Digital Currencies: Unlocking the Secrets of Crypto-Currencies

Copyright © 2017 by David Peterson.

ISBN:      Softcover      978-1-5437-4048-6

                eBook           978-1-5437-4047-9

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Contents

Disclaimer Notice

What You’ll Find In This Book?

Section I

Bitcoin And The Alternative Cryptocurrencies

Chapter One

Introduction To Digital Currencies

1.1 The Next Generation Of Money And Payments

1.2 Digital Currency As An Alternative Currency

1.3 Crypto-Currencies In The Market

1.4 General Features Of Crypto-Currencies

1.5 The Benefits And The Risks

1.6 Impact Of The Digital Currency Revolution

1.7 Conditions For A Successful Cryptocurrency

1.8 Future Prospects And Conclusion

Chapter Two

Is Crypto-Currency A Real Currency? An Economic Insight

2.1 Introduction

2.2 History And Background Of Bitcoin

2.3 Bitcoin’s Weaknesses As A Currency

2.4 Conclusion: Obstacles Faced By Bitcoin

Chapter Three

Bitcoin Mining Technology

3.1 Introduction

3.2 Mining Process

3.3 Technology Behind Bitcoin

3.4 Mining Possibilities

3.5 Conclusion

Section II

Big Data And Network Effect

Chapter One

Network Economics And Crypto-Currencies

1.1 Introduction

1.2 Data Network Economics And Crypto-Currencies

1.3 Sustainability Of A Cryptocurrency Network

1.4 Conclusion

Chapter Two

The Baseline Model

2.1 Market Equilibrium

2.2 Demand For Bitcoin

2.3 The Baseline Model

2.4 Conclusion

Section III

Finance Markets And Bitcoin Regulation & Taxation

Chapter One

Legal Issues In Crypto-Currency

1.1 Introduction

1.2 Legality Versus Illegal

1.3 Global Regulatory Movement

1.4 Conclusion

Chapter Two

How To Tax Bitcoin

2.1 Introduction

2.2 Characteristic And Nature Of Bitcoin

2.3 Income Tax

2.4 Consumption Tax

2.5 National Approaches

2.6 Conclusion

Section IV

Financial Innovation And Internet Of Money

Chapter One

How Digital Currencies Will Cascade Up To A Global Stable Currency - The Fundamental Framework For The Money Of The Future

1.1 Introduction

1.2 Regulatory Framework For Cryptocurrency

1.3 Commodity-Backed Digital Mint

1.4 Making Bitcoin Successful Through Information Cascade

1.5 Conclusion

Chapter Two

Bitcoin: A Look At The Past And The Future

2.1 Reasons For Success And Failure

2.2 A Numismatic Approach

2.3 The End Of Money

2.4 The Role Of The Government

2.5 The Role Of Banks

2.6 Future Possibilities

2.7 Conclusion

References

Disclaimer Notice

T he information included in this book is for educational purposes only and is not meant to be a substitute for seeking the advice of a professional. The author and publisher have made best efforts to ensure the information in this book is accurate. However, they make no warranties as to the accuracy or completeness of the contents herein and cannot be held responsible for any errors, omissions, or dated material.

Liability Disclaimer

By reading this book, you assume all risks associated with using the advice, data and suggestions given below, with a full understanding that you, solely, are responsible for any loss that may occur as a result of putting this information into action in any way, and regardless of your interpretation of the advice.

What You’ll Find in This Book?

The Digital Revolution is marching on and entering every aspect of life. - Ernst Raue, CEO of ER-GBS Gmbh

C rypto-currencies aren’t without their share of controversies. These virtual currencies have created a revolution in both the economic and the financial front.

Whether the founders of the crypto-currencies such as Satoshi Nakamoto (Bitcoin), Charles Lee (Litecoin), Paul Snow (Factom), Vitalik Buterin (Ethereum), and many others have profited from their product is not known.

But their efforts have certainly contributed a digital revolution in the form of a radical new currency – the virtual currency - that once all the loopholes are plugged can one day replace the paper and plastic currencies as they had replaced gold as a mode of payment in the past.

The introduction of the digital currencies has brought forth a whole new set of regulations, technical jargons, and standard practices. In the eBook, Digital Currencies - Unlocking the Secrets of the Crypto-Currencies, you will uncover the secrets of the virtual currency including:

• History and evolution of crypto-currency,

• The next generation of digital currencies,

• Technology that powers the digital currency,

• Big data and the network effect,

• The market equilibrium and the baseline mode,

• Legal and tax issues regarding virtual currency, and

• much more.

So, are you ready to get in-depth knowledge about the crypto-currency revolution? Let’s delve in to find out more.

Section I

BITCOIN AND THE ALTERNATIVE CRYPTOCURRENCIES

Chapter One

INTRODUCTION TO DIGITAL CURRENCIES

D igital currencies such as Bitcoin, Litecoin, and others represent the latest evolution of money and payments. A digital currency in its most basic form is a decentralized and peer-to-peer medium of exchange that represents the latest evolution of currencies.

Similar to paper currencies, digital currencies are designed for the exchange of goods between two or more individuals.

Since the virtual currency makes use of the principles of cryptography to secure the payments and control the creation of new coins, it is also known by the name of crypto-currency.

1.1 The Next Generation of Money and Payments

The first crypto-currency was the ‘Bitcoin’ that was introduced in 2009 by a software developer named Satoshi Nakamoto. The main idea behind the creation of the virtual currency was a mode of payment that was self-regulating, transferred electronically, and involved very low financial charges.

The introduction of bitcoins heralded the beginning of the next generation of currencies that despite being in their infant stages are gaining worldwide popularity.

An individual that wants to use a crypto-currency must:

• Obtain a digital wallet for storing the crypto-currency

• Create a unique public address for the digital wallet

• Use the public address to transfer money into and out of the wallet

The public address consists of a string of characters that identify a wallet. Every public address contains a private address that can be used to carry out the transactions. You can think of the address as a personal email address that is used to send digital currencies instead of the emails.

The digital currencies make uses of cryptography in order to create money and validate the transactions. These transactions are appended into a Transaction Blockchain, which is a form of a large public ledger.

Every block in the blockchain consists of the hash value of the previous block and a random number of the next block. The hash value links the previous block with the current one while the random number provides the proof-of-work.

A unique aspect of the crypto-currency is mining. The miners use their computer resource to verify the transaction. Once the transaction has been verified, it becomes a permanent part of the blockchain ledger.

In order to verify a transaction, the miner has to solve a cryptographic puzzle. This puzzle that is known as the proof-of-work scheme was coded in order to prevent the miners from adding a fake transaction and then simply add to the ledger.

The proof-of-work system that we had mentioned earlier is based on a cryptographic hashing algorithm, which is different for different types of crypto-currencies. For the bitcoin, for instance, the fixed size block header is hashed using an algorithm known as SHA-256d. The hashing algorithm for ethereum is dagger hashimoto, while scrypt and ECDSA are the hashing algorithms of litecoin and ripple, respectively.

The economic system of the crypto-currency is based on a group incentive scheme that is crafted in a way that all the users get a fair reward for their efforts in validating the transactions.

A user invests the computer resources to solve the cryptographic puzzle and receive a fair reward in the form of a currency unit that is added to the public blockchain.

Today, people can use crypto-currencies to purchase just about anything that is sold online. Major companies such as Uber, Expedia, Overstock, Zynga, TigerDirect, Fiverr, and many others now allow users to make payments using the digital currency. This is evidence enough of the growing acceptance of crypto-currencies as an alternative currency.

1.2 Digital Currency as an Alternative Currency

Digital currencies are increasingly becoming the new alternative to traditional fiat currency. There are many benefits of the virtual currencies as compared to the paper based currencies that are issued by the central banks of different countries.

Similar to the traditional currencies people can use the currency to buy grocery items, web hosting services, and even cars online.

At the present, digital currency is in its infancy.

While a large number of people have supported the crypto-currency revolution, the masses still use conventional currencies to make the payments.

However, the use of virtual currencies for carrying out the transactions is growing which each passing year

In the month of February 2013, Coinbase that processes bitcoins reported selling about one million dollar worth of bitcoins.¹ In the same year, a company named Internet Archive had announced that it was accepting bitcoins and that it would give salaries to the employees in virtual currency. ²

Also, in 2013 the University of Nicosia in Cyprus became the first university to allow students to pay fees using the bitcoin.³

In the month of December 2014, Microsoft began accepting bitcoin to buy Windows apps and Xbox games.⁴ As of 2015, the number of merchants that accepted bitcoin had grown to 160,000.⁵

The Bank of Japan had recognized the virtual currency as a mode of payment in March of 2016 stating that it functions similar to real money.⁶ Also, the number of ATMs that use bitcoins as an exchange of payment has doubled over the past year reaching to 770.⁷

While the system is not perfect, the myriad benefits of the payment system over the traditional mode of payment are resulting in increased acceptance of the virtual currency among the masses.

The