Cryptocurrencies Explained

Cryptocurrencies like Bitcoin and Ethereum are currently receiving a lot of media attention. Although they are considered a high-risk investment, they are also attracting the attention of a broader public as digital means of payment. But how do these new currencies work? How and where can they be used? In this post, we explain exactly what a cryptocurrency is:

Why Cryptocurrencies?

Cryptocurrencies are digital means of payment and can theoretically be used like “normal money”. This means that it can be exchanged, bought or sold. You can currently pay with cryptocurrencies in some online shops and occasionally also in retail or gastronomy.

Cryptocurrencies therefore only exist virtually. The money is also virtual on a checking or savings account in online banking and on an EC card when paying. Unlike cryptocurrencies, it can theoretically be paid out in banknotes and coins, and the currency is controlled from a central location.

Here, cryptocurrencies differ from the previously common means of payment in one important respect: they are not dependent on, supervised or involved by banks and central government agencies. Cryptocurrencies are not put into circulation by a central authority like conventional money but via a network of decentralized computers. So they represent a shared digital record of ownership stored on a blockchain.

Types Of Cryptocurrencies

Well-known cryptocurrencies are, for example, Bitcoin, Ether and Litecoin. Bitcoin is the largest cryptocurrency and was created in response to the 2008/2009 financial crisis. The aim was to use its decentralized structure to prevent control or manipulation by a state institution or central bank. The car manufacturer Tesla, for example, allowed payment via Bitcoin – the most well-known cryptocurrency – for a short time.

Ether is also known as Bitcoin’s little brother and is based on a system similar to Bitcoin. In contrast to Bitcoin, Ether can be used in many different ways. Litecoin emerged to create a leaner and more efficient alternative to Bitcoin. Transactions in Litecoin, for example, are processed much faster, which helps to reduce waiting times for payment transactions. There are also many other cryptocurrencies.

Blockchain-Based Digital Money

Basically, as with any other currency, value can be transferred and stored with cryptocurrencies. However, credits are transferred from one participant to another in the form of computer code. Each transaction of an amount is documented by a cryptographically signed transaction in the blockchain. They are intended to secure digital currency.

The cryptocurrency is stored and transmitted via a “wallet”. This is verified when the transaction is added to the blockchain. To make a valid transaction, a matching secret signature key is required. These signature checks are performed by computers within the network. All users save their keys in their digital wallets. So-called “miners” also control and record all transactions. With the help of large computing power, these miners can create new blocks to extend the blockchain. This “mining” service is in turn remunerated in cryptocurrency.

Criticism Of Cryptocurrencies

Supporters cheer for the independence of digital currencies. The cryptocurrencies could theoretically face a bank failure or a stately financial crisis calmly. But it also leads to criticism, since there is no official regulation. A deposit insurance fund for cryptocurrencies is excluded.

There is a controversial discussion about cryptocurrencies in both business and science. When it comes to investments, they are rather risky due to their very fluctuating, volatile prices. They are also vulnerable to tampering, data theft and software bugs. For these reasons, financial experts warn against large investments in these digital means of payment. A total loss is possible.

Cryptocurrencies are also widespread among cybercriminals, who infect systems with malware and often have the victims pay ransoms in cryptocurrency. Ultimately, the digital currency consumes large amounts of electricity due to the required computing power and is therefore subject to criticism in terms of its sustainability. At this point, we would like to point out that the information in this article is intended solely for general information on the cryptocurrency phenomenon and does not constitute any investment or legal advice or purchase recommendation.

Despite all critical objections, crypto currencies seem to be on the rise. Large online retailers and banks are increasingly thinking aloud about paying and investing in these currencies.