Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), Litecoin (LTC), Monero (XMR), IOTA (MIOTA) – cryptocurrencies are omnipresent in the media. Spectacular success stories and profits in the millions, if not billions, have been reported – but is it advisable to invest in virtual money and are digital currencies a new financial instrument?
Cryptocurrency is the umbrella term for virtual currencies that can act as digital means of payment.
A blockchain (composed of block and chain) is often referred to as a collective accounting system. In data blocks, it contains encrypted information about any transactions that were carried out with a specific cryptocurrency. It functions as a database, the blocks of which are not located on a central server, but on the computers of the large number of participants that it manages.
Anyone can become a participant in this decentralized network and provide computing power to continue the chain of data. This is rewarded by receiving currency units (coin or coin or token or token) of the corresponding cryptocurrency. This process is referred to as mining.
Once a transaction has been committed to the blockchain, no participant can change it. This protects it and individual currency units cannot be used more than once. For this reason, there is no longer any need for an established institution that has always been involved in monetary transactions.
The goal of Bitcoin, the first cryptocurrency, was simply to create a payment system that worked without financial institutions to give consumers a degree of informational self-determination and anonymity. As a result, Bitcoin has been used as a means of payment for illegal transactions in recent years. Although this reduced the social acceptance of cryptocurrencies, the underlying technology has meanwhile been expanded and improved. Cryptocurrencies can now be used for much more than just money transactions, as they are a safe, fast and cost-effective alternative for the transfer of sensitive data.
In a pilot project, the United Nations World Food Program is using Ethereum, for example, to distribute resources to refugees. The organization issues food coupons via the blockchain and those affected can pay in refugee camps using an iris scan. In this way, the financial means reach the needy directly and corruption is no longer a problem for the organization.
Facebook also wants to introduce Libra, its own digital currency, to enable worldwide payments via Facebook, WhatsApp and Instagram. The coupling to a currency basket is intended to protect Libra from fluctuations in value. Central banks have so far been skeptical about the plans of the social media giant.
What cryptocurrencies are there?
In 2009, the first and probably best known cryptocurrency was created: Bitcoin (BTC). Measured in terms of market capitalization, the crypto starling still accounts for the largest share of the virtual currency market. Ethereum (ETH) and Ripple (XRP) follow as the second and third largest cryptocurrency.
No banks are required for the payment processes. A decentralized network replaces financial institutions, the participants of which manage transactions and generate new units of the currency. This is made possible by the blockchain technology that underlies every cryptocurrency.
n total there are now over 2,800 different cryptocurrencies worldwide and the number of virtual currencies is growing daily. But why are there so many different currencies at all?
Initially, the technology has been improved and developed since the Bitcoin appeared. This paved the way for currency alternatives that offer many advantages over Bitcoin and have their own focus.
For example, Litecoin is faster than Bitcoin, with Ethereum not only currency transactions can be carried out, but also contracts, so-called smart contracts, and Ripple should be used by banks to accelerate regular transfers.
Bitcoin boom and crypto insanity
The technological advance came with the Bitcoin boom. In mid-December 2017, a single Bitcoin was worth nearly $ 20,000. In the following months, the value plummeted. At the end of 2018, a bitcoin was sometimes worth less than $ 3,000 – a loss of over five hundred percent. Nevertheless, the record-breaking asset of the alternative currency made the market particularly interesting for speculation and created incentives for the development of further cryptocurrencies and new issues of crypto units.
New ideas, plans and business models for cashless digital currencies are constantly emerging. Whether cryptocurrencies linked to diamonds (Carat) or oil (Petro), crypto money that is given as a reward for good deeds (Hullcoin), or a currency that is simply a parody of Bitcoin (Dogecoin) – there seem to be no limits to your imagination.