FAQ: Basics of Bitcoin and Other Cryptocurrencies

This is the first post in a series about cryptocurrency and blockchain. Stay tuned as we share insights on how these new technologies and trends may relate to you and your business.

Times have changed since people exchanged specie currency, like gold and silver, for goods and services. Nowadays, you can pay for items in a variety of ways. Take a look in your wallet. Do you see gold and silver, or cash and credit cards? You might even rely on mobile payment apps like Venmo or Apple Pay to pay bills.

Cryptocurrencies have also become a means of payment and they continue gaining traction worldwide. They appeal to a wide range of investors and users with their relatively strong security, ease of use, low usage fees and frictionless store of value.

What is cryptocurrency?

Cryptocurrency is a type of digital currency that falls somewhere between cash and credit cards. Cash is completely anonymous and no personal information is revealed when exchanged. Credit cards, on the other hand, require validation by a third party. When using credit cards, a record of purchases is maintained, making identities and pertinent financial information known.

Exchanges that transfer cryptocurrencies claim to offer low transaction fees and an easy means to send money. Unlike cash, cryptocurrency transactions are recorded and kept in a globally distributed ledger that is provided by a technology known as “blockchain.”

Cryptocurrencies and the blockchain are decentralized ― no authority or government issues or manages them. This is a distinguishing attribute for the technology, which removes the need of a trusted third party (such as a bank) to verify the integrity of electronic transactions between a buyer and seller. In other words, no intermediaries exist.

What’s the most popular cryptocurrency?

Bitcoin was the first cryptocurrency to enter the market and remains popular among traders and investors worldwide. Bitcoin was first traded in 2010, and that year, its price never surpassed 39 cents per bitcoin. Seven years later, the dollar price of bitcoin reached an all-time high of $19,783.06.

Other types of cryptocurrencies include Ethereum, Litecoin, Zcash, Dash, Ripple and Monero. There are currently more than 1,500 cryptocurrencies available with total market capitalization of over $430 billion.

How do I acquire cryptocurrency?

Thinking about investing in cryptocurrency? First, you’ll need a digital wallet that lives on your computer and/or smartphone to secure your cryptocurrency. Similar to your bank account, you can store, receive and send cryptocurrency with a digital wallet. Several types of digital wallets exist, so it’s important to research and select one that meets your security and trading activity needs.

Now that you have a digital wallet, you can purchase cryptocurrency. Head over to Coindesk.com, Coinbase.com or another cryptocurrency exchange, select the cryptocurrency you’re interested in purchasing, and pay with your credit card. It’s that simple!

How do I pay for things with cryptocurrency?

You can use cryptocurrency to purchase a wide range of products and services, from electronics and furniture to booking a flight to outer space.

Say you want to buy a new television with bitcoin. Usually, you can pay for physical items with your name and email address. Digital items typically only require an email address.

After you supply your information, the website will then display bitcoin payment options: pay via QR code, bitcoin address or a link to sign into an exchange. The payment process might differ depending on the type of digital wallet you use. You can learn more about spending your bitcoin from Coinbase.

Can I cash out?

Most exchanges that sell cryptocurrency give you the option to cash out as well. Let’s use Coinbase, one of the most popular exchanges, as an example. To cash out, make a Coinbase account and connect your bank account or debit/credit card information. Choose how much cryptocurrency you want to exchange, select your currency of choice and click “exchange.” It may take a couple of hours or days to complete the transaction.

You can also cash out at cryptocurrency ATMs. One website offers a map to help you find cryptocurrency ATMs near you.

Is cryptocurrency secure?

The lack of third-party verification makes some individuals uncomfortable with using and/or investing in cryptocurrencies. Blockchain technology helps mitigate risks of theft, hacking and double spending of bitcoins.

Cryptocurrencies like bitcoin are also designed on an open-source cryptography platform with the intent of making transactions between users challenging to reverse. Blockchain’s architecture makes the time and money necessary to reverse a transaction more costly than the value gained, removing the incentive for attacks. Nonetheless, buying cryptocurrencies typically requires the use of wallets and exchanges, which have been hacked on multiple occasions.  Coincheck, a cryptocurrency exchange in Asia, recently reported that hackers stole $530 million from its users.

Other security concerns include the possibility of criminals using bitcoin and other cryptocurrencies for money laundering, given the difficult nature of tracing beneficial ownership (i.e, who the real person is behind transactions) of such assets.  Regulators and law enforcement also have concerns with the amount of new coins entering the marketplace. Regulators have warned investors to take precautions when contemplating investing in such offerings. Cybercriminals have also been known to favor bitcoin for its anonymity, especially in the case of ransomware attacks. Note: We will explore cyber security concerns related to cryptocurrency in a future blog post.

What questions do you have about cryptocurrency? Please reach out to me or another Kaufman Rossin professional if you have questions about this topic or need assistance with a legal case involving bitcoins or other forms of cryptocurrency.