Bitcoins - This is how the cryptocurrency works - The Comprehensive Minds

Bitcoins - This is how the cryptocurrency works

Bitcoins are exciting. Digital money mining on the internet. After the hype three years ago, the cryptocurrency was a little quieter. But recently the price of Bitcoins climbed to a new all-time high.

How does crypto money work? Where can you get bitcoins? Is it worth investing in bitcoins? Is that serious? Dangerous? The financial experts at Stiftung Warentest classify the topic.

Bitcoins - the digital coins

For many years, next to nothing happened, then the value of Bitcoin rose from around 1,014 to around 20,000 US dollars within a year. 

That was in 2017. In 2018, the price of cryptocurrency fell below $ 5,000 again. For a few weeks now, things have been rising rapidly again: In the fall of 2020, the cryptocurrency scratched the $ 20,000 mark again.

Bitcoins have only been around since 2009. At the beginning of 2011, the Bitcoin exchange rate was one dollar. For comparison: The value of the share of the world's most expensive company, Apple, has "only" grown 1,200 times since its IPO in 1980, including dividends.

Cryptocurrency soaring again

Cryptocurrency soaring again

© Stiftung Warentest, Fotolia (M)
Bitcoin rally. Bitcoin scratched the $ 20,000 mark in November. The last time it was worth so much for a short time was in December 2017.

Virtual bitcoins, managed in the blockchain

The term bitcoins is made up of the word for the smallest digital unit, the bit, and the English word for coin. A certain Satoshi Nakamoto is responsible as the inventor - although it has not yet been clarified which head is behind it. Or maybe it's a whole group.

Bitcoins, or BTC for short, are neither coins nor bills, they only exist virtually, as a digital string. Even if they are often compared to gold, there is no real value behind them. New bitcoins are created by the users themselves using mathematical processes. 

The credits and payments are managed in a decentralized network, the blockchain. In order to book a transfer with Bitcoins, a complicated arithmetic problem has to be solved. If you are the first to do this, you will receive Bitcoins as a reward. One speaks of mining, in German the "digging of bitcoins".

Bitcoins - you should know that

Cryptocurrencies. Real, decentralized cryptocurrencies that are mined and traded using blockchain technology are not dubious per se. Speculating on Bitcoin and Co is like going to the casino (buying, betting, and mining). Only wager money that you don't need. You can lose everything.

Initial Coin Offering. Buying tokens and other "vouchers" that companies use to raise capital is far too fraud-prone and risky. Better keep your hands off it. 

The dark side of bitcoins

Bitcoins used to be the currency for dealers who used it to deal with weapons and drugs on the Darknet. The darknet is, literally translated, the dark side of the Internet, in which users can surf largely anonymously. Bitcoin also hit the headlines in connection with ransom demands.

It's over 21 million

According to the website Coinmarketcap, there have been a good 18.5 million Bitcoins so far, with the end of 21 million. However, growth continues to slow down. You can also trade fractions of bitcoins, for example, millibitcoins.

Glossary - cryptocurrency, blockchain, wallet

Blockchain: The blockchain, in German: a chain of blocks, consists of a series of data records. The account balances and all previous transactions are stored in the Bitcoins blockchain. The blockchain is stored decentrally, on the computers of its users.

Cryptocurrency: The Bitcoin payment system uses modern, cryptographic methods of encryption. Therefore, bitcoins and other digital currencies are also called cryptocurrencies.

Wallet. Digital wallet. Bitcoins or other cryptocurrencies are stored here.

Bitcoins imitators - Ethereum and Ripple

The increase in the price of Bitcoin attracts imitators. There are now said to be more than 3,000 cryptocurrencies. Bitcoin is the market leader with a market capitalization - the number of coins multiplied by their current value - of around 340 billion dollars. Ethereum ranks second at $ 63 billion, followed by Ripple at around $ 26 billion. Only about two dozen digital currencies even have a market capitalization of a billion dollars, and many others don't even have a million.

The, the, the Bitcoin?

According to Duden, both the male and the female form are possible. has opted for the more common male form.

Beware of falls and theft

Anyone entering the world of cryptocurrencies does not only have to deal with extreme price fluctuations. The reasons for this are often not easy to understand. Sometimes closings of Bitcoin exchanges play a role. Again and again, digital money comes under pressure because hackers have cleared a platform. Anyone who stores bitcoins on their private computer should also protect themselves against theft.

Buy and mine bitcoins

If you are looking for the thrill and want to become a Bitcoin owner, you have various options.

Bitcoin wallet. The classic variant is to buy a Bitcoin wallet, an electronic wallet in which Bitcoins are stored. There are various providers for this. The wallet has a public account number and a private key with which it can be locked. Investors should secure their computer well to avoid falling victim to theft.

Bitcoin account. Another option is to set up an account with one of the numerous Bitcoin trading platforms. In this case, the Bitcoin is not stored on your own computer or mobile phone, but on the platform.

Tip: Bitcoiners should pay attention to a fair price and - importantly - the costs. There have been times when a transaction costs more than $ 30.

Mining - a computationally intensive task

Bitcoin payments must be confirmed. For example, it must be clarified whether the person making the payment has enough Bitcoins for it. In addition, the new data blocks with the current payments must be linked to the previous data blocks of the blockchain. To do this, certain arithmetic tasks must be solved. Anyone who does this and confirms payments will receive Bitcoins as a reward. This is called mining. The miners not only need technical know-how but above all the appropriate computer equipment.

In the meantime, the demands on computing power are so high that it is almost impossible to get involved on the home PC. Unlike in the early days, mining is therefore largely in the hands of mining pools or companies founded specifically for this purpose.

Bitcoins as a climate killer

Energy consumption increases with the demands placed on technology. Years ago, in an interview with the Handelsblatt, the Bundesbank pointed out calculations according to which a single Bitcoin transaction corresponds to the monthly electricity consumption of a single-family household in Germany. Environmentally friendly is different.

Financial products with bitcoins

Not only private investors are interested in Bitcoin, but the financial industry also does not want to miss the hype either. Investing in hedge funds, US futures exchanges have introduced futures on the Internet currency with which speculators can bet on rising and falling prices.

Bet on bitcoins with certificates

In this country, for example, there are certificates. One of the papers with which investors can speculate on Bitcoin growth is the Bitcoin certificate of the Swedish issuer XBT Provider (Isin SE 000 752 533 2). It costs 2.5 percent a year. There is also a spread - that is the difference between the buying and selling price - of around 2.5 percent.

Another certificate is sold by the Swiss bank Vontobel (Isin DE 000 VL3 TBC 7). The advantage of certificates: They are securities that anyone with a securities account can buy in the usual way - on the stock exchange. The disadvantage: Certificates are bonds and as such are not protected if the issuer goes bankrupt.

Bitcoins in ETC and mutual funds

The British company HANetf, for example, offers an ETC on the Bitcoin, the HANetf BTC etc Bitcoin exchange-traded crypto (Isin DE 000 A27 Z30 4). Legally, however, it is not a fund. An ETC is not an ETF, but a bond with similar functionality and risks as certificates.

Due to the diversification requirements in this country, funds may not invest exclusively in a single value. However, you can bet on Bitcoin with part of the investor's money. This is what the mixed fund Actis Datini Valueflex did, for example. The largest single position in the fund is a Bitcoin certificate.

Caution, the danger of falling

If you buy Bitcoin directly or indirectly speculate on price gains with certificates, for example, you should only use money that you do not need. A total loss is possible, prices fluctuate sharply and quickly.

Bitcoins as a means of payment

Bitcoin was created as a decentralized currency with no control by third parties. It is doubtful, however, whether this is a currency in the classic sense.

Currencies work differently

Bitcoins are not legal tender in Germany. Nobody is obliged to accept Bitcoins and only a few do so at all, like a few shops, cafes, or pubs in some German cities or the food delivery service Lieferando. 

Wikimedia, the foundation behind the Wikipedia online lexicon, accepts donations in Bitcoins. Bitcoins can also be used to support Mozilla, the operator of the Firefox Internet browser.

A salary for a villa or five rolls

A currency should be suitable for transferring value - which is hardly possible in view of the sharp fluctuations in Bitcoin exchange rates. Imagine if the salary came in bitcoins. One month you could use it to pay the rent, the next month you could buy a villa - and possibly only five rolls in the next but one. 

Nobody would get involved in this game if it was about their existence. Then prefer the euro. Bitcoin can, however, develop a protective function in countries with high inflation or capital controls.

Bundesbank and Bafin warn of losses

The Bundesbank and the financial supervisory authority Bafin warn against seeing bitcoins as a store of value - the third function that a currency fulfills. Investors could lose all of the money invested.

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