There are now thousands of so-called cryptocurrencies. Bitcoin is one of the most well-known that investors have also had their eyes on. How does this virtual money work, who can benefit from such currency alternatives and why is bitcoin harmful to the environment? An overview.
What is a cryptocurrency?
A cryptocurrency is virtual. Payments are only processed online and legitimized by a digital signature. Cryptocurrencies are not currencies in the classic sense: they are not generally accepted, they are not stable and they are only suitable as a store of value to a limited extent.
The biggest difference to normal currencies is that cryptocurrency prices are not created and controlled by central banks, but the transactions are processed and authenticated by a network of equal computers. In contrast to government currencies, there is no “supervisor”
If you own a cryptocurrency, you can send and receive it directly without going through a bank. However, there is then no bank that could correct incorrect bookings or send a new password. If the key (code) to your own crypto depot is gone, it’s gone.
There are now more than 4,000 different cryptocurrencies. The best known and largest are Bitcoin, Ethereum, Whether, and Monero.
liquidity meaning is among the core characteristics of a brokerage company, as newer traders prefer to join brokers where their orders are about to be executed instantly. High spreads, gaps, and price slippage force traders to open accounts on other platforms.
Why are there cryptocurrencies?
Cryptocurrencies emerged, among other things, as a reaction to the looming financial crisis from 2007 onwards. At that time, the central banks created gigantic amounts of money to keep banks and ailing countries afloat financially. The inventors of cryptocurrencies accused central banks of financing credit bubbles and running the risk of devaluing money. The counter-program are cryptocurrencies as a decentralized currency created by a network of computers. However, the inventors of cryptocurrency often remain anonymous themselves and operate under pseudonyms with cryptocurrency prices.
Cryptocurrency supporters want to make it impossible for states to access the money. The side effect, however, is a legal vacuum: stolen Bitcoins or even money laundering escape the courts.
Critics of cryptocurrencies see an even more fundamental problem: they see Bitcoin as an attempt to undermine democratically legitimate institutions themselves.
The Blockchain
There is no central bank for bitcoins, instead, all transactions are recorded as data blocks in an open digital “till book”: in the so-called blockchain. When Bitcoin is transferred, a newly calculated block is appended to the chain of old calculation blocks. This new block contains information about all previous blocks. This is to prevent someone from subsequently manipulating payments.
The blockchain documents all previous transactions. Copies of this ledger are spread across the many thousands of computers that participate in the Bitcoin network.
The calculation of new blocks of data is rewarded with the issuance of new bitcoins. The participants who have invested the most computing time in solving certain arithmetic tasks have the greatest chance of winning a bitcoin. This is quite lucrative for the “miners”: They are rewarded with 6.25 bitcoins – compared to the previous high of the bitcoin, which was more than 300,000 euros with cryptocurrency prices.
This issuance process is responsible for the enormous energy consumption caused by “mining” or mining new bitcoins. Only a few large mining pools can afford the necessary investments.
Why is bitcoin popular?
The main reason should be the desire to speculate. The price of bitcoin rises astronomically from time to time (and then often falls very sharply). Celebrities such as Tesla founder Elon Musk are the driving forces: his tweets drive the price up or down violently – and apparently generate FOMO (fear of missing out) among some investors. The fact that the online payment service PayPal wants to partially allow transactions in bitcoins also led to price increases with cryptocurrency prices.
Digital variant of gold
At the same time, it is suspected that some investors see Bitcoin as an opportunity to diversify their investments because of the long-lasting phase of low-interest rates. The economist Philipp Sandner sees in Bitcoin the possibility that this cryptocurrency will become a digital variant of gold developed. According to the economist in Dlf, it is less a means of payment for everyday use than a way of storing value – like gold. The inventor Satoshi Nakamoto limited the money supply to a total of 21 million coins (about 18 billion of them are currently “mined”). As a result, the supply cannot be increased indefinitely, and “a certain value can unfold” in Bitcoin, according to Sandner. This salient feature of bitcoin is to potentially protect against inflation, which appeals to people who accuse central banks of trying to soften the value of money.
Independent currency.
Who are the winners in bitcoin?
The winners are speculators and traders. Many have become rich from the hype. This in turn attracts new investors. Since you can’t buy much with Bitcoin in “real life”, the real motivation for beginners is a bet on the future: they buy in the expectation that the price will rise and someone else will buy the virtual coin from them at a higher price. This is particularly good for those who mined or bought bitcoins early on: they have often benefited the most from the sharp price jumps with cryptocurrency prices.
Some, therefore, accuse Bitcoin of being a pyramid scheme (“Ponzi scheme”); a fraud scheme in which Bitcoin owners are always looking for the “next greater fool”. Who will buy their coins for even more money?
It is correct: Bitcoin is highly speculative. Early entrants have tended to benefit more than later investors. However, the term “Ponzi scheme” is misleading. He suggests that cryptocurrencies like Bitcoin were created with fraudulent intent. That is not right.
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