Once you get past the basics with cryptocurrency, transactions become no less complex than using a credit or debit card. Nevertheless, making the switch to a completely virtual form of currency can seem like a daunting process at first.
Truth is, you do not need to understand the complexities of crypto to use it, just as you don’t need an encyclopedic knowledge of how PayPal of MasterCard work when facilitating transactions. But if planning to buy bitcoin (or any other crypto coin) and trade online to generate revenues, it’s important to get to grips with the basics at least.
In this guide, we will be taking a look at the basics of cryptocurrency, with concise answers in plain English to the most important questions of all.
What is Cryptocurrency?
Cryptocurrency is best described as a form of currency that has no physical presence. Whereas the money you have in the bank can be withdrawn and held as cash, cryptocurrency has no physical form. It exists as a 100% digital currency and is transferred directly between those involved in the transaction, without the inclusion of a bank or any other intermediaries.
All crypto transactions are recorded on a digital public ledger called a “blockchain”, which is not regulated by any central bank or government worldwide. This provides the kind of discretion and anonymity that give crypto its appeal for many traders.
Cryptocurrencies like bitcoin, ether and ripple are traded on cryptocurrency exchanges online, which work in the same way as stock exchanges. Profits can be generated by buying low and selling high within a short space of time, or purchasing crypto coins and holding on to them long-term in pursuit of even bigger gains.
How Does Cryptocurrency Work?
Cryptocurrency transactions take place directly between the “cryptocurrency wallets” of those involved. The balance transfers straight from one account or the other, with no intermediary involvement.
Transfers involve the use of a password (AKA a private key) associated with the account. The transaction is encrypted and subsequently transmitted to the public ledger (blockchain). The ledger can be accessed publicly by all users of the respective cryptocurrency and the value of every transaction is also displayed publicly.
However, the details on the individuals involved in the transaction are kept private. This essentially makes cryptocurrency more similar to cash than credit or debit card payments, as transactions can take place without leaving the usual ‘paper trail’ behind.
How Do You Obtain or Trade Cryptocurrency?
There are two main approaches for obtaining cryptocurrency – the first and most popular (and by far simplest) is to purchase them via online exchanges. As when buying and selling most other types of assets, you simply buy bitcoin or any other cryptocurrency on the basis of its market value at the time, coupled with the fees and commissions applicable on the platform.
As fees and commissions vary significantly from one trading platform to the next, it is essential to compare the market for a good deal.
The second way to buy bitcoin or any other cryptocurrency is through a process known as ‘mining’. In simple terms, cryptocurrency mining involves the use of powerful computer hardware and software to solve cryptographic puzzles and add ‘blocks’ to the blockchain. While mining remains a popular pursuit, it is generally too complex and time consuming for casual traders to get involved in.
Is Cryptocurrency Taxable?
Yes, but the mechanics of cryptocurrency taxation vary significantly from one country to the next. In most western nations, crypto coins are not formally recognized as a valid form of currency. They are instead officially regarded as assets, and are therefore taxable in the same way as other assets are purchased and sold to generate revenues.
Always check the specific taxation rules that apply to your jurisdiction, before trading crypto coins online.
What Does the Future Hold for Cryptocurrency?
Undoubtedly the million-dollar question, and one that’s currently impossible to answer. On one hand, there is every possibility that crypto could eventually take over as a viable and widespread alternative to conventional cash. The skyrocketing popularity of crypto trading over the past year in particular paints a picture of a bright future ahead for cryptocurrency in general.
At the same time, comparatively few central banks or governments have confirmed how (or if) they will eventually regulate cryptocurrency with formal monetary policy. Should this occur, it could have a major impact on the value and popularity of cryptocurrency in one direction or the other.