What Is Cryptocurrency?
Bitcoin

What Is Cryptocurrency?

1 month ago

In 2022, everyone has heard about cryptocurrency, but few can explain it when asked directly: what is crypto?

What Is Cryptocurrency?

Table of Contents

We’ve put together a cryptocurrency for beginners guide, giving you a quick 'n dirty explanation of what cryptocurrency is. You will understand that it is not just monopoly money — cryptocurrency is a new type of money that does not need a centralized network or entity to function. This guide covers:

  • Cryptocurrency 101: all you need to know about cryptocurrency, how to buy and sell crypto and more.
  • Blockchains: you'll learn what a blockchain is and why it's so important for crypto.
  • How to create a cryptocurrency: learn how to make a cryptocurrency.
  • Crypto credit cards: all you need to know about how a crypto credit card works.
  • Crypto taxes: the uncomfortable but important topic of crypto tax, crypto 401(k) and Bitcoin 401(k) implications.

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Cryptocurrency 101

The crypto 101 you need to know is:

Cryptocurrency is a purely digital form of money.
There is no physical form of crypto. Unlike with fiat currencies, you have no coins and bills. But just like with fiat currencies, cryptocurrencies function as a medium of exchange. The first cryptocurrency in existence was Bitcoin. Bitcoin was often described as monopoly money without any real value: in China, crypto was even banned, and people cannot legally buy and sell crypto anymore. However, the "China crypto ban" did little to stop the rise of cryptocurrencies and Bitcoin in the rest of the world.
To use cryptocurrencies, you need a crypto wallet. When you buy and sell crypto, your wallet is where you can access your coins. For example, you can have:
You can buy crypto on a crypto exchange and send and receive digital currency from other crypto wallets. Your crypto exchange account also functions as a wallet, similar to how you can keep your money in a bank account. You can also buy and sell crypto from P2P networks, but the most common way to transact in cryptocurrency is still through crypto exchanges.
Cryptocurrencies are highly secure because they do not rely on a centralized network. In fact, cryptocurrencies like Bitcoin are not created by any one person: instead, they are created in a process called mining. In crypto mining, transactions are verified, and new cryptocurrency is created. Not every cryptocurrency is mined, but the two most popular examples, BTC and ETH, are mined (although ETH will soon move to a new way of creation).

There is also a huge trend in the crypto space to engage in social trading cryptocurrency. This has led to the rise of a subculture that is especially active on Twitter, often known as Crypto Twitter. Among influencers, some present themselves as a crypto 101 insider to monetize their audience: the idea is that fans of these “crypto 101 insider gurus” will copy their traders and make money However, newcomers are advised to always do their own research, as social trading cryptocurrency is not guarantee of a profit.

What's a Blockchain?

Blockchains are the foundation of cryptocurrencies. A blockchain is a distributed ledger that can record information in a cryptographically secure way, making it impossible to hack.
A more intuitive way of explaining blockchains is that they work like a distributed Google Sheet. Each person that has access to the sheet can update it with a new piece of information like a transaction. The information is updated simultaneously for all copies and is added to the existing record after being confirmed by all owners. The key difference is that a record like a Google Sheet is stored in one central location, like the servers of Google. On the flipside, a copy of a blockchain is stored locally by all parties that confirm transactions, so-called nodes: that is why blockchains are a decentralized way of storing information.
However, information is not simply added to a blockchain. To update the blockchain, nodes have to solve a difficult cryptographic problem. This process is called mining and is the foundation of a blockchain security mechanism called proof-of-work. The first party to solve the puzzle receives a reward and can add new information to the blockchain, which all other parties then confirm.
There is one more elementary way of securing blockchains called proof-of-stake. This is basically a lottery, where the winning party gets to add a new record to the blockchain. However, to participate in the lottery, nodes have to commit a certain amount of cryptocurrency (their stake).

How to Create a Cryptocurrency

Unlike traditional currencies, cryptocurrencies are decentralized and can thus be created by anyone. However, even many experienced crypto investors don't know how to make a cryptocurrency. Here are several ways that you can create your own cryptocurrency:
  • Create a new blockchain and issue a new cryptocurrency.
  • Make a copy of an existing blockchain and create a new cryptocurrency.
  • Create a new cryptocurrency on an existing blockchain.
The first option is to create a new blockchain and issue a new cryptocurrency. This is technically difficult and requires a lot of capital and know-how about blockchains. Most popular cryptocurrencies with their own blockchains started developing several years ago.
The second option is to make a copy of an existing blockchain. This is called a fork. Even some of the most popular blockchains today, like BNB Chain, are forks, so this is a realistic option for how to create your own cryptocurrency.
You can also create a new cryptocurrency on an existing blockchain. For example, on Ethereum, you can easily launch an ERC-20 token. Your new cryptocurrency will live as a token on the Ethereum blockchain. Other blockchains have their own token standards, and you can create tokens there as well.

Crypto Credit Cards

Crypto credit cards have become immensely popular since cryptocurrency appeared. But what exactly is a crypto credit card?
In fact, there are two crypto card types: crypto credit cards and crypto debit cards.
Crypto credit cards are reward cards that pay cashback in cryptocurrency. For example, you can earn 1% in BTC on all your purchases with a crypto credit card. For people that spend a lot of money on traveling or other purchases, crypto credit cards offer a way to earn cryptocurrency while doing what they normally do.
Another crypto card is the crypto debit card. This allows you to spend your cryptocurrency directly from your card. For instance, several exchanges like Coinbase and Binance have launched their own debit cards. You can use crypto for your everyday purchases, while the card automatically converts your cryptocurrency to dollars (or euros or any other fiat currency you need).

Crypto Taxes

Crypto tax is an uncomfortable but necessary part of investing in crypto. If you google "crypto taxes USA," you will receive a million explainer articles about crypto tax, how to use a crypto tax calculator, the situation with Bitcoin 401k contributions and which crypto 401k plans exist. Let's address the most important basics about crypto taxes:

How is crypto taxed?

The IRS taxes crypto as stocks, bonds and other assets liable for capital gains taxes. That means you will have to pay tax on your crypto profits and the income you have made in cryptocurrency (from mining or staking).

How to calculate your crypto taxes

You have to define the taxable and non-taxable crypto events. For example, crypto donations are non-taxable events. You also have to distinguish between short-term capital gains (crypto held less than 365 days) and long-term capital gains (crypto held 366 days and more). Finally, some crypto activities qualify for income tax and others for capital gains tax.

The easiest way to calculate your crypto taxes is to search for a good crypto tax calculator. It will eliminate most of the guesswork for you.

What's the deal with Bitcoin 401k and crypto 401k plans?

In May 2022, Fidelity announced a plan that would allow Americans saving for their retirement to invest in Bitcoin. Since Fidelity is America's largest retirement savings provider, the news made headlines and even prompted a White House official to criticize Fidelity for putting consumer funds at risk.
Crypto 401k plans are coming, but they will probably generate more backlash. Fortune quotes an experienced attorney familiar with 401k plans that a Bitcoin 401k could lead to heavy litigation. If your employer allows it, you can invest in a Bitcoin 401k. But don't be surprised about some unpleasant surprises down the road.

Conclusion

Cryptocurrency is one of the most exciting topics in the world today. Check out our crypto learning platform to learn more about cryptocurrency.
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