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What Is Cryptocurrency? Definition And Explanation

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The name “cryptocurrency” is derived from “cryptography”, originally the science used to describe the encryption of information. Cryptocurrencies are Internet-based automated means of payment. Crypto money, in the form of banknotes or coins, is almost entirely a cryptographic currency with no physical counterpart. Protection tokens, also called asset-based tokens, on which the resulting values are deposited in dollars, euros or gold, are the only exception. These, however, represent only a small percentage of the various types of crypto currency, in turn, represent only a small proportion of the sum of the different tokens of the respective crypto currencies. Special software and complicated test procedures and encryption strategies produce virtual capital. Blockchains and digital signatures are important cryptographic methods.

List of the 10 most famous cryptocurrencies – Ranking:

  • Bitcoin (BTC)
  • Ether or Ethereum (ETH)
  • Ripple (XRP)
  • Bitcoin Cash (BCH / BCC)
  • Dash (DASH)
  • Litecoin (LTC)
  • Monero (XMR)
  • NEO (NEO)
  • Ether Classic (ETC)
  • Zcash (ZEC)

What is a blockchain?

A blockchain (English for blockchain) is a decentralized database in which so-called “blocks” of data records are linked to a continuously expandable list in the form of so-called “hashes”. This is intended to secure the integrity of the cryptocurrency against subsequent manipulation. All transactions taking place are recorded in chronological order in the form of so-called hash values ​​in the blockchain.

How does the encryption work?

Most cryptocurrencies like Bitcoin are based on cloud- and software-based peer-to-peer networks. All information within these networks is accessible to all other network participants. Special cryptographic encryption techniques ensure security . Each participant uses 2 associated cryptographic keys:

  • 1 public key (called Account Address in English), which is used like an account number,
  • 1 secret key with which transactions are cryptographically signed (similar to the TAN procedure for transfers)

What is a wallet for cryptocurrencies?

The cryptographic keys are stored in a file called a cyber wallet , online wallet or simply wallet . A wallet has roughly the function of a virtual account: This is where the credit and inputs and outputs of the respective cryptocurrency are recorded and transactions are made.

How do cryptocurrencies like Bitcoin and Co. work?

What is unique among non-governmental cryptocurrencies like the well-known Bitcoin is the other users’ decentralized power over all processes: Each transaction is released on the P2P network and must now be reviewed using the previous entries in the blockchain by other participants to decide whether the public is The sender’s key is valid and if the account will not be overdrawn by the transfer. This should exclude overdrafts from deposits. It is recorded in the blockchain whether the transaction is verified as valid.

Proof of work is rewarded so that users invest enough time and, above all, computing power in the blockchain: the more computing power and work that is invested in the blockchain, the better the probability of taking advantage of new challenges and processing costs. This method, analogous to gold mining, is called “mining” in English.

What are bitcoins?

Bitcoin (BTC) means something like “digital coin” and is the best-known crypto currency to date.

The tempting profits from mining mean that ever higher computing power has to be applied. The increasing requirements and the increasingly specialized hardware have created huge data centers, so-called mining farms, around the world. If they want to engage in the mining of crypto coins, ordinary PC users now have to extend their machines with especially strong global processing units and graphics cards.

THE INCREDIBLE HISTORY AND EVOLUTION OF BITCOIN:

When were bitcoins invented?

2008: A description of the Bitcoin payment system is published under the pseudonym Satoshi Nakamoto.

When did the first Bitcoin hit the market?

2009: Publication of an open source reference software – the 1st Bitcoin is created.

Who is the inventor of Bitcoin?

In 2016, Australian entrepreneur Craig Steven Wright claims to be the inventor of Bitcoin. The late Dave Kleiman was probably also involved. In 2018, Dave Kleiman’s heir sued Craig Wright for $ 10 billion.

How much is a bitcoin worth?

The value of bitcoin is constantly changing. On October 9, 2010, the maximum value was 0.1 US dollars, on April 1, 2013 it was 100 US dollars. On December 22nd, 2017, the Bitcoin price reached a high of almost $ 20,000.

Are there alternatives to mining through proof-of-work?

There are now numerous cryptocurrencies such as EOS, Cardano (ADA) or BitShares (BTS) that rely on proof-of-stake instead of proof-of-work: Here you have to invest primarily in shares. Similar to stock corporations, the size of the stake, i.e. the proportion of tokens, becomes a decisive factor.

The difference between coins and tokens?

Cryptocurrencies are mostly traded in coins or tokens. The name Coin is derived from Bitcoin. Therefore, the term mainly includes digital currencies such as Bitcoin. Tokens, in turn, are differentiated into utility tokens, equity tokens and security tokens. The latter are tokens in which a real monetary equivalent such as gold, dollars, euros or real estate is deposited. Equity tokens are investments in the respective company and often also contain a possible profit sharing in the future company success. These can best be equated with stocks and they are treated very similarly in regulatory terms. Utility tokens are in turn means of payment on the respective platform of the company and represent access to this platform. If the utility tokens only have these properties, then they are not subject to any regulatory obligations. Accordingly, many companies try to mark their cryptocurrency as utility tokens and issue them as such. Plus, cryptocurrencies attract with quick profits – but where there is money to be found, there are also dangers.

The biggest – so far known – dangers for everyone who trade with cryptocurrencies:

Clipboard Hacking – this is where hackers gain access to the clipboard and change the receiving address during transactions. Therefore, always check the transaction address before confirming a transaction.

Phishing – here fake websites that look identical to the original try to “fish” user data.

SAFETY TIPS:

Private keys are a secret password and ensure that only you have access to your wallet and can carry out transactions. So never reveal your private key.

Secure your wallet: You can choose between different providers for wallets. Be sure to pay attention to safety! Can you protect the wallet with a personal password? 2-factor authentication (2FA) with an authenticator program (not via SMS – there is a risk of sim hijacking or sim swapping) is considered particularly secure.

Keep your eyes on the prices of the cryptocurrencies. Since the digital currencies are traded in a matter of seconds, forecasts about price gains or losses are much more difficult than with stocks and other investments.

And the most important tip if you want to buy crypto currencies: Only invest as much in crypto currencies as you can bear.

Value and rate are based on supply and demand. Like all commodities, investments and speculative objects, cryptocurrencies are therefore subject to price fluctuations. The peculiarity of global trading in cryptocurrencies is that digital transactions can lead to enormous changes in a matter of seconds and thus price gains or losses.

Getting started with cryptocurrencies – how do I get started?

If you want to trade in cryptocurrencies, the first question that arises is: How and where can I buy cryptocurrencies? If you want to buy cryptocurrency, you don’t have to go straight to the darknet. There are now numerous established providers on the Internet who trade in cryptocurrency. Here you can buy cryptocurrencies and usually get a wallet. Otherwise, you can use a wallet from other providers.

How are profits from cryptocurrencies taxed?

Since cryptocurrencies are not yet recognized as legal tender, profits are not taxed like capital income. There is also no withholding tax on profits from the sale. Profits from mining or trading must also be taxed, but the case law on the taxation of profits with cryptocurrency is not yet clear. Since crypto currencies are usually treated similarly to state foreign currencies when taxing.

NOTE: If you earn money privately or commercially with cryptocurrencies, it is advisable to consult a professional when filing your tax return.

IMPORTANT: Tax evasion can result in heavy fines and even imprisonment.

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