Cryptocurrency FAQ

Cryptocurrency FAQ

The Cryptocurrency FAQs has everything you need to know to get started buying, using, and making money with cryptocurrency. Learn about the history, future, mechanics of, and the basics of bitcoin and other cryptocurrencies by exploring the questions and answers on this page.

General Cryptocurrency FAQs

What is cryptocurrency?

Cryptocurrency began with the creation of bitcoin around 2009. In 2017, the number of different cryptocurrencies, public awareness, and market capitalization of cryptocurrency has grown exponentially.

Cryptocurrency is a digital asset and means of exchange that uses cryptography to encrypt, secure, and confirm transactions and create new asset units.

Cryptography is a form of mathematics that is used to secure data. The cryptography used in cryptocurrency algorithms is feasibly impossible to crack and helps ensure the integrity of the network.

Another way to think of cryptocurrency is as a way to track transactions from one individual or entity to another. It’s very similar to what banks and credit card companies do, but instead of being tracked and controlled by a central organization or third party, transactions a governed by a decentralized network of computers. This makes it so no one person or entity can alter the system or a given transaction, and once a transaction has been completed and confirmed, the sender can no longer use the asset again.

Transactions are confirmed and tracked on a distributed, decentralized, and public digital ledger known as the blockchain.

Cryptocurrency is an alternative way for individuals to transact on a peer-to-peer basis without the need of a third party or centrally-issued currency.

Decentralized cryptocurrencies like bitcoin, eliminate the issue of double-spending that the idea a digital cash faced in the past. Double spending refers to using a single amount for different transactions. By distributing the digital ledger, or blockchain, across a decentralized network, each transaction must be confirmed across the entire network for it to be valid.

Essentially, most currency and transactions are done digitally. Using your debit or credit card, writing checks, transacting online all send data to servers and update balances within the organizations controlling the funds. The major difference is that cryptocurrency is governed by cryptographic code with rules around valid transactions, security, and the creation of new units of “money.”

How do I get started with cryptocurrency?

Getting started with cryptocurrency is easy. All you’ll need is a little bit of understanding of what you’re getting into, a way to acquire the cryptocurrency you’re interested in, and a method to safely store it.

Depending on your specific needs, interest level, and risk tolerance, you’ll find that there are ways to get involved with cryptocurrency that will cater to your needs and vary in terms of convenience and security.

The quick version of how to get started with cryptocurrency is this:

  • Find a cryptocurrency you’re interested in. Do some research into what’s available, its history, and future outlook.
  • Acquire the currency. You can do this through a cryptocurrency exchange, by accepted the cryptocurrency for goods or services, by finding someone to trade with locally, or by using a cryptocurrency ATM.
  • Store your cryptocurrency. Find a cryptocurrency wallet or storage method that’s right for you and use it to transact with your cryptocurrency.

What is bitcoin?

Bitcoin, created in 2009 by an anonymous developer or group of developers who went by the name Satoshi Nakamoto, was the first iteration of a cryptocurrency.

Bitcoin, currently the most popular cryptocurrency as of Q4 2017, used cryptographic algorithms to secure, confirm, and record transactions and the creation of new bitcoins across a decentralized peer-to-peer network.

Bitcoin can be traded on cryptocurrency exchanges and used to buy and sell goods and services across country borders.

Bitcoin’s code is open source and decentralized, meaning no single person or entity can control it. Bitcoin’s open source code is what the majority of altcoins, or other types of cryptocurrencies are based off of.

Bitcoin is continually improved upon and made more secure by distributed developers, but changes can only take place if there is full consensus in the entire network.

You can think of bitcoin much like you do your credit card and debit card. You can use it to buy and sell things, and when you do, the transactions are recorded and your balance is updated across the network.

How does cryptocurrency work?

Cryptocurrencies work through cryptography algorithms and computer code across a decentralized network of computers. Blocks of transactions are “mined,” confirmed, and updated on a distributed digital ledger by all the computers within the network. In the process, new units of the cryptocurrency are created and awarded to the miners that successfully solve the algorithms associated with a particular block of transactions.

Transactions using cryptocurrency work much like transactions with your credit card. Using a public address, which is similar to an account number, digital assets can be sent from one person to another.

How does bitcoin work?

Bitcoins work by confirming transactions on a decentralized, public ledger known as the blockchain. A bitcoin transaction involves a sender using their bitcoin wallet’s public address to send an amount of bitcoins to a receiver’s public key. The receiver is able to access their funds and manage their wallet with the use of their private key.

When someone sends a transaction, it waits to be confirmed in a block of other transactions by miners across the network. Mining involves computers working to solve cryptography functions. Once the function is successfully solved, the transaction is confirmed and added to the ledger and new bitcoins are created.

Solving the cryptographic functions require significant processing power and uses electricity. For this reason, bitcoin transactions also include fees that are awarded to the successful miners as part of the block reward.

For an end user, all that you’re required to know is how to send, receive, and access bitcoins through the use of your public and private keys.

What are the advantages of cryptocurrency?

Cryptocurrency allows the owner of the digital assets to be in full control. Transactions can be processed quickly across borders and around the world on a peer-to-peer, highly-secure basis without the use of a third-party of governing agency.

The fees for transacting with cryptocurrency are flexible, and for certain use cases, much less than when using traditional currencies through traditional means.

Cryptocurrency provides security and less risk for both buyers and sellers. Assets cannot be double-sent, reversed, or manipulated. Additionally, wallet addresses contain no personal information.

Fraudulent charges and transactions are much easier to avoid with cryptocurrencies since they are protected with extremely secure encryption methods.

Since most cryptocurrency is decentralized, no single entity can manipulate or control the asset. Anyone can participate in the network and access the full history of transactions.

What are the disadvantages to cryptocurrency?

Currently, most cryptocurrencies are highly volatile assets. This makes them a relatively risky place to store wealth. Volatility is due mostly to the newness of cryptocurrency and the relatively small number of users. As adoption grows and cryptocurrency matures, they will become less volatile.

While you can increasingly use cryptocurrency for many goods and services, there are still many businesses and individuals who do not accept or are not aware of cryptocurrency. Again, as usage and awareness grows, this becomes less of a problem.

How are bitcoins created?

New bitcoins are created as the network of users grows and transactions are processed. Bitcoin transactions are confirmed and added to the blockchain as miner computers successfully solve cryptographic functions associated with a given transaction block. Upon completion, the successful miner is rewarded and a predetermined amount of new bitcoins is released.

New bitcoins are created at a fixed and decreasing rate. There will only ever be a maximum of 21 million bitcoins available, and over time the reward of new bitcoins that are released decreases by half.

How do I make money with cryptocurrency?

There are many ways to make money with cryptocurrency.

As it’s such a volatile asset currently, one of the most popular ways to make money with cryptocurrency is by trading it on exchanges. Much like the stock market or currency exchanges, the idea for investors is to buy low and sell high for a profit. You can transfer in and out of the exchanges with your local currency as you wish for small transaction fees.

You can sell goods and services and accept the cryptocurrency of your choosing. You can then use that cryptocurrency for other things or trade it on an exchange.

You can try to make money by mining cryptocurrency as well. However, as more and more miners enter the decentralized network, the mining reward becomes more and more competitive.

What are cryptocurrency transaction fees?

Many cryptocurrencies include transaction fees. Depending on how you are completing your transactions, you may have control over the amount of the transaction fee you have to spend. Generally, the higher the fee, the quicker your transaction will be processed and confirmed as there is more incentive for the network of miners.

Transactions fees help to protect the network from malicious attempts to clog the network and to incentivize miners who are expending computational resources and electricity on processing transactions.

Certain cryptocurrencies have no transaction fees at all. Transaction fees are something that will likely change over time as technology is improved upon.

What is a blockchain?

The blockchain is the underlying technology and governing system that most cryptocurrencies operate upon. It is essentially a shared, decentralized digital ledger that confirms and records every transaction made with a given cryptocurrency.

The blockchain is protected and built upon cryptographic functions and algorithms over a decentralized network, making it practically impossible to hack or manipulate.

What is cryptocurrency mining?

Cryptocurrency mining is how transactions are processed and confirmed and how new units of a cryptocurrency are created.

Mining works with computer software connected to the decentralized network that listen for transactions. As new transactions are processed, the miners go through a confirmation process which involves using computer processing resources to solve cryptographic problems known as hash functions.

The hash functions require the mining computer to run through enormous amounts of calculations to solve it. The miner that is able to solve the function first is rewarded.

As the block is solved, it is added as record to the public blockchain and new blocks are added on top of it. The network works on consensus with the largest blockchain and adds from there.

The blockchain is set up so that it is impossible for a single miner to gain control over block processing.

How many different cryptocurrencies exist?

The number of different cryptocurrencies that exist is ever-increasing. Since the code is open source, any developer can create their own set of rules that govern a specific cryptocurrency.

New cryptocurrencies are developed for different reasons – sometimes malicious – so it’s best to do your due diligence before investing into one. Some cryptocurrencies aim to add security, increase network speed, or reduce processing power required.

Check out the full list and rankings for all cryptocurrencies here.

What is fiat money?

Fiat currency or fiat money is legal tender issued by a central government. Fiat money’s value comes from the government backing it rather than a physical commodity like gold or silver. The central agency in charge of the nation’s currency is able to add new money to the system and control the rate of inflation. Too much fiat money created leads to hyperinflation.

What is the difference between cryptocurrency and fiat currency?

A major difference between cryptocurrency and fiat currency is how it’s created. While fiat money can be creating by a single, controlling entity, cryptocurrency relies on a decentralized network of participants and secure algorithms that govern its creation.

Is cryptocurrency legal?

For the most part, cryptocurrency is legal. However, some countries restrict the use of foreign currencies, under which cryptocurrency may fall.

As cryptocurrency grows in popularity and use, it’s likely that countries and organizations will look to impose rules and regulations on it.

Contrary to common belief, cryptocurrency is not only useful for illegal activities. While it certainly can be used for illegal activities, just like fiat currency, there has to be a network that supports it. The cryptocurrency itself is not the cause or support of the illegal activity.

Bitcoin is often associated with drugs or illicit activities with its early start on illicit exchanges like the SilkRoad.

Just like traditional currencies, cryptocurrency is subject to scams. As cryptocurrency grows in popularity, there will be more scammers trying to get access to your cryptocurrency wallet just like they try to get access to your bank accounts or credit cards today.

Fortunately, cryptocurrency is protected against counterfeiting operations and many financial crimes. Given the decentralized and secure nature of the blockchain, counterfeiting or committing fraud becomes extremely difficult if not impossible with cryptocurrencies.

Can cryptocurrency be regulated?

They way in which Bitcoins and other cryptocurrencies cannot be controlled without the participation and consensus of the entire decentralized network.

However, countries, local jurisdiction, and organization may impose regulations on cryptocurrencies in the form of taxes and acceptance rules.

Is cryptocurrency a scam?

Cryptocurrency in itself is not a scam nor a Ponzi scheme. Open source, decentralized cryptocurrencies have no single entity or group controlling them, and anything that happens to the cryptocurrency is controlled by the entire network of participants.

However, since anyone is able to build their own cryptocurrencies and blockchain applications, there is the possibility of scams. This can come in the form of Initial Coin Offerings in which tech companies raise money with the promise of delivery an application. There’s always the risk that they are misleading investors. It’s best to do proper research into a given cryptocurrency before investing.

Bitcoin is not a scam or Ponzi scheme.

Is bitcoin/cryptocurrency a bubble?

Bubbles refer to an over-valuation that results in a large crash. Bitcoin and cryptocurrency in general is experiencing fast growth as more people are becoming aware of it. The price of cryptocurrency is dictated by supply and demand – the more people using it and buying it, the higher the price has gone.

Cryptocurrency participants still make up a small minority of the population, many of whom wholly see its value. The price will likely remain volatile in the immediate future and stabilize once there are enough confident market participants.

What is the future of bitcoin?

The bitcoin network will need to continue to improve and optimize as more and more market participants join in order to support transactions at scale. Developers are continually working to improve bitcoin.

It is always possible that bitcoin could fail and become worthless, but failures would be restricted to major technical issues, significantly better and more quickly adopted altcoins, or a mass departure from the network. Given its design and governing rules, bitcoin is protected from failure due to hyperinflation.

What is the future of cryptocurrency?

Cryptocurrencies have emerged as digital gold. They’ve proven themselves as a fast, secure way to complete transactions around the world.

They’ve also proven to be lucrative for speculative investors, which has served to raise awareness and attract new participants, which in turn strengthens the networks and raises the value of cryptocurrency.

We’re experiencing a unique time in history where technology and social issues have reached a point where a decentralized, digital currency sounds like the answer to some of the world’s problems.

As we’re still in the very early phases of the cryptocurrency economy with a relatively small number of participants, it looks like the only place to go from here is up as awareness and participation rises.

Cryptocurrencies are certainly here to stay. There may be different iterations, coins that overtake bitcoin, and different ways that the public interacts with cryptocurrency altogether, but it will certainly be a growing phenomenon in our modern society.

Acquiring & Buying Cryptocurrency FAQs

Do I have to buy a whole coin when buying cryptocurrencies?

As the price of bitcoin soars over $10,000, many new investors ask themselves if they have to pay $10,000 for 1 BTC to participate. If you’ve had this question, you’re not alone.

Fortunately, you do not need to purchase a whole bitcoin or altcoin to get involved with cryptocurrency.

Once you find an exchange that accepts your local currency, you can buy into any ammount of cryptocurrency you’re interested in. Any amount of fiat currency gets you into the cryptocurrency market with a subdivision of a single coin.

How do I buy cryptocurrency?

There are a few different ways to buy cryptocurrency. You can:

  • Find an online cryptocurrency exchange to buy and sell the cryptocurrency of your choice.
  • Find a local seller to meet with.
  • Buy cryptocurrency from a cryptocurrency ATM machine.

Additionally, you can acquire cryptocurrencies by:

  • Accepting them for goods and services.
  • Participating in cryptocurrency faucets for new coins.
  • Using computer hardware to mine a cryptocurrency.

How do I get bitcoins?

You can get bitcoins in following ways:

  • Offer goods and services in exchange for bitcoin.
  • Buy bitcoins from a local seller.
  • Buy bitcoins on a cryptocurrency exchange.
  • Buy bitcoins from a bitcoin ATM machine.
  • Mine bitcoins using specialized computer hardware and software.

What is a cryptocurrency exchange?

A cryptocurrency exchange or cryptocurrency market is an online service that allows you to buy, sell, and trade cryptocurrency for other cryptocurrency or fiat currency.

Different exchanges are available in different countries, and each offers its own set of available cryptocurrencies available for trade.

Cryptocurrency exchanges allow users to keep cryptocurrency and fiat currency stored on the exchange, however, this is not the most secure way to store your cryptocurrency.

Is it difficult to get cryptocurrency?

The level of difficulty to get into cryptocurrency will typically depend on where you live. Certain countries allow for easier access to cryptocurrency exchanges or ATM machines, while others restrict them outright.

With the proper computer hardware, you can choose to mine cryptocurrency of your own.

How do I decide which cryptocurrencies to invest in?

Deciding which cryptocurrencies to buy or invest in comes down to both your goals and your outlook. In general, it’s best to invest in a cryptocurrency you understand and have confidence in. You’ll need to do you research, set up some test portfolios, and get a feel for the market.

When should I buy a cryptocurrency?

Obviously, the best time to buy a cryptocurrency is at its lowest price. However, given the high volatility of cryptocurrencies and the variable longevity of altcoins in general, making a one time investment at a single price point is not the best strategy. Many cryptocurrency participants have found success buying consistent amounts of cryptocurrency overtime. This involves determining how much you’d like to invest and setting up weekly or bi-weekly buys for the same amount.

How do I start bitcoin mining?

Unless you have advanced equipment and access to cheap electricity, mining bitcoin for profit is probably not a feasible option for most. As more and more miners enter the network, the degree of difficulty and competition rises, the miners with better equipment will beat you out.

Many successful miners use their mining rigs to generate heat for their home, essentially making the cost of mining bitcoins net neutral to what they’d be paying in heat anyway.

Technically, all you need to mine bitcoin is a computer. However, as more miners and users enter the network, more efficient and power hardware is required.

Storage & Security FAQs

What is cryptocurrency transaction synchronization and confirmation?

Transaction synchronization refers to a given cryptocurrency client connecting with the full blockchain to confirm all previous transactions. This is part of the security and confirmation process that most cryptocurrencies possess.

When a cryptocurrency transaction is sent from one wallet address to another, it gets loaded into a block with other transactions. From there, miner computers work to add the new block to the existing blockchain. Once all nodes can confirm the transaction and ensure that those assets have not already been spent, the transaction is confirmed.

What is a cryptocurrency wallet?

A cryptocurrency wallet is how cryptocurrencies are stored, sent, received, and accessed. Wallets consists of a public key, which can be shared, and a private key, which should be kept secret to the owner in order to access and control their digital assets.

There are different types of wallets and methods of storing cryptocurrencies, each with their own varying degrees of convenience, cost, and security.

What is a bitcoin wallet?

A bitcoin wallet is a type a cryptocurrency wallet that is compatible with the bitcoin blockchain and bitcoin technology.

As the first and most widely adopted cryptocurrency, bitcoin users have the largest number of wallet options to secure their bitcoin.

What does cryptocurrency cold storage and hot storage mean?

Cold storage and hot storage refer to how a cryptocurrency wallet operates. Hot storage cryptocurrency wallets are wallets that are housed on a computer or smartphone that is connected to the internet.

Cold storage cryptocurrency wallets are wallets (keys) that are not connected to the internet. These include paper wallets, disconnected hard drives, and usb hardware wallets.

What is a cryptocurrency paper wallet?

A cryptocurrency paper wallet is a means of cryptocurrency storage that is completely disconnected from any computer hardware or the internet. They typically include a QR code with your public and private keys in order to manage your cryptocurrency.

Is cryptocurrency secure?

Most cryptocurrency is secure in the sense that they are decentralized and open source. This means no single entity can control or manipulate the underlying rules governing a cryptocurrency.

Additionally, cryptocurrency transactions are not typically tied to personal information like your name, address, or social security number.

It’s also secure in the sense that fraud is much more difficult with cryptocurrency. As long as the user protects and secures their private key, their cryptocurrency is safe.

Is bitcoin secure?

Bitcoin is secure because it functions on a decentralized network with rules and protocol that cannot be manipulated at a single point. The cryptographic functions are some of the most secure encryption methods that exist, and are already used to protect data.

Bitcoin “hacks” that have occurred in the past have not hacked the bitcoin protocol itself, but rather exchanges or businesses that held bitcoin private keys on their servers. These hacks are similar to a bank robbery – while money was stolen, the value of the dollar was not necessary compromised.

Bitcoin developers are constantly working to make wallets and transactions more secure, but it is really up to the end user of bitcoin as to how the store and manage their assets.

Bitcoin is also secure in the sense that it allows for transactions to made without the use of third-party contracts or fine print. Rules can be built into transactions that require multi-signatures or confirmations before they can be validated. This protects users from fraud and transactions manipulation that can occur with traditional means.

Once a transaction has been confirmed and added to the blockchain, each additional transaction and block added after it ensure that the past transactions are secure.

Is bitcoin anonymous?

Bitcoin transactions are anonymous in the sense that they are not tied to personal information. However, given the fact that every bitcoin transaction is stored and publicly accessible on the decentralized blockchain, it is possible to see how bitcoins are moving between wallets.

Can bitcoins be lost?

Bitcoins cannot technically be lost or deleted, however, it is possible for users to lose access to a wallet that stores bitcoin. If the private keys are lost and the wallet cannot be accessed, the bitcoins can no longer be used by anyone and are effectively removed from circulation.

Transactions & Usage FAQs

Why would I use cryptocurrency?

Cryptocurrency allows users to transact in a relatively short amount of time from anywhere in the world. Adjustable transaction fees give users control over how quickly a given transaction will be processed. Additionally users can have confidence that their transactions are protected against fraud and manipulation. Personal information is removed from transactions, giving users an added protect against identity theft.

Cryptocurrency is also entirely peer-to-peer, which means that users have control over the terms of their transactions and do not need to rely on a third-party for oversight or control.

Given the fact that cryptocurrency is in its early phases, there is still a minority of individuals and businesses that transact with cryptocurrency. The small, but quickly growing number of users also has led to a highly volatile exchange market. These are some reasons some people may want to avoid cryptocurrency until it becomes more adopted and stabilizes.

How do I use cryptocurrency?

Cryptocurrency can be used for a growing number of goods and services, as a way to transfer money to people in other countries, and as a way to diversify your investment portfolio.

To use cryptocurrency, you’ll just need to acquire the coin of your choice, set yourself up with a wallet and means of transacting, and use it just like you’d use your credit or debit card.

How does a cryptocurrency transaction work?

To the end user, cryptocurrency transactions function much like credit card transaction – information is entered or scanned, and the transaction is processed. The difference is that cryptocurrency transactions are confirmed through the decentralized blockchain rather than a bank.

When someone sends a cryptocurrency transaction to someone else, the transaction is added to a block of other recent transactions. This new block is mined and added to the blockchain. As new blocks of transactions come in, the blockchain grows and past transactions are confirmed.

How do I trade bitcoin?

Given the high volatility of the price of bitcoin, many new users are interested in it for speculative and trading purposes. This is a valid reason to be interested in bitcoin, and helps to build awareness and adoption.

To trade bitcoin, you’ll need to find a cryptocurrency exchange that allows you to trade fiat money or cryptocurrency for other cryptocurrency. Different exchange platforms will give you options of market orders, limit orders, or margin trades.

How to sell bitcoins?

You can sell bitcoins in a few different ways. The easiest is through an online exchange. Additionally, you can find local buyers who are interested in exchanging money, or goods/services for cryptocurrency.

Is it difficult to pay with bitcoin?

Paying with bitcoin and other cryptocurrencies is a simple as scanning or entering a code of the associated wallet where you are transferring funds. In some applications this can be achieved in a click of a button. Many applications have features that allow you to add extra layers of security to process cryptocurrency transactions.

What happens if someone sends a cryptocurrency payment when my wallet is offline?

Your cryptocurrency wallet does not need to be connected to the internet in order to receive a cryptocurrency payment. Since every transaction is processed and stored on the public blockchain, your wallet will sync back up with any new transactions the next time your connect.

Where can I spend cryptocurrency?

Bitcoins and cryptocurrency can be spent at a growing number of businesses. Both brick-and-mortar stores and online retailers are increasingly accepting bitcoins and other cryptocurrencies as payment.

Can cryptocurrency be transferred between different countries?

Given the decentralized nature of cryptocurrency, transactions can easily be made across country borders with much smaller transaction fees than would occur if you were to transfer money using traditional methods.

Can I leave cryptocurrency in my Will as an inheritance?

Cryptocurrency, just like anything else, can be left as inheritance in a Will. You’ll simply need to leave your beneficiaries the private information required to access the wallet(s) where your cryptocurrency is stored.

Value & Price FAQs

Why does cryptocurrency have value?

The value of cryptocurrency is often denoted by its market capitalization. Market cap equals the number of asset units on the market times the current trading price on an exchange.

The inherent value of cryptocurrency comes from the fact that it can be used as a currency in order to exchange goods and services. Cryptocurrency has all the necessary characteristics of money, but is backed by and controlled by mathematics rather than a central organization.

As more and more users begin to trust and adopt cryptocurrency, the value of a given cryptocurrency will increase.

What determines the price of bitcoin and other cryptocurrencies?

The price of a cryptocurrency like bitcoin is determined by supply and demand. As more people become interested in bitcoin and other cryptocurrency, the price rises. Given the relatively small size of the market and market participants, the price of cryptocurrency can be highly volatile.

What is a bitcoin worth?

The price of bitcoin and other cryptocurrencies changes everyday. As of mid-December 2017, the highest price for 1 BTC was around $18,000.

What are the tax implications for cryptocurrencies?

Tax implications for cryptocurrency will vary depending on where you live. However, as cryptocurrency grows in popularity and adoption, you can be confident that governments will begin to tax it.

In the United States, Bitcoin users are required to pay capital gains tax on bitcoin earnings.

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