Answers to all your crypto questions.
We've compiled some frequently asked questions about Bitcoin and crypto currencies, please click a tab to learn more about the topic of your choice.
What is Bitcoin?
The short answer: an investment opportunity and/or a financial revolution. Bitcoin is a decentralized, encrypted, global payment network. It is deflationary and very secure, which is why millions of people and businesses are adopting this new technology daily. The value of your cryptocurrencies goes up and down as demand and supply increase. Now you are your own bank.
Is there more than one cryptocurrency?
Yes, with blockchain technology, developers started creating new use cases: faster, cheaper, more robust, decentralized, more functions even! So each new coin tries to fill a niche in the market and learns from the successes and failures of the previous technologies to create something unique. Some cryptocurrencies are just clones of others with small differences, others aim to apply the blockchain technology to a brand new industry and create a self-sustaining ecosystem, and then, inevitably, there are also pure scams. This is pioneer country, the financial Wild West, so be careful! For beginners, it's best to stick to the well-known ones, and thoroughly research any other currencies/tokens/ICOs you would like to invest in.
How do I get cryptocurrency?
There are a couple of ways to get the cryptocoin of your choice. The easiest is probably to ask someone to send you some directly, maybe a friend or a client as payment for a good or service—this will arrive in your wallet directly. Alternatively, you could purchase bitcoin or another currency at an exchange, or meet someone locally to exchange in person.
Can I start my own cryptocurrency?
Yes. A lot of the technology is open source, meaning you can freely use the code to make something brand new. An initial coin offering (ICO) is like an IPO for a company. There are now hundreds (going into the thousands) of new currencies on the market. They usually start low (often priced at pennies) because it's risky, and initial investors are encouraged by potentially huge profits if the new concept catches on. Early investors usually adopt a hold strategy, meaning they keep currencies for a period of time (months or years) till they 'moon'.
So it's almost a new way to launch a company, get investment capital from everyday people (launch your token), and as more people buy into your idea/values/vision your token price goes up and you are able to do more business. Think of it as a Kickstarter for a new age. New ICOs are coming out everyday and people are democratically choosing the causes they support by contributing from the cryptocurrency capital pool. In addition to the open source alternatives already out there, Amazon, IBM, Google and other big names are working on their own blockchain implementations and offering them to the public.
Are cryptocurrencies a scam?
There are definitely some scams out there as this is an unregulated arena, so be careful when investing in something brand new or that sounds too good to be true. Some of the bigger currencies have now been around for almost a decade and are performing well in the real world. Here is a list of obituaries for all the times Bitcoin was pronounced dead. There is a lot of regular FUD (fear, uncertainty, doubt) that circulates about this brand new industry which spooks many newcomers.
What is the intrinsic value of crypto, is there any?
Fiat currencies such as the dollar and pound draw their value from the perceived strengths of their economies (measured by GDPs and growth rates etc.), the promise of their taxpayers to keep paying taxes, and the threat of consequences from their police and military.
Gold and silver have some side uses such as jewelry, electronics and dentistry, but are mostly attached their values because of their perceived scarcity and durability.
When you move to the crypto currency sphere, you see the "greater fool theory" at play at its finest - something is worth X because enough people say so - much like all other human attempts at capturing value - except there is nothing physical about its form. People will argue that, in addition to the trust-less, encrypted, digital nature of crypto (which make it ripe for the 21st century), there are core similarities that make a currency like Bitcoin "real money":
What is an exchange?
An Exchange is where you can buy and sell your crypto currencies on the global market. There are several thousand exchanges now and while the price differences do allow for a little arbitrage sometimes it is really just about the UI or the tools you like. There are a lot of very reliable exchanges on the internet where you can also trade your fiat currency of choice for the cryptocoin of your choice.
Exchanges are regarded as "honey pots" and do make for easy targets for hackers so they do have an associated risk, along with the fact that the exchange invariably has your personal keys - not you - which irks many crypto hardliners.
Exchanges have been known to refund their consumers money in a the case of a hack and some of them have specifically set aside budgets for prevention and remediation.
What is a wallet?
You can store your digital tokens in a wallet. They can be wallet apps for your phone such as Jaxx or Coinomi, or your desktop computer, such as Electrum or Exodus. You can get a dedicated device like Trezor or Ledger, and you can even print your tokens to a paper wallet, or host them on the cloud with a service such as MyEtherWallet or FreeWallet.
You must keep your keys safe for your wallet, they are the only way to recover your funds in case you lose access to them. Someone could technically hack into your wallet, which would mean they were specifically targeting you, it's easy enough to get a new wallet and/or address though - getting your funds back though, not so easy since there is no one to go complain to, it is all just algorithms.
Which takes us finally to:. Wallets represent complete financial sovereignty and come with their own risks, meaning that all the responsibility of maintaining and securing them rests solely on you (and your techy friend) for the time being.
Where can I store my cryptocurrency?
Both wallets and exchanges are great places for storing your crpto, so: should you get a physical wallet or an exchange? Both ideally. You will principally use the exchanges to trade currencies. Having an offline wallet on an old phone (Jaxx is a good multi currency wallet) for example is not at all a bad idea, especially if you plan on big holdings. Exchanges can be hacked and you could lose all your crypto.
If you're holding (or hodling) for a really long time, you might even want to put them offline in a Trezor or Nano S wallet. For small holdings, an exchange or other hot wallet is fine. To cover all your bases, get on a couple of exchanges if you can. Importantly, keep your keys in a safe place—they let you reclaim your wallet if lost.
This is what an Etheruem wallet address looks like: 0x99b59a1c9d68efc4233d1cc7e2fa7b0b6dd6f975
How does the network resolve disputes?
The crypto network is trust-less, i.e. you do not need to know anything about the other party, accept that they have a balance in their wallet and can make payments that can be verified by the network. Additionally all transactions on the blockchain are irreversible adding to the security of all previous transactions, these transactions are encrypted but transparent for all to scrutinize - some privacy coins are virtually untraceable though.
Smart contracts on some cryptos take this up a level, and allow you to literally make if-then clauses that restrict or allow payment of funds based on whether certain criteria have been fulfilled and/or could include payment released by a third party.
Many new crypto platforms like OpenBazaar are implementing third party mediation services or escrows to secure your purchases.
Why is cryptocurrency trading so volatile?
Basic economics, supply and demand really: it has a lot to do with human psychology, so whenever there's bad news or negative publicity (like China banning ICOs) people sell (prices drop, people are trained to buy the dip), and when there's good news or media attention (like Paris Hilton launching her coin), the price goes up, and it's a good time to sell if you need to. Bitcoin's price resilience comes from its increasing popularity as a legitimate alternative to the increasingly problematic fiat money systems instated and regulated by governments.
Do all cryptocurrencies fluctuate in price?
Bitcoin is the standard, but others are gradually being adopted. Ethereum is a front runner, then Litecoin, Ripple, Dash, etc. Think of them as blue chip stocks. As more individuals, businesses, governments, and robots (IOTA) use them, their price will go up. With all the geopolitical volatility the price will eventually rise as people keep transferring their investments into cryptocoin. Each coin also often does something specific: Ethereum has smart contracts, Monero is totally anonymous, etc. Do some research to see what makes the technologies different. Evidence so far suggests that Bitcoin is the gateway and then funds slowly funnel down to the other currencies organically, and thus a lot of the Bitcoin effects are seen on other cryptocurrency's charts.
Is this a good time to buy XYZ currency?
Depending on your time horizon—yes, probably. Almost all cryptocoins have a tendency to increase in price as their new technology gains acceptance. Hodling is a common strategy. Do a little research—sometimes a particular currency will have the impulse and you might end up buying at the highest price and sitting on it for a while. Here is a list of the top currencies. It's best to stick with the main ones till you get a handle on what's going on. Buy low, sell high is usually a good rule of thumb. If you do buy at the top you will be forced to hodl longer than intended or suffer a loss when you sell lower. Look for overall market cycles and try to stay on the right side of the wave.
Can I buy ETH when it drops to $100 or BTC when it gets to $500?
Both are unlikely scenarios. Nonetheless, you can place limit orders to buy Ethereum and Bitcoin at $100 and $500 respectively. This way you won't have to wait for anyone to tell you when that happens, and you'll buy at those prices automatically. All cryptocurrencies (much like stocks and everything else in life, lol) have a propensity to get more expensive. Market crashes will create the scenario in question (e.g. ETH $100 levels, up to a 90% drop in price), and then limit orders are a good option because you'll actually get the price you want in the event. One caveat: your money is unusable (held with them) until you cancel the order or it is fulfilled. If the coin crashes, it's a good time to buy the dip as everyone looks to get their money out. This may seem counterintuitive but the market will likely rebound in the future, but you should be prepared to hold for a little while (2 months—2 years) for that to happen. Try to get a sense of the market and individual crypto cycles.
Do I need to know how to read charts?
Not necessarily. They can be extremely helpful in figuring out what's going on while everyone else is just freaking out. If you want to actually know what you're doing, it's probably a good idea to start getting familiar with them. There are only a handful of patterns you need to train your eye to see: check out our chart patterns cheat sheet. Then you can start coming up with your own kooky theories!
What is a fork?
A fork happens when a large segment of the developers / miners agree on a proposed update. If there are disagreements, the chain splits. Results mainly include a price hike before the 'mutation,' and some uncertainty as to which is the original. Forks are usually announced in advance, and also get cancelled and moved around all the time—Segwit2x is the best example of that for Bitcoin. People holding coins at the time of the fork get an equal amount of the new forked coins - lots of the inherited market cap is almost virtual then - unless collected. Soft-forks are temporary to fix a hack or glitch. Hard-forks are permanent, new clones of original currencies created with 'advanced' features. The internet is very ambivalent about forks as some feel it weakens the currency, but others say it's part of the evolution of this space. No spoons or knives yet.
What is mining in the context of Bitcoins and cryptocurrency? Does mining Bitcoin increase the supply of Bitcoin?
Mining is what compensates people for maintaining the overall ledger and computing the next block of transactions that will be added to the ledger (the chain), and so mining does increase the supply. There is usually a limited overall supply of all coin, mimicking the Gold Standard model—for example, there are 21 million Bitcoin, divisible to the 6th decimal in the total supply.
Can I just buy some NVIDIA cards and processors and make a few dollars every month just "mining coins?"
Mining is an alternative way to get into cryptocurrency. The process requires a lot of hardware and electricity but is necessary to keep the whole process moving forward. Miners' returns are diminishing as the algorithms are getting more difficult, and the payout rate is halving every X bitcoin. Eventually, once all the coins are mined, miners get only transaction fees and no new coin. Competition is already steep and increasingly bigger and faster operations are coming up daily. Some countries (Russia, China, Japan, Venezuela, to name a few) are setting up their own national mining facilities and subsidizing electricity costs. There are now cloud mining operations too—you can pay to lease their equipment for X years.
Mining uses a lot of electricity
Yes, in comparison to what though? Here are some counter-arguments:
What are some good investing principles for first time savers?
DYOR = Do your own research. Don't trust what anybody says.
Hold some, trade some.
Keep increasing holdings regularly.
Buy low, sell high (90% of the population does not do that—only 10% of people make money).
Overcome FOMO (Fear Of Missing Out).
FUD = fear, uncertainty, doubt (Shows up a lot in cryptocurrency—usually signaling a buying opportunity).
Don’t sell your shirt to get into this. Like any big financial venture, it should be part of a bigger, carefully considered plan.
Please keep in mind that these are all opinions and educated speculation. It's your money.
In keeping with the communal nature of the cryptocurrency system, all related information is shared peer-to-peer—take advantage of other people's knowledge; google (and youtube) that shit.
Make no moves without research—this is uncharted territory but it's possible to extrapolate from existing economic systems like the stock market. Because the space is deregulated (arguably its greatest advantage), it's incumbent on participants to do their due diligence.
So I have some bitcoin, now what?
Lots! Just to cover the regular things:
What does it mean for taxes?
According to Forbes:
“The IRS treats cryptocurrencies as personal property, not currency. Therefore, buying and selling cryptocurrencies is the same as buying and selling gold or stock. So, the traditional rules apply: (1) is it a business asset; or (2) a passive investment? If it’s not a business asset, then: (1) what did you buy it for; (2) how much did you sell it for; and (3) how long did you own it? Let’s assume for this article you’re not using your cryptocurrency for business purposes and you’ve bought cryptocurrency on a lark at a very low price. And now you’re potentially facing a large gain if you sell those coins. Given the taxes crypto investors may be subject to (currently, 39.6% for short term holdings, 20% for long term holdings, plus the 3.8% NIIT), and the IRS’s recent efforts to enforce tax payments on cryptocurrency gains, perhaps crypto-traders can look to traditional methods of tax planning for inspiration for solutions."
Here's an article from Coinbase on the topic.
And here is an article from the IRS.
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