Learn about the world of altcoins, mining and digital wallets in our guide to cryptocurrency.
Digital transactions aren't new: The majority of us regularly using mobile payments, online banking and wireless transfers. However, until 2008 the idea of a completely digital currency was only that — an idea.
In the years since Satoshi Nakamoto made bitcoin known to the world, several other cryptocurrencies have flourished, creating a "crypto" marketplace for those with the gumption to trade them. Our guide tells you what you need to know about cryptocurrency, where bitcoin fits into the picture and how you can get your hands on it.
What is a cryptocurrency?
Cryptocurrency is any of the many digital currencies exchanged by means of encrypted software and held in digital wallets. Several hundred cryptocurrencies exist, with bitcoin the best known. People who hold cryptocurrency that's part of the same network can trade coins or make purchases where the currency is accepted.
How does a cryptocurrency exchange work?
Cryptocurrencies are exchanged through markets that are based on the blockchain. Once a cryptocurrency transaction takes place, digital copies of the transaction are passed to a peer-to-peer network of computers, known as nodes. These nodes confirm the transaction and then compete to turn it into a block, which is accomplished by solving a complicated mathematical formula. The first node to solve the problem is rewarded with cryptocurrency to add to the blockchain.
How secure are cryptocurrencies?
Cryptocurrency transactions are extremely secure because they rely on the blockchain. This is an online chronological ledger with record of every transaction ever made for that cryptocurrency. A copy is held by each node and used as proof for each transaction.
However, while cryptocurrencies are secure, hacking is still possible. Cryptocurrencies are held in digital accounts that can be hacked into to drain their balances. Think of it like physical money held in your wallet: If your wallet is stolen, you lose out.
Bitcoin was the first cryptocurrency invented in 2008 by an anonymous individual or group using the pseudonym Satoshi Nakamoto. Altcoins are the 700+ alternative bitcoin cryptocurrencies introduced since bitcoin. The first altcoin — Namecoin — was introduced in 2011.
How can you get cryptocurrencies?
While it can sound daunting, the process of acquiring coins from a cryptocurrency is relatively straightforward.
- Choose a cryptocurrency. The main cryptocurrency in circulation remains bitcoin. But more than 700 altcoins are currently in circulation. Some use the same hashtag algorithm as bitcoin, while others rely on script algorithms or other hashing algorithms. These different hash algorithms are related to the rate at which blocks are solved and how much memory is required by computers in the node to solve them.
- Get a wallet. Once you’ve chosen your cryptocurrency, sign up for a digital wallet that supports your currency. You have the option of an online wallet service or downloading a software wallet.
- Accumulate coins. To get coins from your chosen cryptocurrency, either buy them or start mining your own coins. Mining requires connecting your computer to the coin’s network and solving mathematical equations to find blocks and process transactions. In turn, you receive coins. You can find out how to buy bitcoins in our detailed guide.
How are cryptocurrencies treated for tax in Australia?
Bitcoin is illegal in some countries — including in Iceland and Vietnam. But you're free to buy and use bitcoin and other cryptocurrencies here in Australia. The Australian Taxation Office does not treat Bitcoin as a foreign currency or as money and the supply of it is not a financial supply for GST purposes. However, it is an asset for capital gains tax (CGT) purposes.
You will not need to worry about income tax or GST implications if you’re just using bitcoin for personal transactions. If you use bitcoin as part of your business, whether it be to pay staff, receive it as payment for goods or services or paying for goods or services, you will need to note it down on your tax return in Australian dollar value. Any income you earn from mining bitcoin also needs to be noted.
Bitcoin's got a big reputation — but it's not the only cryptocurrency around. Among the hundreds of other virtual currencies that run the gamut, many feature the same type of blockchain technology underlying bitcoin, others sprung from memes or exist to push the boundaries of the Internet and still others appear to be part of elaborate Ponzi schemes.
While prices rise and fall dramatically, here's our list of the top traded cryptocurrencies you can buy and sell today.
- Ether (ETH). Commonly referred to by its platform, Ethereum, ether's marketed as a "next-generation" currency allowing for "smart contract" exchanges without a middleman.
- Litecoin (LTC). Announced in 2011, Litecoin is most similar to bitcoin but with one of the highest market caps among cryptocurrencies.
- Digitalcoin (DGC). Announced in 2013, digitalcoin is the product of a Litecoin fork that boasts improved technical features.
- Dogecoin (DOGE). Founded on the jokey "doge" memes, Dogecoin has since gained traction for targeted donations and online tipping.
- Monero (XMR). Focused on privacy, Monero claims it's "secure, private and untraceable" through a multilayered signature process.
- Dash (DASH). Named for "digital cash," dash focuses on speed and privacy with the ability to spend it through debit cards accepted worldwide.
- Ripple (XRP). Integrated with the Earthport blockchain, ripple can now be used for services with select banks that include Bank of America and HSBC.
- Tether (USDT). Introduced in 2014, this currency is "tethered" to the US dollar, offering a more stable value for traders.
- BitShares (BTS). Among the more popular cryptocurrencies, BitShare's founder describes this altcoin as "shares" distributed among a network and software that embraces public keys.
A to H
cryptocurrency. A digital currency for which encryption techniques are used to regulate its use and generate its release. Unlike fiat currency — like US dollars, euros and yen — cryptocurrency is not regulated or controlled by any government or agency.
bitcoin. A digital cryptocurrency using peer-to-peer technology for nearly instant payments. Bitcoin was invented by an unidentified programmer, or group of programmers, under the pseudonym Satoshi Nakamoto.
bitcoin address. Also called a key, a string of alphanumeric characters used to receive bitcoin. Whereas public addresses typically begin with 1 or 3, private addresses — or addresses that aren't visible to all users — typically begin with a 5 or 6.
bitcoin exchange. An online website or platform that allows users to buy and sell bitcoin for other currencies.
blockchain. A public digital ledger in which the entire history of a cryptocurrency is recorded chronologically.
block reward. The amount of cryptocurrency mined after a "miner" has succeeded in solving a hash.
digital wallet. Sometimes called an e-wallet, an electronic system or app that securely stores personal information, payment details and passwords so that a consumer can make digital payments online or at retail stores that accept it.
hash. A computational puzzle that a cryptocurrency "miner" must solve in order to add the next block on a blockchain.
I to O
mining. A process by which a cryptocurrency is released into the world. "Miners" complete a computational puzzle to be rewarded with a block of currency along the public blockchain.
node. A computer connected to the bitcoin network.
P to Z
proof of work. A system that replaces the concept of “mining” a cryptocurrency with a consensus algorithm, whereby miners put up a stake of their currency to verify a block of transactions.
proof of stake. A hash — or computational puzzle to unlock a cryptocurrency — that is so difficult, it could only have been solved through significant work or power.
What are the benefits of cryptocurrency to me?
Simple money transfers: Imagine you wanted to sell your friend a vase. Would it be better to go directly to them and exchange the vase for cash, or would it be better to hire a lawyer and go through the courts to formally transfer ownership and eventually possession of the vase to them?
With cryptocurrencies, you don't have to go through a third party, like a financial institution or organisation like PayPal, to give someone money in exchange for property. You just give it directly to them, and the transaction gets logged onto the blockchain. The simplicity of cryptocurrencies is probably the biggest benefit.
No or low fees: The simplicity and lack of third parties means things like transfer fees either don't exist or are very low. The miners, the people who run the computations to register a transfer, are compensated for their work by 'mining' currency as they complete transfers, so there's no need to give them any more money.
Faster international transfers: International money transfers using cryptocurrencies are completed quickly. As the system has become more complex, transfer times have slowed, but they are still faster than traditional methods. Again, this is because you go through a few computers, instead of going through several banks, companies and governments (along with their working hours and holidays) to transfer currency.
More accessible: There are an estimated 2.2 billion people who have access to the Internet, but not to traditional banking systems. For these people, cryptocurrencies can be life savers, as they can exchange money with the Internet-enabled phones they already have.
What are the risks of cryptocurrency to me?
Hackers: The first and most obvious risk is that, as cryptocurrencies are digital, they are susceptible to hackers. The robustness of the blockchain formula prevents hackers from attacking the currency systems themselves, but individuals can find their virtual accounts have been hacked and drained of funds. This is the digital equivalent of someone breaking into a bank account. Since, however, no central authorities, banks or other regulated industries are involved, there is nothing the victim can do. If someone drains your bank account, your bank will refund your money. With cryptocurrencies, the money is just gone.
Lack of protection: Similarly, if a person is defrauded – say, they bought an item that was never shipped – the more anonymous nature of most cryptocurrencies means the victim cannot seek redress from either the fraudster or a financial institution with a duty to protect customers from fraud.
Volatile currency rates: Bitcoin only has value because people want to use it. There is no supply of gold or silver backing up the currency, and there isn't even value in its physical makeup, like there is in the metals used to produce coins, since the currency is only digital. Because of this, bitcoin's value can fluctuate wildly, depending on the demands of the market. That means that you could earn or lose money quickly, especially if you put a significant amount of money in bitcoins, as happened back in 2010.
Is cryptocurrency traceable?
Cryptocurrency transactions are traceable, but your name is kept private. The transactions have to be traceable; that's how the miners can verify transactions and ensure the balance adds up.
However, according to Bitcoin.org, "the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances." The transactions are easily traceable, but the user's identities are not – especially if you use a new public address every time you receive bitcoins.
That doesn't mean it's completely anonymous, however. While your name and photo aren't attached to the transaction record, it is possible, with some work, for a transaction to eventually be traced back to you, or at least your IP address. That's why we say cryptocurrency is "somewhat anonymous" and not just "anonymous".
Which countries accept bitcoins?
The city government of Zug, in Switzerland became the world's first locality to accept bitcoins. Still, although residents can pay government fees worth up to 200 Swiss francs, most local businesses still don't accept the currency. Travelers on the Swiss national railway, Swiss Federal Railways, can buy tickets using bitcoin, however.
Why don't countries accept bitcoins?
In short, they'd lose control of their currency. And as Mayer Amschel Rothschild, founder of the banking dynasty said, "Give me control of a nation’s money supply, and I care not who makes its laws." Governments have a reason to want to control the money in their borders.
Governments print and distribute money, sometimes creating more of their currency in times of economic hardship, in order to maintain a stable, growing economy, and they are loathe to give up that control, especially to a volatile young currency like bitcoin.
Who else accepts bitcoins?
Generally, countries and governments don't accept bitcoins, but businesses are more willing to take some moderate risks to allow customers to spend money the way they want to. As a result, there are many lists on the internet of companies that accept bitcoins, and the lists are growing constantly. Web-based companies like Reddit, Wikipedia, NameCheap and make natural early adopters of cryptocurrency, but many real-world retailers also accept bitcoin. Subway, Dell, Tesla and the San Jose Earthquakes (a Major League Soccer team) all accept bitcoins. Even small retailers like Grass Hill Alpacas (a farm in Massachusetts), The Pink Cow (a diner in Tokyo) and the Old Fitzroy (a pub in Sydney) accept bitcoins.
Do companies pay in bitcoins?
Perhaps surprisingly, the answer is yes, sort of. CoinBase gives employees the option of being paid in bitcoins. Canadian startup Wagepoint manages companies' admin and payrolls, and they offer a service where they pay employee wages in bitcoins. As of 2014, they paid CAD$75,000 in bitcoins to customers' employees, and 80% of those employees opted to have their entire wage in bitcoins.
The list of companies offering wages in bitcoins is still very small, but many companies are using the option as a draw for potential employees – especially in the hyper-competitive tech industries where many early bitcoin adopters work.
How long do transfers take?
It depends, really. With cryptocurrency, transfer times have been increasing as the mathematical problems at the heart of the blockchain keep getting harder.
Still, this chart (below) from 2016 shows how much shorter transaction times can be with systems that use blockchain technology.
Blockchain.info created the interactive chart below which shows that while transaction times are increasing, they still only take minutes or hours. It still takes days to transfer funds through more traditional routes.