'Coinjar Swipe' allows Australians to spend from Coinjar bitcoin
Unocoin is an exchange
aimed at the Indian market, allowing users to buy, sell and store
bitcoin. Deposits can be made via any national online bank or through
NEFT/RTGS. Registration with a PAN card
is necessary to use the site's services.
Once you've set up your account, you'll probably need to link an
existing bank account and arrange to move funds between it and your
new exchange account via wire transfer. This usually entails a fee.
Some exchanges allow you to make a deposit in person to their bank
account (that is, via a human teller, not an ATM).
While people in most countries can transfer money to overseas
accounts, fees are much higher and you may face more long delays
changing your bitcoins back into fiat currency (should you still wish
to do that).
If you are required to link a bank account to use the exchange, it may
only admit banks from that country.
The table above is an advertising unit
Warnings about exchanges, wallets and banks
Despite the proof of identity requirements, remember exchanges and
wallets don't provide the same protections banks do.
For example, there is often no or limited insurance for your account
if the exchange goes out of business or is robbed by hackers, such as
was the case with the infamous failed exchange Mt
Bitcoin does not have legal status as a currency in most of the world,
and authorities usually do not know how best to approach thefts. Some
larger exchanges have replaced customer funds after a theft from the
exchange itself, but at this stage they are not legally obliged to do
Further, if a theft from your personal wallet occurs due to a security
or password lapse on your part, you do not have any guaranteed way to
recover your funds.
Some existing banks see digital currency refuse to work with funds
that were the result of digital currency transactions, citing
Check your bank first to see if they have taken action
against users in the past, and for your protection, open an account
with a bank known to be more bitcoin-friendly.
Personal Hardware Wallets to Store Your Bitcoin Offline
The above tables are advertising units.
Face-to-face, or 'over-the-counter' (OTC) trades
If you live in a city, prefer anonymity or don't want bank hassles,
the easiest option to acquire bitcoin is to make a face-to-face trade
with a local seller.
LocalBitcoins is the primary site where such transactions are
arranged and prices negotiated. The site also provides an escrow
service as an added layer of protection for both parties.
There are security considerations for
both buyers and sellers, especially if the trade is a sizeable one.
Always meet in a busy public place, don't meet in private homes and
take all the precautions you'd usually taken when walking around with
large amounts of cash.
Remember, if you're meeting face-to-face somewhere, you'll need to
have access to your bitcoin wallet. Whether it's a smartphone, tablet
or laptop, you'll also need live Internet access to confirm the
If one-on-one trades aren't your thing, check out Meetup.com to
see if your area has a bitcoin meet up group, where you can do it all
in a group setting and learn a lot from the other members in the
London held its first Satoshi
Square event on
Saturday 18th January 2014
Depending on the seller, you may pay a premium of around 5-10% over
the exchange price for a face-to-face trade, for convenience and
privacy. A reputable trader will negotiate the price before a meeting,
but many won't want to wait too long in case bitcoin's value takes a
Some sellers may let you use a PayPal account to pay, though most
prefer non-reversible cash for the reasons described earlier.
It's also wise to check first if such trades are legal in your local
area. There is also a slight danger you'll arouse police
suspicion by exchanging cash in a public place, if they think
you're trading something more illicit.
A word or two about 'mining'
What about this mining thing? I've heard you can make
your own bitcoins.
You might've heard about 'mining' your own bitcoins with your PC or a
card. That was possible until not so long ago, but time and the
increasing popularity of bitcoin have brought more and more powerful,
mining-specific devices (called ASICs) onto the network, increasing
the difficulty and energy required to mine worthwhile amounts of
Added to that, the number of bitcoins remaining to be mined diminishes
sharply as time progresses. All this means mining as an individual
isn't as cost-effective as it was just a year ago. Many end up paying
more for hardware and electricity than they ever make back in bitcoin.
Most mining these days is the domain of large mining
groups called 'pools', and companies set up specifically to mine. You
may choose to buy shares in such a pool or company, but mining is
definitely not the hobbyist pursuit it once was.
Anyone who claims you can mine bitcoins with an ordinary PC or even a
graphics card array in 2014 either has out-of-date information, or may
be trying to sell you outdated equipment. Beware.
Another relatively new option is 'cloud mining', where to mine
bitcoins without investing in expensive and fast-dating equipment, a
person pays to use a company's data centres to mine on their behalf.
An investment trust
If you don't like the idea of having to buy and safely store a large
quantity of bitcoins, you can turn to an investment trust, such as the Bitcoin
Investment Trust (BIT)
This trust invests
exclusively in bitcoins and uses a state-of-the-art protocol to store
them safely on behalf of its shareholders. So far, the fund has been
exclusively for serious (i.e.: very rich) investors, but is to open to
all, hopefully by the fourth quarter of 2014.
Superfund is a new
option soon to launch in the UK.
Though a relatively new concept, bitcoin ATMs are growing in number.
More are on the way, from a number of different vendors including BitAccess, CoinOutlet, Genesis
Coin, Lamassu and Robocoin.
Like a face-to-face exchange but with a machine, you insert your cash
and either scan your mobile wallet QR code or receive a paper receipt
with the codes necessary to load the bitcoins onto your wallet.
Exchange rates vary, and may be anything from 3% to 8% on top of a
standard exchange price.
Keep up with the latest bitcoin
ATM news and also view
the locations worldwide on our bitcoin
Buying bitcoins is not always as easy as newcomers expect. The good
news is the number of options is increasing, and it is getting easier
all the time.
Some may not even necessarily require a wallet or Internet access.
Other ideas have included bitcoin debit cards, physical
bitcoin 'coins' with a
wallet value pre-loaded, and stored-value cards.
The CoinDesk Bitcoin Calculator tool allows you to convert any amount to and
from bitcoin (up to six decimal places) and your preferred world currencies,
with conversion rates based on the live CoinDesk Bitcoin Price Index.