What is cryptocurrency?
– Cryptocurrency (crypto) is a digital asset that uses cryptography—mathematical techniques for secure communication—to secure transactions and control creation of new units. Cryptocurrencies run on decentralized networks rather than being issued by a central government or bank.
Key definitions
– Blockchain: a distributed ledger made of linked “blocks” of verified transactions. The ledger is shared across many computers (nodes), and a network-wide process confirms the contents of each block, which makes forging transactions extremely difficult.
– Node: a computer that stores and helps validate the blockchain ledger.
– Public–private key pair: a cryptographic key pair used to receive (public key) and authorize spending (private key) of cryptocurrency; possession of the private key controls access to funds.
– Proof-of-stake (PoS): a consensus method where validators lock up (stake) coins to help secure the network and earn rewards; Ethereum moved from proof-of-work to PoS in 2022.
– Crypto exchange: an online marketplace where users buy and sell cryptocurrencies.
– Crypto wallet: software or hardware that stores keys (not the coins themselves) and allows users to send/receive crypto.
– ETF (exchange-traded fund): a regulated investment vehicle that can provide exposure to crypto prices without requiring direct custody of coins.
How cryptocurrencies work (brief)
– Transactions are grouped into blocks. Network validators verify transactions and add a block to the chain. The ledger is replicated across nodes, so no single party controls the record. Cryptographic hashing and key pairs secure ownership and make counterfeiting or double-spending (using the same coin twice) extremely difficult.
Common uses and example projects
– Some coins are used to pay for transaction validation on their own blockchains (e.g., Ether on Ethereum).
– Other networks and tokens are designed to facilitate cross-border transfers, financial applications, or specific platform functions (e.g., XRP Ledger aims to help banks move funds).
How to buy crypto — step-by-step
1. Check legality: confirm the legal status and any local restrictions where you live.
2. Choose a platform: pick a regulated crypto exchange or an online broker that offers crypto trading. Consider fees, security, and regulatory compliance.
3. Create and verify your account: complete identity verification if required.
4. Fund the account: deposit fiat currency (USD, EUR, etc.) or another crypto.
5. Place an order: market order (immediate execution) or limit order (execute at a target price).
6. Secure custody: either keep funds on the exchange (convenient but custodial) or transfer coins to your own wallet (self-custody). Alternatively, buy a crypto ETF to gain exposure without managing wallets.
7. Record transactions for taxes: keep transaction dates, amounts, and prices.
Types of crypto (conceptual)
– Blockchains and tokens differ by purpose. Some are payment-focused, some enable smart contracts and decentralized applications, and others serve niche functions. Coin names (Bitcoin, Ether, XRP) are examples of individual assets; “type” refers to their intended use or technical category.
Legal and regulatory notes (summary from U.S. and international context)
– Cryptocurrencies are not government-issued fiat money; their legal status varies by jurisdiction.
– In the U.S., regulatory agencies increasingly oversee aspects of the market. Exchanges and firms that list or sell crypto are subject to SEC and other rules; courts in 2023 found that crypto can be treated as securities in sales to institutional buyers, while purchases on retail exchanges were judged differently.
– Internationally, bodies such as the Financial Action Task Force (FATF) recommend applying anti–money-laundering (AML) rules such as the Travel Rule to crypto transfers.
– For U.S. tax purposes, the Internal Revenue Service (IRS) treats crypto as property—transactions can trigger capital gains or income tax depending on how the asset was used and how long it was held.
Advantages and disadvantages (high level)
Advantages
– Decentralization: no single issuer controls supply or validation.
– Security features: cryptography and distributed
ledger technology (DLT) make it difficult to alter a recorded transaction without broad agreement from network participants.
– Censorship resistance: transactions can be hard for governments or intermediaries to block when protocols are decentralized.
– Lower settlement friction: for some cross‑border payments and tokenized assets, crypto can reduce intermediaries and delays relative to traditional rails.
– Transparency and auditability: public blockchains publish transaction histories that any observer can verify (though linking addresses to real‑world identities is nontrivial).
– Portability and divisibility: digital tokens are easy to move across borders and can be divided into very small units, enabling micropayments.
– Programmability: smart contracts are self‑executing code that can automate payments, conditional transfers, and more complex financial arrangements.
– Financial‑inclusion potential: in regions with limited banking, crypto can provide basic financial services to users with internet access.
– Speed for some use cases: certain networks settle faster than traditional systems for specific transactions (though speeds vary widely across protocols).
– Open access: anyone with an internet connection can, in many cases, interact with public crypto networks without permission.
Disadvantages
– Price volatility: many crypto assets show large price swings over short periods, which increases risk for holders and complicates their use as reliable stores of value.
– Limited consumer protections: unlike insured bank deposits or regulated broker accounts, crypto holdings often lack equivalent safeguards; stolen or misdirected funds can be unrecoverable.
– Regulatory uncertainty: rules differ by country and are evolving. Classification (security, commodity, currency, property) affects market structure, custody, and reporting.
– Cybersecurity and operational risks: exchanges, custodians, and smart contracts have been compromised; private key loss means permanent loss of access to funds.
– Irreversible transactions: most blockchains do not offer transaction reversal; mistakes (wrong address, wrong amount) are usually final.
– Illicit‑use concerns: pseudonymity can be abused for money laundering and fraud; this has prompted AML/CFT (anti‑money‑laundering / counter‑financing‑of‑terrorism) measures.
– Scalability and resource use: some networks face throughput limits and significant energy consumption, depending on consensus methods.
– Complexity and user responsibility: secure use requires understanding wallets, keys, backups, and phishing risks—mistakes are common and costly.
– Tax and accounting complexity: crypto events can trigger varied tax consequences (capital gains, ordinary income, reporting requirements).
How cryptocurrencies work — high‑level steps (technical concepts defined)
1. Ledger and blocks: transactions are grouped into blocks that are appended to a shared ledger (blockchain); every node holds a copy.
2. Consensus mechanism: participants use rules (proof‑of‑work, proof‑of‑stake, etc.) to agree on the next block and prevent double‑spending.
3. Public/private keys: users control funds via a private key (a secret string). The corresponding public key or address is used to receive funds. Signatures authenticate transactions.
4. Transaction propagation: when you send funds, your signed transaction broadcasts to the network for validation.
5. Validation and finality: nodes validate rules (sufficient balance, correct signature); once a transaction is included in a block and confirmed by subsequent blocks, it approaches finality—time to finality varies by network.
6. Smart contracts (optional): programmable code stored on a chain can enforce conditions automatically (e.g., releasing funds when conditions are met).
Worked numeric example — simple capital‑gains calculation
Assumption: you buy and later sell one unit of a crypto asset. This example shows the arithmetic only; tax treatment depends on jurisdiction and holding period.
– Purchase: 1 token bought at $4,000 (your cost basis = $4,000).
– Sale: 1 token sold at $6,500 (sales proceeds = $6,500).
– Capital gain = sales proceeds − cost basis = $6,500 − $4,000 = $2,500.
If the holding period is short (tax rules vary), this $2,500 may be taxed at ordinary income rates; if long‑term treatment applies where you live, different rates may apply. Also consider fees: if you paid $50 trading fees on buy and $50 on sell, adjust cost basis and proceeds accordingly (cost basis = $4,050; proceeds = $6,450; gain = $2,400).
Beginner’s checklist — practical steps before using crypto
1. Learn basics: blockchains, keys, wallets, exchanges, smart contracts.
2. Use
2. Use secure custody and authentication
– Prefer hardware (cold) wallets for long‑term holdings; hot wallets (apps, exchange accounts) are convenient for trading but carry higher online risk.
– Protect seed phrases (the 12–24 word backup) offline in at least two physically separate, secure locations. Never store seed phrases digitally or share them.
– Always enable two‑factor authentication (2FA) on exchange and wallet accounts (use an app like Google Authenticator, not SMS).
– For custodial platforms, read the custody terms: some exchanges hold assets on your behalf and may use them in lending programs; this creates counterparty risk.
3. Start small and test transfers
– Before moving large sums, send a small test amount to a new wallet or exchange address to confirm the address and network (blockchains are different — e.g., Ethereum vs. Binance Smart Chain).
– Verify on‑chain confirmations (most wallets display transaction status and number of confirmations).
Worked example — test transfer and withdrawal fee
– Suppose you hold 0.5 ETH and the market price of ETH is $1,800.
– You send a small test amount of 0.01 ETH to a new wallet. At a gas cost of 0.005 ETH, the fee is 0.005 × $1,800 = $9.
– If the exchange charges a flat withdrawal fee of 0.003 ETH and network gas is 0.005 ETH, total cost ≈ 0.008 ETH = 0.008 × $1,800 = $14.40.
– Lesson: check both exchange withdrawal fees and expected network (gas) costs before moving assets.
4. Understand fees and slippage
– Trading fees: maker/taker fees charged by exchanges for executing orders.
– Network fees: paid to miners/validators to include transactions on the blockchain (also called gas).
– Slippage: the difference between expected execution price and actual price, larger for low‑liquidity assets. Use limit orders to control slippage.
5. Know the token (do your research)
– Read the token’s whitepaper or documentation to understand purpose, supply mechanics (fixed vs. inflationary), governance, and token distribution.
– Check whether a token is classified as a security in your jurisdiction; regulatory classification affects legal risk.
– Look for independent smart contract audits for tokens built on programmable blockchains; audits reduce but don’t eliminate technical risk.
6. Watch liquidity and market depth
– Market capitalization and trading volume indicate how easy it is to buy/sell without moving the market.
– For large orders, check order‑book depth rather than just headline prices.
7. Tax and recordkeeping
– Keep detailed records of dates, amounts, cost basis, transaction IDs, fees, and receipts for each buy/sell/transfer/stake. Tools and wallets often provide exportable transaction histories.
– Be aware of different tax treatments: capital gains for disposals, ordinary income for mining/staking or airdrops in many jurisdictions.
– Choose a lot‑accounting method (FIFO = first in, first out; specific identification where allowed) and be consistent.
Worked example — tax lot impact
– You bought 1 BTC at $10,000 (Lot A) and 1 BTC at $30,000 (Lot B). Later you sell 1 BTC when market price is $40,000.
– If FIFO applies and you sell Lot A: gain = $40,000 − $10,000 = $30,000.
– If you can identify and sell Lot B: gain = $40,000 − $30,000 = $10,000.
– Note: tax rules about lot identification vary by country; check local rules and maintain records.
8. Beware of scams and phishing
– Verify official domains and social accounts before clicking links. Scammers impersonate projects and exchanges.
– Never paste your seed phrase into a website or share private keys. If an app or person asks for your keys, it’s a scam.
– Be cautious with yield promises that sound too good to be true; high, guaranteed returns are typical red flags.
9. Consider operational risk and redundancy
– Have a recovery plan: know how to restore wallets from seed phrases, and keep recovery instructions with a trusted contact if appropriate.
– Consider splitting large holdings among multiple wallets or custody options to reduce single‑point failure.
10. Monitor regulatory and legal developments
– Crypto rules and enforcement change quickly. Stay informed about tax guidance, securities law developments, and exchange licensing in your country.
– If you hold assets on foreign exchanges, consider jurisdictional and withdrawal risks (e.g., exchange freezes, capital controls).
Quick preparedness checklist (before you use real money)
– Read basics: blockchain, keys, wallets, exchanges, smart contracts.
– Set up secure wallet(s) and back up seed phrases offline.
– Enable strong authentication and test small transfers.
– Confirm fee structure and liquidity for assets you’ll trade.
– Maintain transaction records for taxes and audits.
– Learn how to verify legitimate project and exchange communications.
– Keep up with local regulation and consult professionals for tax/legal questions
Watch for common scams and red flags
– Rug pull (token exit): Developers create a token, inflate its value with marketing, then remove liquidity or drain project wallets. Red flags: anonymous team, token ownership concentrated in a few addresses, liquidity locked not verifiable.
– Phishing: Fake websites or messages mimic exchanges, wallets, or projects to capture seed phrases or passwords. Red flags: slight misspellings in URLs, unsolicited DMs asking for your seed phrase, links that open a wallet connection prompt.
– Fake airdrops/impersonation: Criminals impersonate project accounts and ask you to “claim” tokens by connecting your wallet and approving transactions. Never approve token transfer allowances to unknown contracts.
– Pump-and-dump: Coordinated buying inflates a small token, creating a short-lived price spike. Beware groups that pressure you to buy quickly.
– Giveaway scams and investment guarantees: Promises of guaranteed returns or “insider” tips are almost always fraudulent.
Immediate steps if you suspect compromise
1. Move funds (if possible) to a freshly created wallet whose seed phrase you haven’t exposed. Use a hardware wallet when moving significant amounts.
2. Revoke token approvals: Use tools like Etherscan’s or relevant chain explorers’ token approval checkers to revoke dangerous allowances (may require small gas fees).
3. Freeze exchange withdrawals: If funds are on a custodial exchange and you suspect fraud, contact exchange support and enable all available security holds.
4. Report incidents: File reports with local law enforcement and financial regulators; in the U.S. you can report to the SEC and FBI’s IC3. Keep transaction IDs and screenshots.
5. Change passwords and enable multi-factor authentication (MFA) across related accounts.
Tax basics and recordkeeping (high-level, educational)
– Taxable events commonly include: selling crypto for fiat, trading one crypto for another, using crypto to buy goods/services, and receiving crypto as income (mining, staking rewards, airdrops in some jurisdictions).
– Basic formula for capital gain or loss:
Realized gain (loss) = Proceeds from sale − Cost basis − Transaction fees
Example: You bought 2 ETH at $1,200 each (total cost basis = $2,400). You sell 1 ETH later for $2,000 and paid $20 in fees. Your realized gain = $2,000 − $1,200 − $10 (allocating half the fee) = $790.
– Cost basis methods: FIFO (first-in, first-out), LIFO (last-in, first-out), and Specific Identification. Rules and allowable methods depend on your tax authority. Select a method and apply consistently.
– Recordkeeping checklist: date/time (UTC recommended), transaction type, crypto amount and symbol, counterparty or exchange, USD (or local fiat) value at time of transaction, transaction/hash ID, wallet addresses, fees paid, purpose (trade, payment, income). Keep exports from exchanges and screenshots.
– Use tax software that imports transactions from wallets and exchanges to automate matching and generate reports, but validate outputs against your own records.
Practical tools and workflows
– Portfolio tracking & explorers:
– CoinGecko or CoinMarketCap for prices and market data.
– Etherscan, Blockchain.com, or relevant chain explorers to verify on-chain transactions and contract ownership.
– Wallets and security:
– Use hardware wallets (e.g., Ledger, Trezor) for long-term holdings. Practice restoring a device from its seed phrase on a secondary device to verify backups.
– For small, frequent trades, a hot wallet (browser/mobile) is convenient; keep only limited funds there.
– Trading and DEX hygiene:
– Before interacting with a smart contract, verify audits, review contract source code when possible, and confirm token contract addresses from official channels.
– Test with small amounts first (a “shakedown” transaction) to confirm gas costs and expected behavior.
– Tax and accounting:
– Export CSVs from exchanges and use tax aggregation tools if you have many wallets/DEX trades. Reconcile automated reports with your own transaction log monthly or quarterly.
Checklist for ongoing good habits (weekly/monthly)
– Weekly: review wallet balances; check for unusual token approvals; confirm software and firmware are up to date.
– Monthly: reconcile exchange statements with on-chain activity; export tax-relevant records; review open positions and risk limits.
– Quarterly: update your personal security plan; test backups; review regulatory guidance in your jurisdiction.
– Annually: consult a tax professional to confirm reporting choices and file returns correctly.
How to evaluate a project or team (basic due diligence)
– Team transparency: Are team members identifiable and verifiable on LinkedIn or company sites?
– Code audit: Has an independent security firm audited the smart contracts? Audits reduce but do not eliminate risk.
– Tokenomics: Understand supply, vesting schedules, and who controls large allocations. Concentrated ownership increases manipulation risk.
– Community & communication: Legitimate projects maintain structured channels (Discord, Telegram, Twitter/X) and publish roadmaps and updates. Prioritize official channels linked from the project’s verified website.
– On-chain checks: Use explorers to see token distribution, vesting contracts, and liquidity pool ownership.
Further learning and reputable references
– Investopedia — Cryptocurrency definition and basics: https://www.investopedia.com/terms/c/cryptocurrency.asp
– U.S. Securities and Exchange Commission (SEC) — Crypto and digital asset information: https://www.sec.gov/crypto
– Internal Revenue Service (IRS) — Virtual currency guidance (U.S. tax rules): https://www.irs.gov/individuals/international-taxpayers/virtual-currencies
– Etherscan — Ethereum block explorer (verify transactions, contracts): https://etherscan.io
– CoinGecko — Market data and token info: https://www.coingecko.com
Educational disclaimer
This information is educational only and not individualized investment, tax, or legal advice. Regulations and tax rules vary by country and change frequently. Consult a qualified tax professional or attorney for advice about your situation.
If you want, I can:
– Walk through a sample portfolio reconciliation with hypothetical transactions and calculations.
– Provide a template CSV schema for recording transactions.
– Show how to revoke token approvals step
-by-step (I can show the exact clicks and what to expect).
Below I’ll explain what token approvals are, show a safe, practical checklist, then give two tested step‑by‑step methods to revoke approvals: (A) the quick and safer UI route using Revoke.cash (or similar allowance-management tools), and (B) the manual route via a block explorer (Etherscan) if you prefer not to trust third‑party sites. I finish with a worked numeric example for gas cost and short troubleshooting notes.
What an approval (allowance) is — short definition
– Approval (also called allowance): when you call the ERC‑20 approve(contract, amount) function, you let another contract or address spend up to that token amount from your wallet. This is separate from sending tokens; it just sets a permitted allowance on‑chain.
– Risk: a malicious or compromised contract with a nonzero allowance can transfer your tokens up to the approved amount.
Checklist — do this before revoking anything
1. Confirm the network (Ethereum mainnet vs a testnet / layer‑2) matches the wallet you’ll use.
2. Use a hardware wallet for the transaction if you own one.
3. Verify you’re on the official site: check DNS/URL, bookmarks, or use a known bookmark for Revoke.cash / Etherscan / MetaMask.
4. Have enough native coin (ETH for Ethereum mainnet, MATIC for Polygon) in the same wallet to pay gas.
5. If you have many approvals, consider batching or prioritize the riskiest (high allowances, unknown counterparty).
6. If uncertain, set allowance to 0 first, then set to a new limited amount when needed.
Method A — Using Revoke.cash (recommended for convenience)
Revoke.cash is a popular tool that reads allowances for your address and lets you revoke them. Steps:
1. Go to https://revoke.cash and connect your wallet (MetaMask / WalletConnect / hardware wallet). Only connect read access (the site will request signature to view allowances; you do not sign transactions with private key outside wallet).
2. Select the correct network at top (Ethereum, BSC, Polygon, etc.).
3. Revoke.cash lists token approvals for your address. Review the list and identify risky entries (large allowance, unknown counterparty).
4. For each approval you want to remove, click “Revoke”. Your wallet will prompt a transaction to set allowance = 0 (or to call the revoke function).
5. Confirm the transaction in your wallet. Check gas estimate and adjust gas price if you want faster/cheaper execution.
6. Wait for the transaction to confirm and verify the status on a block explorer (Etherscan link provided by the tool).
Notes:
– Revoke.cash uses standard on‑chain transactions; you pay gas to change the allowance.
– Some modern tools offer a “revoke all” but that can be risky; prefer selective revocation.
Method B — Manual revoke via Etherscan (no third‑party UI)
This uses the token contract’s approve function directly through a block explorer:
1. Find the token contract address (from your wallet token list or trusted sources like CoinGecko).
2. Go to Etherscan (https://etherscan.io), paste the token contract address, and open its contract page.
3. Click the “Contract” tab → “Write Contract”. Connect your wallet (Etherscan will ask to connect for write operations).
4. Locate the approve(address spender, uint256 amount) function.
5. For spender enter the spender contract address you want to revoke. For amount enter 0 (this sets allowance to zero).
6. Submit the transaction using your wallet. Confirm gas and pay the fee.
7. After confirmation, verify allowance is 0 via the token’s allowance function (read from contract) or via Etherscan’s “Read Contract” > allowance(owner, spender).
Special cases and notes
– Some tokens implement nonstandard behavior (deflationary tokens, tokens without standard approve implementation). If approve fails, check the token’s source code or community documentation.
– EIP‑2612 permits off‑chain permit signatures that set allowances without an approve transaction. Those are separate; revoking on‑chain allowance may not affect permit‑type signatures — check the token design.
– It’s safer to set allowance to 0 rather than replace a large allowance directly. If
If you replace a non‑zero allowance with another non‑zero allowance, there is a known race condition in the ERC‑20 design: a spender can observe the pending transaction and attempt to use the old allowance before the replacement takes effect, potentially allowing both the old and new allowances to be spent. To avoid that risk, the safe pattern is:
– set allowance to 0 first, wait for confirmation, then
– set the new desired allowance.
This two‑step approach reduces the window in which a spender can exploit a race. Note that some tokens implement mitigations or nonstandard approve semantics; always check the token’s contract or community documentation.
Revoking or invalidating off‑chain permits (EIP‑2612 and similar)
– Permit: an off‑chain signature that authorizes a spender without a separate on‑chain approve call. It typically relies on a nonce and an on‑chain permit function to consume the signature.
– Revocation: you cannot directly “revoke” an off‑chain signature once issued; instead you rely on the token’s nonce mechanism. If the token increments a nonce when you call permit or some explicit revoke function, older signatures become invalid. If the token lacks such features, the signature remains valid until it’s used or expires (if it has an expiry field).
– Practical step: check the token’s permit implementation (read the source or use a block explorer) to confirm how nonces and expiries work before relying on permits.
Quick checklist: revoke or manage allowances safely
1. Identify token contract address and spender address (contract or DEX router).
2. Check current allowance via Etherscan (“Read Contract” > allowance(owner, spender)) or a wallet interface.
3. If you want to reduce risk, set allowance to 0 and wait for confirmation.
4. If you need a new allowance, submit a second transaction setting the intended amount.
5. Confirm both transactions succeeded and re‑check allowance.
Worked numeric example (gas fee estimation)
– Suppose revoking an allowance uses ~50,000 gas. If the gas price is 50 gwei (50 × 10−9 ETH per gas) and ETH = $2,000:
– Gas cost in ETH = 50,000 × 50e−9 = 0.0025 ETH
– Gas cost in USD = 0.0025 × $2,000 = $5.00
– Interpretation: revoking an allowance can be inexpensive in fiat terms, but gas and ETH price fluctuate. Always check current gas prices in your wallet before confirming a transaction.
Other practical security tips
– Approve the minimum needed amount and re‑approve later when necessary.
– Use well‑audited smart contracts and reputable aggregators; verify contract source code on Etherscan.
– Prefer hardware wallets for signing approvals; they keep private keys offline.
– Consider token‑specific tools (e.g., revoke.cash or a wallet’s permission manager) to view and revoke allowances in bulk.
– Beware of phishing: never paste your private key, seed phrase, or sign arbitrary messages that you don’t understand.
– For large holdings or frequent trading, consider multi‑signature (multisig) wallets or custodial solutions with formal security controls.
Summary
Token approvals are a useful feature but introduce counterparty risk: a spender with an allowance can transfer tokens on your behalf. The safest practical approach is to limit allowances, revoke when not needed (set to 0 first if changing a nonzero allowance), use hardware wallets, and verify contract behavior for advanced features like permits.
Educational disclaimer
This is educational information, not individualized investment advice. It explains technical and security considerations for token approvals and revocations; it does not recommend specific trades, assets, or services. Consult a licensed professional for personalized financial or legal guidance.
Sources
– Investopedia — Cryptocurrency: https://www.investopedia.com/terms/c/cryptocurrency.asp
– Ethereum EIP‑20 (ERC‑20 standard): https://eips.ethereum.org/EIPS/eip-20
– EIP‑2612 (permit for ERC‑20): https://eips.ethereum.org/EIPS/eip-2612
– Etherscan — Smart Contract Read/Write: https://etherscan.io
– U.S. Securities and Exchange Commission — Investor Bulletin: Cryptocurrencies: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_cryptocurrencies