Right now there is a lot of talk in the media about what cryptocurrency is. But the subject is certainly not an easy one. Therefore, in this article, we bring some light into the darkness and answer questions about the topic of cryptocurrency. A cryptocurrency is a form of universal, digital money that you can use to buy goods or services. You can also trade and invest in cryptocurrencies - since they are very volatile, they are not for the faint of heart.
So what is the difference between cryptocurrencies and conventional currencies such as the dollar or the euro? A basic requirement is a trust. The word "crypto" comes from the cryptographic techniques used for cryptocurrencies. These techniques ensure that transactions in cryptocurrencies can be processed securely. In addition, these techniques allow transactions to be carried out without the supervision of a third party such as a bank.
This is the main reason why cryptocurrencies are so popular. A decentralized financial system that does not rely on banks or influential institutions has several advantages. It can be faster, cheaper, fairer, and more transparent. However, this is currently still a vision for the future and there are still some challenges to be overcome for cryptocurrencies.
How does cryptocurrency work?
Many cryptocurrencies are based on blockchain technologies. This enables the review and approval of all transactions in a decentralized network. A blockchain is a type of digital cash book of which all users on the network receive a copy. If a user tries to edit or change the blockchain without authorization, this version will be rejected by other users.
The blockchain is a database that stores large amounts of information and does not allow changes. However, cryptocurrencies use a decentralized peer-to-peer network to verify new transactions. They are therefore based on the mutual trust of users, which fundamentally distinguishes them from conventional currencies.
While traditional currencies are issued and regulated by a bank or a central authority, there is no central institution that manages typical cryptocurrencies such as Bitcoin or Ethereum. In addition, there is no trusted third party (like a bank) that monitors transfers between two parties. This is part of the appeal of cryptocurrencies, but it can cause problems when paying.
This is how you can pay with cryptocurrencies
You can pay for your purchases with cryptocurrencies - after all, they're real currencies. Many websites and online shops now accept Bitcoin as a payment method. With other cryptocurrencies, you can buy anything from an NFT to a virtual lot in an online video game.
To make a digital purchase with a cryptocurrency, you need a crypto wallet. You can store cryptocurrencies securely in a crypto wallet. Each wallet contains private keys and public keys (public and private keys) that can be used to pay and receive cryptocurrencies. The public key is a code that all users within the system know. The private key is only known to one user at a time and is used to verify the transactions.
How many cryptocurrencies are there?
According to statista.com, there are currently almost 6,000 different cryptocurrencies. However, 20 of these currencies have a 90% market share.
It is relatively straightforward to start a cryptocurrency, which explains the sharp increase in the number of cryptocurrencies in recent years. B. still fewer than 70 cryptocurrencies. The most popular cryptocurrencies include Bitcoin, Ethereum, and Litecoin.
How is the value of the individual cryptocurrencies determined?
Compared to other financial markets, the market for cryptocurrencies is subject to relatively strong fluctuations. To put it mildly, the value of cryptocurrencies can rise dramatically within days or even hours - but it can also fall again just as quickly.
Many cryptocurrencies like Bitcoin have no intrinsic value. Instead, their value is based on supply and demand. If many people want to buy a cryptocurrency when there is a short supply, the value increases. Bitcoin and many other cryptocurrencies have a limited number of tokens, so supply doesn't exceed demand - at least for now.
What is cryptocurrency mining about?
Crypto mining is about introducing new crypto units into the market. Users can “mine” units by verifying transactions and adding them to a blockchain.
In this system, users update and secure the network on an ongoing basis and receive cryptocurrencies such as Bitcoin in return. All you need to mine is a computer and internet access, but it's not always lucrative. The success rate of mining depends on which cryptocurrency you “mine”, how powerful your computer is, and how much electricity you use.
With Bitcoin, the mining process works like a lottery. Any company or individual who wants to get involved in mining must try to solve a specific code before anyone else is involved. This code confirms the transaction and saves the details in the blockchain. The winner then receives new bitcoins as a reward.
How to invest in cryptocurrency
Nowadays some websites serve as exchanges for cryptocurrencies - this is where you can buy and sell cryptocurrencies. This includes websites from companies such as Binance, Coinbase Exchange, or Huobi Global. Many of these exchanges charge fees for various types of transactions. So be aware of this and find out in good time what these fees can mean for your possible winnings.
With some cryptocurrencies, you can pay in euros, with others only in one cryptocurrency. With Bitcoin z. B. both possible. To start trading, you first need to set up an account with a crypto exchange. B. Transfer euros and then buy cryptocurrencies.
Many exchanges provide you with a so-called “custodial wallet”. Here you can store all of your cryptocurrencies that you buy or sell on the exchange. Usually, the exchange has private keys for this wallet. So make sure you can trust the exchange before storing your cryptocurrencies in this wallet.
Is investing in cryptocurrencies risky?
In a word: yes. It is very risky to invest in cryptocurrency.
If you only invest in one cryptocurrency, the risk will be concentrated in that one currency. You may be able to reduce the risk a little by buying various cryptocurrencies through an exchange-traded fund (ETF). You can invest in several currencies at once, but that is not a safe investment either. The entire cryptosystem is still unstable and does not offer long-term security. So do some research before investing large amounts.
Why are cryptocurrencies so popular?
People are interested in cryptocurrencies for a variety of reasons - but there are also many skeptics. Here are some possible reasons why cryptocurrencies are becoming increasingly popular with die-hard fans:
Fewer fees
One reason for the popularity of certain cryptocurrencies is the comparatively low fees. The fees are often lower compared to the costs of traditional banking, as there is no central authority that manages the payments.
Efficiency
The availability and speed of transactions also make up part of the incentive with various cryptocurrencies. Transactions can be carried out within a few minutes - around the clock, 365 days a year. You don't have to adhere to the opening times and there is no additional processing by third parties. So dealing with the currencies is straightforward and they are very accessible.
Safety
Blockchain technology is the system that is responsible for dealing with many cryptocurrencies. This makes it very difficult to change transaction data after entering it into the system. This security feature has contributed to increased demand.
Another reason is the lack of human involvement - the computer network releases the data entering the database, thus reducing the risk of errors.
No government involvement
The lack of any government regulation is also well received by some. Different cryptocurrencies, therefore, appear to be more stable and less at risk if, for example, B. riots occur in a certain region.
Profitability as an investment
The opportunity to make a profit is, of course, attractive too. The cryptocurrency market is very active. As banks invest in projects to introduce blockchain technology, cryptocurrencies could become an important part of the financial industry in the future.
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