Learn about the world of altcoins, mining and digital wallets in our guide to cryptocurrencies.
Digital transactions aren't new, with the majority of us regularly using mobile payments, online banking and wireless transfers. However, the idea of a completely digital currency was only that – an idea – until 2008.
In the years since Satoshi Nakamoto made bitcoin known to the world, several other cryptocurrencies have been introduced and flourished, creating a "cryptocurrency" marketplace. This guide will tell you what you need to know about cryptocurrencies, where bitcoin fits into the picture and how you can get your own.
What is a cryptocurrency?
Cryptocurrencies are digital currencies that are exchanged by means of encrypted software and held in digital wallets. There are several hundred cryptocurrencies in existence, with bitcoin being the most well-known. Those which are part of the same cryptocurrency network can transact their coins or make purchases where the currency is accepted.
How does a cryptocurrency exchange work?
The market through which cryptocurrencies are exchanged is based on the blockchain formula. 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 done 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 of the blockchain. This is an online ledger with records, in chronological order, of every transaction that has ever been made. A copy is held by each node and is used as proof for each transaction.
However, while cryptocurrencies themselves are secure, hacking is still possible. Cryptocurrencies are held in digital accounts which can be hacked into and balances drained. It’s similar to physical money held in your wallet; if your wallet is stolen, you'll 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 that have been introduced since bitcoin. The first altcoin, Namecoin, was introduced in 2011.
How can you get cryptocurrencies?
While it may seem daunting at first, the process of acquiring coins from a cryptocurrency is relatively straightforward:
- Choose a cryptocurrency. The main cryptocurrency in circulation is still bitcoin, but there are over 700 altcoins in circulation. Some use the same hashtag algorithm as bitcoin while others rely on script algorithms or other hashing algorithms. These different hash algorithms relate to the rate at which blocks are solved and how much memory is required by computers in the node to solve the algorithm.
- Get a wallet. Once you’ve chosen your cryptocurrency you can sign up for a wallet. You have the option of an online wallet service or downloading a software wallet.
- Accumulate coins. To get coins from your chosen cryptocurrency you can 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?
While bitcoin is illegal in some countries, including Iceland and Vietnam, you can legally buy and use bitcoins 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.
List of 12 cryptocurrency alternatives to bitcoin