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A cryptocurrency or crypto currency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. The decentralized control of each cryptocurrency works through distributed ledger technology, typically a blockchain , that serves as a public financial transaction database.
Bitcoin , first released as open-source software in , is generally considered the first decentralized cryptocurrency. In , the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash. This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party.
In , Wei Dai published a description of "b-money", characterized as an anonymous, distributed electronic cash system. A currency system based on a reusable proof of work was later created by Hal Finney who followed the work of Dai and Szabo.
The first decentralized cryptocurrency, bitcoin, was created in by pseudonymous developer Satoshi Nakamoto. It used SHA , a cryptographic hash function, as its proof-of-work scheme. Soon after, in October , Litecoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA On 6 August , the UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what role, if any, they can play in the UK economy.
The study was also to report on whether regulation should be considered. According to Jan Lansky, a cryptocurrency is a system that meets six conditions: . In March , the word cryptocurrency was added to the Merriam-Webster Dictionary.
The term altcoin has various similar definitions. Stephanie Yang of The Wall Street Journal defined altcoins as "alternative digital currencies,"  while Paul Vigna, also of The Wall Street Journal , described altcoins as alternative versions of bitcoin. A blockchain account can provide functions other than making payments, for example in decentralized applications or smart contracts.
In this case, the units or coins are sometimes referred to as crypto tokens or cryptotokens. Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the Federal Reserve System , corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers.
In the case of decentralized cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralized cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto. As of May [update] , over 1, cryptocurrency specifications existed. Most cryptocurrencies are designed to gradually decrease production of that currency, placing a cap on the total amount of that currency that will ever be in circulation.
The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records , called blocks , which are linked and secured using cryptography. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".
Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority. Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain. Cryptocurrencies use various timestamping schemes to "prove" the validity of transactions added to the blockchain ledger without the need for a trusted third party.
The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA and scrypt. The proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency.
It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there's currently no standard form of it. In cryptocurrency networks, mining is a validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network.
Thus the value of the currency obtained for finding a hash often does not justify the amount of money spent on setting up the machines, the cooling facilities to overcome the enormous amount of heat they produce, and the electricity required to run them.
Some miners pool resources , sharing their processing power over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a block. A "share" is awarded to members of the mining pool who present a valid partial proof-of-work. Some Chinese miners have since relocated to Canada.
Prices are contained because nearly all of the country's energy comes from renewable sources, prompting more mining companies to consider opening operations in Iceland. In March , a town in Upstate New York put an month moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city.
An increase in cryptocurrency mining increased the demand for graphics cards GPU in Miners regularly buy up the entire stock of new GPU's as soon as they are available. Nvidia has asked retailers to do what they can when it comes to selling GPUs to gamers instead of miners. A cryptocurrency wallet stores the public and private "keys" or "addresses" which can be used to receive or spend the cryptocurrency.
With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet. Bitcoin is pseudonymous rather than anonymous in that the cryptocurrency within a wallet is not tied to people, but rather to one or more specific keys or "addresses".
Still, cryptocurrency exchanges are often required by law to collect the personal information of their users. Additions such as Zerocoin , Zerocash and CryptoNote have been suggested, which would allow for additional anonymity and fungibility.
Most cryptocurrency tokens are fungible and interchangeable. However, unique non-fungible tokens also exist. Such tokens can serve as assets in games like CryptoKitties. Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet.
Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction.
The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest. Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.
For ether , transaction fees differ by computational complexity, bandwidth use, and storage needs, while bitcoin transaction fees differ by transaction size and whether the transaction uses SegWit. Cryptocurrency exchanges allow customers to trade cryptocurrencies for other assets, such as conventional fiat money , or to trade between different digital currencies. Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.
The kiosk installed in Austin, Texas is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities. An initial coin offering ICO is a controversial means of raising funds for a new cryptocurrency venture.
An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U. In an ICO campaign, a percentage of the cryptocurrency usually in the form of "tokens" is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often bitcoin or ether.
According to PricewaterhouseCoopers , four of the 10 biggest proposed initial coin offerings have used Switzerland as a base, where they are frequently registered as non-profit foundations. The Swiss regulatory agency FINMA stated that it would take a "balanced approach" to ICO projects and would allow "legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with national laws protecting investors and the integrity of the financial system.
The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade,  others have banned or restricted it. Various government agencies, departments, and courts have classified bitcoin differently. China Central Bank banned the handling of bitcoins by financial institutions in China in early In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.
Cryptocurrencies are a potential tool to evade economic sanctions for example against Russia , Iran , or Venezuela.
Russia also secretly supported Venezuela with the creation of the petro El Petro , a national cryptocurrency initiated by the Maduro government to obtain valuable oil revenues by circumventing US sanctions. The Japanese platform Line and the Russian platform Yandex have similar prohibitions.
This means bitcoin will be subject to capital gains tax. In July , the IRS started sending letters to cryptocurrency owners warning them to amend their returns and pay taxes. As the popularity of and demand for online currencies has increased since the inception of bitcoin in ,  so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society.
Concerns abound that altcoins may become tools for anonymous web criminals. Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and launder money. Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals.
Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track.
Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions. In February the world's largest bitcoin exchange, Mt. Gox , declared bankruptcy.
Homero Josh Garza, who founded the cryptocurrency startups GAW Miners and ZenMiner in , acknowledged in a plea agreement that the companies were part of a pyramid scheme , and pleaded guilty to wire fraud in The U. The SEC's complaint stated that Garza, through his companies, had fraudulently sold "investment contracts representing shares in the profits they claimed would be generated" from mining.
Tether indicates that it is building a new core for its primary wallet in response to the attack in order to prevent the stolen coins from being used. Properties of cryptocurrencies gave them popularity in applications such as a safe haven in banking crises and means of payment, which also led to the cryptocurrency use in controversial settings in the form of online black markets , such as Silk Road. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18, to 32, Darknet markets present challenges in regard to legality.
Cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world.
Going down the rabbit hole
Since then, thousands of unique cryptocurrencies have popped up. Of these, Bitcoin remains the most popular. Curious to see why Bitcoin is the most popular and what other cryptocurrencies are running close behind? Keep reading. With Bitcoin, users transfer money from one digital wallet to another digital wallet with ease. Each transaction is then verified by other users and recorded on the public ledger, known as the blockchain. Bitcoin also has the highest market capitalization among cryptocurrencies, which is often considered by investors. Market caps are calculated by multiplying the current supply of the currency by the current price.
What is Bitcoin?
Gox, a Bitcoin exchange in Japan, was forced to close down after millions of dollars worth of bitcoins were stolen. In Charles Stross ' science fiction cryptkcurrencies, Neptune's Broodthe universal interstellar payment system is known as "bitcoin" and operates using cryptography. Archived PDF from the original on 20 March Mercatus Center. Market Risk. What is your job function? Miners are rewarded with the cryptocurrency. Indeed, there was speculation that the "Bitcoin bubble" had burst when the price declined from its all-time high during the cryptocurrency rush in late and early Research by John M. What it does is hold my bitcoin address, which keeps a record of all of bitvoin transactions, and therefore of my balance. Retrieved 8 February They take transactions, stamp them as legit and spread them in the network. Bitcoin is a digital asset designed to work in peer-to-peer transactions as a currency. The domain name xryptocurrencies.