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Since Bitcoin was the first cryptocurrency to be released in 2009, a lot has happened around cryptocurrencies. Today countless more or less well-known digital currencies exist.
The vast majority of the currencies that emerged in large numbers in the last five years have disappeared almost unnoticed into the digital void again after a while – but some have held up, and names like Ethereum, DogeCoin, Litecoin, and of course the “dinosaur” Bitcoin are always a topic in the media. What is it all about, what exactly are cryptocurrencies?
The basics: what are cryptocurrencies?
Many people have heard of cryptocurrencies, but few know what it is really about. Banks, states, and companies are dealing with digital currencies – let’s take a closer look at the phenomenon of cryptocurrencies.
Cryptocurrencies are a by-product. When Satoshi Nakamoto released Bitcoin, he probably didn’t want to invent a new currency. He aimed to develop an electronic peer-to-peer payment system. The advantage: double expenses are avoided, the system is decentralized, there is no central control.
This makes the cryptocurrency independent of banks, nation-states, financial crises, and a secure form of currency. At least that’s the theory.
But what is behind a cryptocurrency? The currencies are only limited entries in a database. And they cannot be changed. That is the technology called the blockchain: Users (of a network) can calculate data sets and verify the exchange of data sets, the “passing on” of the data.
Only when this data exchange has been verified is the transaction considered to have been made. And each of these processes is appended and saved as a new record. The path taken by a data record is therefore always and also in the future, traceable.
Specifically, what this means for the cryptocurrency is: If an amount is transferred from one account to another, the process must be verified by other people in the network. The records of what happened when with the amount being saved. And the amount only has the value that the members of the system assigned to it.
What do I need cryptocurrencies for?
Everyone has to decide for themselves whether they need cryptocurrencies. Cryptocurrencies offer all the possibilities that conventional currencies also provide. They can be used in developing new eCommerce business solutions to pay for transactions.
Not every trader online and offline offers this, but higher costs, in particular, are now also settled in Bitcoin online on many trading platforms.
Cryptocurrencies are even accepted as a means of payment in some shops and bars in huge cities. Cash can be exchanged for the respective digital currency at machines.
And of course, you can also trade and speculate with cryptocurrencies. The way it works is the same as with the FIAT currencies: Euros, US Dollars, Yuan, or another conventional currency are invested in the cryptocurrency. If the rate rises, the money can be sold for a profit. The entire spectrum of currency trading is also available for cryptocurrencies.
As a “safe investment” like gold, however, cryptocurrencies are not suitable, at least not yet. Because the prices are highly volatile, so fluctuate extremely and, above all, extremely quickly. Although the major currencies such as Bitcoin and Ethereum have tended to increase (sharply) since their release, no one can say how long this will continue.
The future belongs to cryptocurrencies; it is predicted. But at the same time, Bitcoin, which is viewed as an enormously profitable business, is currently already considered a fossil and almost at the end because the blockchain technology behind cryptocurrencies has developed rapidly since the currency was released.
How do cryptocurrencies work?
In principle, cryptocurrencies work like conventional currencies: A community of people agrees that a particular unit of the currency has an absolute value – and thus, this unit has the agreed value. For example, suppose everyone around the world suddenly agrees that the US dollar is no longer worth anything, but the yen is very valuable.
In that case, the dollar rate will fall, and the Japanese yen on the stock exchanges will rise. It’s the same with cryptocurrencies. But how does a digital currency work with no coins or banknotes that cannot be carried in your pocket and used to pay at the chewing gum machine?
For a standard coin, you have a wallet, a small cloth bag, or a leather case for storage. It is thrown in the piggy bank at home or kept in the bank account. There is a so-called wallet for the individual units of digital currencies: This is a type of electronic money storage. It is a way of securely storing data.
The software wallet is a secure, password-protected little program that records and saves the digital currency on the smartphone, on the PC, or in the cloud. A bit like a bank account – online banking also takes place virtually, transfers are only made digitally.
The hardware wallet is a small data storage device, a kind of external hard drive. The little sticks look like a USB stick but are also secured multiple times. This is to prevent data loss and, above all, data theft.
Types of Cryptocurrency
Bitcoin is the world’s leading cryptocurrency based on a decentralized accounting system. All payments are cryptographically legitimized. The fees are processed via a network of equivalent computers, which is known as a peer-to-peer network.
Central clearing of money movements is unnecessary. Bitcoin was invented in 2007, but the originator is still unknown today. He or she appears under the pseudonym, Satoshi Nakamoto. To date, new Bitcoin units can be created by solving cryptographic tasks. This is known as mining.
Ethereum is, first and foremost, an open-source distributed system. The system offers the creation, administration, and execution of decentralized programs and contracts in its blockchain. This is not about a currency and a decentralized payment system, but about an alternative to the conventional client-server architecture.
The internal cryptocurrency Ether is used within the Ethereum system. It is used as a means of payment when processing transactions. In 2019, Ether was the cryptocurrency with the second-largest market capitalization, equal to Bitcoin.
Monero is a decentralized, blockchain-based cryptocurrency. Unlike Bitcoin, Monero has a significant focus on privacy and decentralization, and the currency takes a different approach with a view to scalability. The currency is based on the CryptoNight protocol, so it is not based on a code split off from Bitcoin, as is the case with Litecoin.
In practice, Monero differs from many other cryptocurrencies, among other things, through its strong anonymity and the proof-of-work algorithm CryptoNight, which has been optimized for commercially available processors. The mining difficulty is adjusted continuously, and the algorithm for improving the block size also makes the cryptocurrencies almost unique.
Buy cryptocurrencies – how, why, and where?
You cannot buy cryptocurrencies from your house bank’s bank advisor, but you do that online with broker services. The brokers maintain their platform; they can often only buy more exotic cryptocurrencies if you have previously purchased Bitcoin.
In concrete terms: choose a platform, try out a demo account, deposit money from a bank account, invest in any currency. It is usually offered to purchase Bitcoin with US dollars, Euros, or another common conventional currency. If other cryptocurrencies are to be traded, this is often only possible via Bitcoin.
How do you recognize a trustworthy platform? A self-respecting broker is well established. The relevant trading platforms have been on the market for a long time and are rated by numerous users. Various reputable payment methods are available. Will cryptocurrency become a norm for online shopping and eCommerce solutions? It is too early or too late to answer that.