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What is Cryptocurrency?

What you need to know to bring yourself up to speed on the world of crypto.

Brandon Bartlett - Crypto consultant and OBR founder

Brandon Bartlett

OBR | CEO

Crypto 101

Cryptocurrencies are rapidly leading the way to a more flexible future. No longer do we need to rely on banks that have large fees, transaction charges, lengthy waiting times, and centralised governing or regulating authorities. Cryptocurrency is an instant currency transfer system between people, businesses, and countries around the world.

Cryptocurrencies do not need centralised authorities, such as central banks, and thus are not susceptible to government intervention or manipulation or vulnerable to hackers gaining access to your money and private information

Cryptocurrency Definition

Cryptocurrency, sometimes called ‘crypto’ for short, is a digital currency which is any form of currency that exists digitally using cryptography to secure transactions on a distributed ledger called a blockchain and create new units of that currency.

Cryptocurrency is a type of digital asset which can be used to exchange value between parties. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments.

Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.

Instead of physical cash that is carried around and exchanged in the real world, cryptocurrencies are only exchanged digitally, online. When you transfer funds, the transactions are recorded on a public ledger. You store your cryptocurrencies in a private wallet.

Fiat currencies, like the AUD, USD, or YEN, are all printed by the government, which just decides to print more and more of that currency whenever they need it. Cryptocurrencies are different, in that they are made by the same mathematical equations that make them work.

And that’s what Bitcoin does. However, Bitcoin is just one type of cryptocurrency. There are many more, and many of them have been based on the same concept that Bitcoin is.

How Does Cryptocurrency Work?

Cryptocurrencies are operated entirely online through a distributed ledger called a blockchain, a transparent and permanent record of all transactions verified, updated, and held by all participating nodes. Each node will have a full record of data that has been stored on the blockchain since its inception.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.

If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a third party.

Types Of Cryptocurrency

In 2009 cryptocurrency blew up online and became popular when a pseudonymous person or persons, named Satoshi Nakamoto Satoshi Nakamoto, released Bitcoin to the public. Since then, Bitcoin has become the most well-known cryptocurrency across the world. By late 2010 dozens of other cryptocurrencies were introduced for purchase, and since the beginning of 2022, there are now over 10,000+ active cryptocurrencies available, however, some are more popular than others, and they’re all different from one another. You can read more about the history of cryptocurrencies here

There are two main categories of cryptocurrencies, which are important to distinguish:

Coins

Cryptocurrency coins are built into a blockchain, native to their blockchain technology. They usually require significant resources and skills to create, mostly distributed through a mining process. Coins are used as a store of value or transfer for goods or services and, are valid with any merchant who accepts it.

Bitcoin is the most popular cryptocurrency coin to date. It has remained the hottest currency since 2009 and continues its top ranking in the market. Satoshi Nakamoto, the founder of Bitcoin, is known to still own $1 million Bitcoin, with a net worth of over AUD$60 billion. Litecoin is another example that works very similarly.

Tokens

Tokens have far more uses than just digital money. Tokens are created on top of an existing blockchain and can be used as part of a software application. These are called “smart contracts”. For example, to grant access to an app, verify identity, or to track products moving through a supply chain. They can represent digital art like NFTs or “non-fungible tokens”, which certifies something as unique.

Ether is an example of a token, which is used to make transactions on the Ethereum network. Ethereum is a popular smart contract blockchain for creating other cryptocurrencies. Ethereum was developed by a programmer named Vitalik Buterin in 2013. He was only 21 years old at the time. It was launched to the public in 2015 where it was valued under $1 per Ether token, and in December 2021 reached a high of AUD$6867.

Anyone who knows how blockchain technology works can develop their cryptocurrency. Blockchain technology is open source, which means that any software developer can use a source code and create something new with it. Developers have done just that. This explains why there are so many different types of cryptocurrencies on the blockchain today. There are estimated to be more than 10,000+ different valid cryptocurrencies in circulation at the time of writing this blog, and the figure keeps increasing. For reference, the number of cryptos surpassed 2,000 at the end of 2018. It’s now over 5 times that amount.

How To Buy Cryptocurrency

To acquire cryptocurrencies, it is necessary to purchase the right cryptocurrency at the right time. Here are the simple steps to acquire your own.

 

  1. Choose a crypto exchange, such as Swyftx, CoinSpot, or Digital Surge
  2. Create and verify your account
  3. Deposit funds into your account
  4. Purchase your selected cryptocurrency
  5. Select a storage method (crypto wallet)
  6. Transfer to your crypto wallet for safe storage
 

Read more about the Best Cryptocurrency Platforms for Beginners.

Pros And Cons Of Cryptocurrencies

Cryptocurrency Pros

  • Anti-inflationary characteristics – supporters see cryptocurrencies, such as Bitcoin, as the currency of the future. With its anti-inflation characteristics, many people are buying them now before they become more valuable.
  • No mediatory – cryptocurrency removes central banking authorities from managing the money supply since over time these banks tend to reduce the value of money via inflation and have complete control over the money supply.
  • Instant and secure transfer – It is simple to transfer currencies to anyone if you have the other person’s wallet address. You do not have to ask permission, it is instant and very secure, plus no documentation is needed.
  • Self-managed and regulated – The governance and upkeep of cryptocurrencies are critical factors. Developers and miners hold Bitcoin transactions on their hardware and receive a transaction fee as a reward for doing so. Because miners are compensated for their effort, they continue to maintain the cryptocurrency’s integrity by ensuring accurate transaction records and that the data is decentralised.
  • Passive income – Some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking. Crypto staking involves using your cryptocurrencies to help verify transactions on a blockchain protoco Though staking has its risks, it can allow you to grow your crypto holdings without buying more.

Cryptocurrency Cons

  • Chance of illegal activity – Bitcoin has been known in the past, because of its high level of security and anonymity, to be used for illicit activities, including purchasing narcotics on the dark web.
  • Risk of cyber-attack – Although cryptocurrencies are very safe, exchanges are not. Most exchanges save users’ wallet info to correctly operate their user ID. Hackers can gain access to a large number of accounts on exchanges and steal the clients’ wallet information. A handful of exchanges have been backed over the years, and crypto worth hundreds of millions of dollars has been stolen. Most exchanges are now very secure, but there are always possibilities of hacks.
  • High loss risk – with the lack of ownership and power over cryptocurrencies, there is no recourse if something goes wrong. One technical issue and you could lose your digital assets. Nobody controls the money so there is nobody to complain to. So, if you are choosing a wallet to safeguard your crypto, make sure it has good evaluations and it can be trusted. Remember, there are no refund policies!
  • Highly volatile market – The cryptocurrency market is quite volatile. Estimating a graph of Bitcoin, which tends to control the market, can be very challenging. It’s very difficult to anticipate value changes. If you are trading, it’s important to be a competent analyst and researcher, plus be up to speed with the news affecting Bitcoin.

How Do You Store Cryptocurrency?

Cryptocurrency storage is one of the most important aspects of digital currency ownership. The reason for this is simple. Without a way to store your digital assets, you have no way to use them. If you don’t know how to store your cryptocurrency safely and securely, it’s better to not own any than to end up losing your money.

A digital wallet is an application or program that securely stores your cryptocurrency. Your cryptocurrency wallet can be accessed from any device such as your phone, tablet, computer, etc. The most common way to access your cryptocurrency is by using a “hot” wallet that you can access at any time and that is connected to the internet. It is a very convenient and cheap option for easy access to your digital assets. A ‘cold’ wallet enables offline storage of your assets and is not connected to the internet. Cold wallets are a very safe option, especially for long-term storage. Some people use a combination of the two.

Is Cryptocurrency Legal?

The cryptocurrency market has been growing at an exponential rate. Even though Bitcoin was the first digital currency to be created and has become one of the most sought-after cryptocurrencies in the market, many people have still been wondering if it is legal or not. Bitcoin, Ethereum, Litecoin, and over 10k+ cryptocurrencies, are indeed legal. They are also considered legitimate forms of currency. This means they can be used to exchange goods and services. However, cryptocurrencies differ from traditional currencies in one important way: there’s no requirement in Australia that they are accepted as “legal tender.”

The Australian dollar, by contrast, must be accepted for “all debts, public and private.” Countries around the world are taking various approaches to cryptocurrency. El Salvador in 2021 became the first country to adopt Bitcoin as legal tender. Meanwhile, China is developing its digital currency. For now, in Australia, what you can buy with cryptocurrency depends on the preference of the seller.

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Cryptocurrency Tax Issues

If you’re receiving cryptocurrency as a payment for goods or services, or by mining it, this is considered ordinary taxable income. The current market value will be applied to the income amount on the day it is received.

If you purchase a cryptocurrency and hold and sell it in the first year at a profit, you will be owing the tax department 50% of your profits in capital gains tax. If you have held on to your cryptocurrency for more than a year and then sell it for profit, it will be counted as normal income and you will owe the tax department the appropriate rate of income tax.

However, it’s not all doom and gloom. If you are using cryptocurrency for business expenses, you can claim these in the same way you do with fiat currency. This even includes the costs of acquiring cryptocurrency itself!

If you plan to make a profit on cryptocurrencies, whether you are holding on for the long term or trading, please take the time to educate yourself in more detail on the tax implications. Check out this blog which will take you through the Australian tax implications in detail.

How Can You Spend Cryptocurrencies?

All of the valid cryptocurrencies can be exchanged for fiat currencies or other cryptocurrencies. They can also be used to buy items such as goods, services, and digital content if a merchant accepts crypto. There are several ways that you can spend your cryptocurrencies.

  • Living Room of Satoshi – If you have Bitcoin or one of 35 other cryptocurrencies, you can pay your bills, including your credit card, or transfer money to another bank account via Living Room of Satoshi.
  • Digital Surge – On this exchange, you can use your crypto to pay your bills, credit card, or transfer fiat dollars to someone’s bank account.
  • Private wallet – You can transfer cryptocurrencies directly to a merchant’s private wallet address.
  • Wirex – you can apply for a Wirex card, which is connected to Visa. You transfer your chosen cryptocurrency to your Wirex account and can spend your crypto when you are out shopping just like any other debit or credit card. The merchant receives fiat dollars in their bank.

Mitigating Risks

Cryptocurrencies can be relatively risky to invest in, especially with many scam coins, with little liquidation, the volatility of the market, and lack of regulations. Generally speaking, it’s important to diversify your investment portfolio and decide what percentage cryptocurrencies will make up. Make a decision, and stick to your plan.

Another way to manage risk within your crypto portfolio is by diversifying the range of cryptocurrencies that you buy. Crypto assets may rise and fall at different degrees, and over different periods, so by investing in several different products, you can insulate yourself, to some degree, from losses in one of your holdings.

Perhaps the most important thing when investing in anything is to do your research. This is particularly important when it comes to cryptocurrencies, which are often linked to a specific technological product that is being developed or rolled out. A good place to start is CoinMarketCap where you can find information on every single cryptocurrency in the world.

When you buy a stock, it is linked to a company that is subject to well-defined financial regulatory reporting requirements, which can give you an idea of its prospects.

Cryptocurrencies, on the other hand, are more loosely regulated in Australia and the rest of the world, so discerning which projects are viable can be challenging.

For beginner investors, it can also be worthwhile to examine how widely a cryptocurrency is being used. Most reputable crypto projects have publicly available metrics showing data such as how many transactions are being carried out on their platforms. If the use of a cryptocurrency is growing, that may be a sign that it is establishing itself in the market. Look how many contracts they may have with other companies.

Cryptocurrencies also generally make “white papers” available to explain how they’ll work and how they intend to distribute tokens. It can take a lot of work to comb through a white paper or a prospectus; the more detail it has, the better your chances it’s legitimate. But even legitimacy doesn’t mean the currency will succeed. That’s an entirely separate question, and that requires a lot of market savvy that you obtain over time and thorough investigations.

Cryptocurrency Fraud And Scams

As cryptocurrencies have continued to grow, so too have the number of fraudsters who are trying to scam unsuspecting investors into parting with their hard-earned cash. 

When you buy a cryptocurrency, you don’t literally own it, you just store it safely in your wallet. You are the one who controls your assets and only you can transfer them anywhere in the world. The only thing that is keeping you from losing all of your money is the fact that your crypto wallet has a specific level of security.

There are two categories of scams to look out for:

  1. Initiatives aiming to obtain access to your digital wallet or your authentication details. This means that scammers try to get information such as security codes.
  2. Transferring your cryptocurrency directly to a scammer due to impersonation, fraudulent investment or business opportunities, or other malicious means.

Is It Worth Mining Cryptocurrencies?

Bitcoin mining began as a well-paid hobby for early adopters who had the chance to earn 50 BTC every 10 minutes, mining from their bedrooms. Successfully mining just one Bitcoin block, and holding onto it since 2010 would mean you have AUD$350,000 worth of bitcoin in your wallet in April 2022.

Cryptocurrency mining is the process of using specialised computers to solve complex algorithms to confirm transactions. The computers used to mine cryptocurrency are known as “miners”, and they are responsible for validating transactions and adding them to the blockchain. They receive transaction fees for their services.

Up until a few years ago, Bitcoin miners received a good return for their efforts. However, as there are fewer Bitcoins left to be mined, the mathematical equation for each block is harder and takes longer to solve. Cryptocurrency mining has become increasingly difficult over the years due to the high energy consumption and rising operational costs of new hardware, leading to a steady drop in its profitability.

Although the average consumer could not easily do this job in their bedroom like in 2010, there are people and a lot of companies who have the right equipment and technologies.

So, is it worth it to set up equipment to mine Bitcoin? The short answer is still ‘yes’, if you are motivated and have money to invest in the equipment. But the long answer is complicated and you will need to do some research on how to set yourself up so that you can receive a passive income and have maximum returns.

Conclusion

Bitcoin mining began as a well-paid hobby for early adopters who had the chance to earn 50 BTC every 10 minutes, mining from their bedrooms. Successfully mining just one Bitcoin block, and holding onto it since 2010 would mean you have AUD$350,000 worth of bitcoin in your wallet in April 2022.

Cryptocurrency mining is the process of using specialised computers to solve complex algorithms to confirm transactions. The computers used to mine cryptocurrency are known as “miners”, and they are responsible for validating transactions and adding them to the blockchain. They receive transaction fees for their services.

Up until a few years ago, Bitcoin miners received a good return for their efforts. However, as there are fewer Bitcoins left to be mined, the mathematical equation for each block is harder and takes longer to solve. Cryptocurrency mining has become increasingly difficult over the years due to the high energy consumption and rising operational costs of new hardware, leading to a steady drop in its profitability.

Although the average consumer could not easily do this job in their bedroom like in 2010, there are people and a lot of companies who have the right equipment and technologies.

So, is it worth it to set up equipment to mine Bitcoin? The short answer is still ‘yes’, if you are motivated and have money to invest in the equipment. But the long answer is complicated and you will need to do some research on how to set yourself up so that you can receive a passive income and have maximum returns.

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