Chapter 3

CRYPTOCURRENCY: BITCOIN,
ALTCOIN AND TOKENS

Blockchain Technology Chandramouli, Asha, Abhilash, Meena 1

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Birth of Bitcoin
Banks acted as the ultimate gatekeepers of the financial world and charged fees for the services that
they provided. This monopoly, however, had its disadvantages, especially for people in lower-income
groups who did not have accounts or IDs or instances where the transaction fees took a toll on their
earnings.
Financial institutions incur significant costs related to back-office expenses, reconciliations, legalities,
secure data storage, prevention measures for security breaches, and potentially fraudulent activities.
These costs are passed down to the end-users as fixed transaction fees irrespective of the size of the
transaction.
There was also the question of transparency. People deposit money, trusting the banks to keep them
safe. However, these deposits are used by banks to find opportunities for additional financial returns
like extending mortgage and other loans, and investments. When people defaulted on loan payments
and the investments the banks made did not pay off, the banks declared bankruptcy. The result was that
while the Government bailed out many of the financial institutions, the depositors lost all the money
that they trusted the banks to keep safe, as was seen during the financial crisis of 2008.
Blockchain Technology Chandramouli, Asha, Abhilash, Meena
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Birth of Bitcoin (Contd.)
Three key requirements eventually brought about the birth of the
Bitcoin. The need was felt for a monetary system

• where one can directly transact with another person without

involving a third party, like a bank, to verify and validate the
transaction and thus avoiding the cost of mediation.

• that is not backed and controlled by a central authority and can

assure the value of the money is maintained

• where there is transparency in transactions, while still

maintaining the users' privacy

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What is Cryptocurrency?
A cryptocurrency is a digital asset that is used as a
medium of exchange on the blockchain. The most popular
cryptocurrency is Bitcoin, followed by Ether of Ethereum
and Ripples XRP tokens.

Since the creation of the first decentralized cryptocurrency

Bitcoin, thousands of alternative digital currencies have
emerged that are referred to as altcoins or coins (used for
buying or selling products or services) and tokens (used as
a utility or security).

According to CoinMarketCap, there are over 3000 active

cryptocurrenciesBlockchain
as ofTechnology
October 2019. Chandramouli, Asha, Abhilash, Meena
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Fork
A fork creates an alternative version of a blockchain. It is typically
done to apply upgrades or new governance rules to a network. A fork
can be of 2 types:

Hard Fork: A hard fork occurs when the protocol upgrade results in
a split in the blockchain that is not backward compatible, i.e., the
software validating according to the old protocol will see the new
protocol as invalid and vice versa. Hence all clients need to upgrade
to the new version if they want to continue participating in the
network.

Soft Fork: A soft fork is a protocol upgrade that is backward

compatible. Here the old software will recognize the blocks made by
the new protocol as valid. Hence it does not require all the nodes in
the network to upgrade to maintain consensus
Blockchain Technology
as the soft-forked
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chain follows both the old as well as the new set of protocol rules.
Characteristics of Crypto Currency
• Decentralized

• Form of existence

• Limited supply

• Global Access

• Anonymity & transparency

• Impossible to duplicate

• Irreversible
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Cryptocurrency Wallets
Bitcoin or any other cryptocurrency transaction can be done
only using a digital wallet. A digital wallet or cryptocurrency
wallet is a software program that stores the user’s private and
public keys enabling the user to transact crypto assets.

It is a management system that interacts with various

blockchains to enable users to send and receive digital
currency and monitor their balance.

Cryptocurrencies are stored immutably on the blockchain using

your public key, i.e., your public key is used by other wallets to
send funds to your wallet’s address. However, the private key
is required if you want to spend cryptocurrency from your
address. Blockchain Technology Chandramouli, Asha, Abhilash, Meena
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 Types of Wallets A cold wallet is a digital
A hot wallet is designed for wallet that is not connected to
online day-to-day transactions. the internet. They are not free.
It is always connected to the Being offline, they are more
internet and hence it is a strong CRYPTOCURRENCY WALLETS secure and used for storing
candidate for hackers. cryptocurrencies long term.

HOT WALLETS COLD WALLETS

ONLINE/WEB SOFTWARE HARDWARE

WALLET PAPER WALLET
WALLET WALLET
E.g. MyEtherWallet E.g. Ledger,
Trezor
MOBILE DESKTOP
WALLET WALLET
E.g. Coinomi, E.g. Electrum,
Mycelium Blockchain Technology
Armory Chandramouli, Asha, Abhilash, Meena
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Cryptocurrency Types
CRYPTOCURRENCY TYPES

T
Utility
Token
Security
Token
BITCOIN ALTCOIN TOKEN

DERIVED DERIVED FROM

FROM ORIGINAL
BITCOIN BLOCKCHAIN
E.g. Litecoin, E.g. Ether, NXT
Blockchain Technology Chandramouli, Asha, Abhilash, Meena
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Cryptocurrency Eco-system Players

1) Programmers/Developers: Miners
2) Users
3) Merchants

4) Traders

Blockchain Technology Chandramouli, Asha, Abhilash, Meena

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Crypto Mining
Miners generate wealth through mining. A miner needs to have
some level of technical knowledge and expertise in setting up
computing software and equipment. Blockchains vary in the mining
systems that they use. However, they all have some form of a
consensus algorithm and an incentive system.
There are two types of miners: those who go solo called solo miners
and those who collaborate with others, referred to as pool miners.

There are different types of mining based on the processors or

equipment used by the miner:
• CPU Mining
• GPU Mining
• ASIC Mining
• Cloud Mining
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Airdrop
Airdrop is a promotional activity aimed at spreading awareness among
the blockchain community. It is a distribution event where a blockchain
project distributes free coins or tokens to wallet addresses to create a
market for the project and create a buzz among investors.

The various benefits of airdrops to the blockchain enterprise are:

• Marketing and Hype

• Rewarding Loyalty Supporters and Investors
• Wider and Even Distribution of Tokens
• Lead Database Generation

Cryptocurrency airdrops are done in two ways – a surprise airdrop or a

planned airdrop.

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 Coin Burning
Token or Coin Burning is a process of permanently removing
coins out of circulation to reduce the total supply. The coin is
considered to be burned when it is sent to an unspendable
public address, known as an eater address, which does not
have an operable private key associated with it.

The key purpose of burning coins:

• To Reward Investors
• To destroy unsold ICO tokens
• To decentralize mining opportunity (Proof-of-Burn)

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 Cryptocurrency Safety
Best practice in using Exchanges
Choose regulated exchanges that have safety and security measures in
place. Binance, Bittrex, and Coinbase are popular crypto exchanges.

Storing Cryptocurrency
Store your crypto in desktop or mobile wallets if short-term and in paper and
hardware wallets if long-term.
Use wallets from reputable sources.

Transaction Safety
Study the transaction requirements of a cryptocurrency carefully as they
may indicate the security precautions to be taken.

Enable Security Measures

Protect wallets and backups with strong passwords.
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Cryptocurrency Regulations
COUNTRIES

Canada, Estonia, Gibraltar, Lithuania, Luxembourg, Malta,

Cryptocurrency not Singapore (treated as goods & hence taxable), South Korea,
considered as a legal tender United States, UK
Note: Bitcoin is legal in the US
Cryptocurrency accepted as Argentina, Belarus, Brazil, Canada, Chile, Germany, Holland,
payment, exchanges and Japan, Malta, Mexico, New Zealand, South Korea,
may or may not be regulated Switzerland, Venezuela

Legal crypto-exchanges Australia, Canada, Estonia, Gibraltar, Lithuania, Luxembourg

regulated by financial Malta, Singapore, South Korea, Switzerland, United States,
regulators United Kingdom,

Cryptocurrency & crypto

exchanges in effect illegal
China, India (banned by banks), Kyrgyzstan, Russia, UAE
but global/federal regulations
being considered

Cryptocurrency & crypto Algeria, Bangladesh, Bolivia, Equador, Macedonia, Morocco,

exchanges banned Nepal, Pakistan

Blockchain Technology Table 3.1 Chandramouli, Asha, Abhilash, Meena

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