Cryptocurrency, sometimes just called crypto, is any form of currency that exists digitally or virtually and secures transactions using cryptography. There is no central issuing or regulating authority for cryptocurrencies. Rather, they use a decentralized system to record transactions and issue new units.
DEFINITION AND MEANING OF CRYPTOCURRENCY
A cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It is a so-called peer-to-peer system in which any user can make and receive payments anywhere. Instead of physical money exchanged in the real world, cryptocurrencies exist only as digital entries in online databases that describe individual transactions. When you transfer cryptocurrencies, the transactions are recorded in a public ledger. Cryptocurrencies are stored in digital wallets called wallets.
Cryptocurrencies get their name from the fact that encryption is used to verify transactions. This means that complex coding is used to store and transfer cryptocurrency data between e-wallets and the public registry. This encryption aims to increase security.
The first cryptocurrency, Bitcoin, was launched in 2009 and is still the best-known today. The main purpose of cryptocurrencies is to trade them for profit, with speculators sometimes driving up the prices.
There are thousands of different cryptocurrencies on the market, the best known of which is Bitcoin. However, the use of cryptocurrencies as a payment method is still the exception. There are few shops online that accept cryptocurrencies.
A cryptocurrency is a digital means of payment based on a blockchain system. However, cryptocurrencies are not a currency in the legal sense but are considered “financial instruments,” according to BaFin. In particular, there is no government regulation, no deposit insurance, etc. Cryptocurrencies are, therefore, fundamentally different from digital central bank money.
With cryptocurrencies, the transfer of funds is documented in the blockchain by a cryptographically signed transaction. The computers in the network are responsible for verifying these transactions (signature verification). These agree on the validity of the transactions in a so-called consensus mechanism.
The payment process is processed using a digital wallet (a wallet that is available on a smartphone, for example ). This is where you store the secret signature keys, which you can use to access the credit behind it. Users are usually only represented by an abstract address (a kind of account number), so cryptocurrencies can ideally be used pseudonymously.
To minimize security risks, the following measures make sense:
- Make sure to use wallets from trusted providers.
- Protect your wallet credentials.
- As with cash, you should not keep large amounts of money in your wallet on your PC or smartphone.
- Make several backup copies of your wallet in case your PC or smartphone is stolen or has a technical defect. These backups should be stored securely and provided with cryptographic access protection.
In addition, areas of application for blockchain technology and smart contracts are being discussed in many other sectors of the economy, such as tracking supply chains.
How Many Cryptocurrencies Are There?
As of mid-2022, there are over 10,000 different cryptocurrencies. Many of these are non-public, and there are also some index files for which there are no current transactions and price data. Usually, several hundred securities are traded on very large crypto exchanges. The market capitalization of all cryptocurrencies, i.e., the shares in circulation multiplied by the current market value, was almost 900 billion euros in June 2022. In 2021, this market capitalization was almost 3 trillion euros due to the higher prices of many currencies at the time.
Are Cryptocurrencies Actually Currencies?
The term cryptocurrency is also viewed critically. We chose to use it in our writing because it is catchy and common, but we would like to address a few limitations.
Let’s first look at the word currency: On the one hand, what Bitcoin and Co. have in common with conventional or state currencies is that they can be used as a speculative assets. Accordingly, some traders bet on price movements in the yen, franc, or dollar. The exchange itself feels similar because there are current exchange rates and specialized dealers. But there are important differences.
If you look at the guarantee that is linguistically contained in the currency, it takes place completely differently. A state guarantees – more or less credibly – the value of its currency. No government body guarantees the value of a cryptocurrency. Depending on the concept of the respective cryptocurrency, there may be accompanying guarantees. For Bitcoin, for example, it is stated in the code that there will be no more than 21 million units. However, this says nothing about the exchange value of Bitcoin for everyday goods. Stablecoins are regulated in some way so that their value is linked to another investment object, for example, tied to the US dollar.
Roughly speaking, the guarantee that the Swiss National Bank provides for the franc is probably more serious than that of a dictatorship or a developing country. Likewise, the value proposition of the Bitcoin concept is certainly more robust than that of any fun coin.
In addition to the exchange and store of value function, traditional currencies also have a third role, namely that of a benchmark. This means that prices are stated in the respective currency or are recorded in contracts (e.g., the monthly salary in euros or a barrel of crude oil in dollars). Cryptocurrencies very rarely take on this role, not least because of the strong price fluctuations. Even Bitcoin is usually exchanged at the current daily rate of a government currency such as the euro.
The word crypto is also questioned – although less often. The argument: There are usually cryptographic, i.e., encryption technologies, behind the projects. However, the use should not be viewed in the sense of “hidden” or “secret.” Ultimately, the central component of a cryptocurrency is a database, often implemented as a blockchain. In principle, it is possible to completely trace every single transaction – completely different than with cash. With the help of pseudonyms, it’s not as wild in everyday practice, but the objection is worth considering.
Alternative names for cryptocurrencies are crypto money (some criticisms also apply here), crypto value unit or crypto asset, and crypto asset.
Government currencies such as euros and francs, in turn, are referred to as fiat currencies, especially in the crypto industry. This is intended as a boundary, for example, in formulations such as “Here, you can deposit fiat currency and exchange it for Bitcoin.” The use of “fiat,” Latin for “let there be,” is intended to emphasize that they are not linked to a raw material – which leads to the question of whether cryptocurrencies would then also fall under this definition. As you can see, the terms can be a bit confusing, but the context usually shows who is talking about what.
How Does A Cryptocurrency Work?
Cryptocurrencies run on a distributed public ledger called a blockchain, where all transactions are recorded and maintained by the currency’s owners.
Units of cryptocurrencies are created through a process called mining, which uses computer power to solve complicated mathematical problems that produce coins. You can also buy the currencies from brokers and then store them in cryptographic wallets and spend them again.
As a cryptocurrency owner, you have nothing tangible in your hands. What you have is a key that allows you to transfer a data set or unit of measurement from one person to another without involving a trusted third party.
Although Bitcoin has been around since 2009, cryptocurrencies and the applications of blockchain technology in finance are still in their infancy, with more use cases expected in the future. Transactions such as bonds, stocks, and other financial assets could eventually be traded using the technology.
Examples Of Cryptocurrencies
There are thousands of cryptocurrencies. The most famous include:
Bitcoin:
Launched in 2009, Bitcoin currency was the first cryptocurrency and is still the most widely traded. Satoshi Nakamoto developed it, and it is widely believed to be a pseudonym for a person or group of people whose exact identity is still unknown.
Ethereum:
Developed in 2015, Ethereum is a blockchain platform with a cryptocurrency called Ether (ETH) or Ethereum. In terms of popularity, this currency comes just behind Bitcoin.
Litecoin:
This currency is most similar to Bitcoin but has contributed significantly to the development of innovations such as faster payments and processes that enable more transactions.
Ripple:
Ripple is a distributed ledger created in 2012. Ripple can be used for various types of transactions, not just cryptocurrencies. The company behind it has already worked with various banks and financial institutions.
Cryptocurrencies that are not Bitcoins are called “altcoins” to distinguish them from the original currencies.
Here’s How You Can Buy Cryptocurrency
You may be interested in knowing where you can safely purchase cryptocurrencies. Typically, three steps are required. They are:
Step 1: Choosing a Platform
The first step is to decide which platform you want to use. In general, you can choose between a traditional broker or a dedicated cryptocurrency exchange:
Traditional brokers. These are online brokers that offer opportunities to buy and sell cryptocurrencies as well as other financial assets such as stocks, bonds, and ETFs. Although lower transaction costs generally characterize these platforms, they offer fewer crypto functions.
Cryptocurrency exchanges. There are numerous cryptocurrency exchanges, each offering different cryptocurrencies, wallet storage, interest-bearing accounts, and much more. Many exchanges charge asset-based fees.
When comparing the individual platforms, you should pay attention to which cryptocurrencies they offer, what the fees are, what security they offer, how storage and withdrawals work, and what additional information is offered.
Step 2: Fund Your Account
Once you have chosen a platform, you will need to deposit into your account so that you can start trading. Most crypto exchanges offer cryptocurrencies in exchange for fiat currencies (i.e., government-issued means of payment) such as US dollars, British pounds, or euros via your debit or credit card. However, this varies depending on the platform.
Cryptocurrency purchases by credit card are considered risky and are not supported by some exchanges. Some credit card companies also reject crypto transactions. They do this because cryptocurrencies are very volatile, and they shy away from the risk of going into debt – or potentially having to pay high credit card transaction fees.
Some platforms also accept ACH payments and electronic transfers. Which payment methods are accepted and how long deposits or withdrawals take vary from platform to platform. The time it takes to clear deposits also varies depending on the payment method.
An important factor to always keep in mind is the fees. These include possible transaction fees for deposits and withdrawals as well as trading fees. Fees vary depending on the payment method and platform, so you should find out about them right from the start.
Step 3: Placing An Order
You can place the purchase order via the web or mobile platform of your broker or exchange. To purchase cryptocurrency, select “Buy,” then the order type, enter the amount you want to purchase, and confirm the order. The same procedure applies to selling cryptocurrency.
But there are also other ways to invest in cryptocurrencies. These include, for example, payment services such as PayPal, Cash App, and Venmo, through which users can buy, sell or hold cryptocurrencies. There are also the following investment instruments:
Bitcoin trusts: You can purchase shares of Bitcoin trusts using a normal brokerage account. This is a good opportunity, especially for small investors, to get into cryptocurrencies via the stock market.
Bitcoin Mutual Funds: You can choose between Bitcoin ETFs and Bitcoin funds.
Blockchain Stocks or ETFs: You can also invest in cryptocurrencies indirectly through blockchain companies that specialize in cryptocurrency and crypto transaction technologies. Or you can buy stocks or ETFs from companies that use blockchain technology.
Which option is best for you depends on your investment goals and risk tolerance.
How To Store Cryptocurrency
If you have purchased cryptocurrencies, you must store them securely to protect them from hacking or theft. Typically, cryptocurrencies are stored in crypto wallets. These are physical devices or online software programs that securely store the private keys to your cryptocurrencies. Some exchanges offer wallet services so that you can deposit directly through the platform. However, not all exchanges or brokers automatically offer wallet services for you.
In this case, you must use a separate wallet provider. A distinction is once again made between the so-called “Hot Wallet” and the “Cold Wallet”:
Hot Wallet Storage: A hot wallet is a digital cryptocurrency wallet where the private keys to your assets are protected via software that is constantly connected to the Internet.
Cold wallet storage: Unlike hot wallets, cold wallets (also called hardware wallets) store your private keys on electronic devices that are mostly offline.
Fees are usually charged for cold wallets but not for hot wallets.
What Can You Buy With Cryptocurrencies?
When Bitcoin came onto the market, the cryptocurrency was initially intended to be an everyday means of payment that could be used to buy everything from a cup of coffee to a computer to large purchases like real estate. However, this has not yet become established, and although more and more institutions are accepting cryptocurrencies, large transactions with them are rare. Nevertheless, it is possible to pay for a variety of products on e-commerce websites using cryptocurrencies. Here are some examples:
Websites Of Technology Companies And Online Shops:
Several companies that sell technical products accept cryptocurrencies in their online stores, e.g., B. newegg.com, AT&T, and Microsoft. E-commerce platform Overstock was among the first to accept Bitcoin. But Shopify, Rakuten, and Home Depot also allow payments in cryptocurrency.
Luxury Goods:
Some providers of particularly high-quality products accept cryptocurrencies as a means of payment. For example, the exclusive online retailer Bitdials offers high-quality watches from Rolex, Patek Philippe, and others in exchange for Bitcoin.
Cars:
Some car dealers – from everyday brands to luxury car suppliers – already accept cryptocurrencies as a payment method.
Insurance:
In April 2021, the Swiss insurance company AXA announced that it would now accept Bitcoin as a payment method for all of its insurance lines except life insurance (due to legal restrictions). And Premier Shield Insurance, a home and auto insurer in the USA, also accepts Bitcoin when paying insurance premiums.
If you want to pay in cryptocurrency at a retailer that doesn’t accept cryptocurrencies themselves, you can use a cryptocurrency debit card such as B. Use BitPay in the USA.
Cryptocurrency scams
Unfortunately, cryptocurrency-related crime has increased significantly in recent years. Common cryptocurrency scams include:
- Fake Websites: Fraudulent websites with fake reviews and crypto jargon that promise huge, guaranteed returns if you keep investing.
- Virtual pyramid schemes: The criminals advertise alleged investment opportunities in digital currencies and initially appear to generate fantastic returns by distributing the money of the newly acquired investors to the previous ones. The BitClub Network was able to collect more than 700 million US dollars with this scam until the public prosecutor brought charges against it in December 2019.
- Alleged celebrity endorsers: Scammers pose as billionaires online or use the names of celebrities with the promise of increasing your investments in a virtual currency many times over. Instead, they embezzle your money. Occasionally, messaging apps or chat rooms are used to spread a rumor that a famous business person is endorsing a particular cryptocurrency. After encouraging investors to buy and driving up the price, the scammers sell their shares, and the value of the currency collapses.
- Romance scams: The FBI is warning of a new trend in online dating scams, in which scammers trick people they met through dating apps or social media into purchasing virtual currencies. More than 1,800 cases of cryptocurrency romance scams were reported to the FBI’s Internet Crime Complaint Center in the first seven months of 2021, with a total loss of $133 million.
In other cases, scammers posed as legitimate virtual currency traders or set up fake exchanges to get their victims’ money. In another case, individual retirement products were offered for sale in cryptocurrency. Then, there are classic hacker attacks on digital wallets in order to acquire the virtual currency stored in them.
Is Cryptocurrency Safe?
Cryptocurrencies are usually based on blockchain technology. “Blockchain” describes the way transactions are recorded in so-called blocks and with a time stamp. The technological process is extremely complex, making the digital registry of crypto transactions difficult for hackers to crack.
Additionally, all transactions require two-factor authentication. For example, users must log in with a username and password to start a transaction and then enter an authentication code sent to their cell phone via SMS.
But even though various security mechanisms are in place, that does not mean that cryptocurrencies are unhackable. Some crypto startups have lost large amounts of money due to hacks. In two of the largest cryptocurrency attacks of 2018, hackers stole $534 million from Coincheck and $195 million from BitGrail.
In contrast to government-backed money, the value of virtual currencies is determined solely by supply and demand. This can lead to sharp fluctuations, causing investors to make significant gains or suffer large losses. Additionally, cryptocurrency investments have far less legal protection than traditional financial products such as stocks, bonds, and mutual funds.
Four Tips For Safe Investments In Cryptocurrencies
According to US consumer organization Consumer Reports, all investments involve risk, but some experts consider cryptocurrencies to be one of the riskier investment options currently available. So, if you want to invest in cryptocurrencies, we can support you with the following tips.
Find Out About Exchanges:
Before you invest, you should research the different crypto exchanges. It is estimated that there are currently more than 500 exchanges to choose from. That’s why you should do research, read reviews, and talk to experienced investors before diving into it.
Clarify How Your Digital Currency Should Be Stored:
When you buy cryptocurrencies, you also need to store them somewhere. You can deposit them on an exchange or in a digital wallet called a wallet. There are different types of wallets, each offering different benefits, technical requirements, and security features. Just like with stock exchanges, you should carefully consider choosing the right wallet before investing.
Diversify Your Investments:
Diversification is the key to any good investment strategy. This also applies to cryptocurrencies. For example, don’t invest all your money in Bitcoin just because you already know that name. There are thousands of options – and it’s better to spread your investment across multiple currencies.
Be Prepared For Price Fluctuations:
The cryptocurrency market is extremely volatile. Therefore, you should be prepared for price fluctuations. These fluctuations can sometimes be very severe. If your budget doesn’t provide enough buffer or you can’t handle the stress, you should think twice about investing in cryptocurrencies.
Cryptocurrencies are all the rage right now but remember: they are still relatively new and highly speculative. Investments in this new market, therefore, come with challenges. If you want to earn money here, do your research and invest cautiously at the beginning.
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