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Cryptocurrencies: Bitcoin & Co as an investment – this is how it works

What are cryptocurrencies actually?

In short: cryptocurrencies are digital money that only exists as a chain of information modules, but has no physical equivalent in the form of bills or coins. Unlike money issued by states, cryptos are not regulated by a central control body. There are currently almost 12,000 cryptocurrencies, but at least they have the right to be a real currency and to act as a store of value.

How does a digital currency work?

Cryptos are, so to speak, “cash for the Internet” because they can be exchanged between users directly – without going through a bank. There is no central point that monitors, stores or otherwise controls these transfers. Every user has an electronic wallet and can easily transfer sums to another user. The payment is practically untraceable.

Also read: Digital euro: will cash be phased out in Europe?

The digital infrastructure differs fundamentally with cryptos. Bitcoin, for example, is created through what is known as “mining”. Put simply: Since the entire currency network has to be available decentrally, i.e. not on the servers of a central bank, users make the computing power of their computers available. The entire transaction history is checked, merged and encrypted in a “blockchain” on this. For their help, users are rewarded with small Bitcoin packages.

Which known digital currencies are there?

The first and best-known cryptocurrency in the world, Bitcoin, was launched in 2009 and now has a market capitalization – i.e. a total value – of around 740 billion euros. The second largest currency is ether with a market capitalization of around 330 billion euros, followed by the much smaller cryptos Cardano and Tether.

Why do people want to invest their money in cryptos?

In the first years of the Bitcoin hype, the allure of the new primarily played a role: Bitcoin users wanted to try out the innovative blockchain technology on which the currency is based. And many of them saw the idea of ​​trading completely independently of state structures as revolutionary. The financial crisis of 2008 certainly played a role here, fueling the existing skepticism towards the global banking system.

Read more: Bitcoin is a means of payment in El Salvador

Over the years, however, the picture has changed fundamentally. The expansionary monetary policy of the central banks of the USA and the EU, the persistently low interest rates and the sharp rise in the prices of shares and real estate forced both institutional and private investors to look for alternatives. Numerous banks, companies and private individuals are now investing in crypto currencies.

Is it advisable to invest your money in cryptocurrencies?

Not for conservative investors. A distinction must be made here between investment and speculation. Investors want to invest their money in a real asset that has a relatively high probability of increasing over time – slowly but relatively surely. Examples are broadly diversified equity ETFs, shares in companies that are continuously increasing their profits or real estate in a good location. The speculator, on the other hand, promises profits because he bets that other buyers will want to pay a (significantly) higher price for the speculative object in the future. Investing in cryptocurrencies is currently highly speculative, with rapid price increases and sharp drops – sometimes for no apparent reason.

What do experts say about this question?

Opinions differ widely here. “We would not yet speak of our own, established asset class for cryptocurrencies,” says Nicolas Pilz from Societas Vermögensverwaltung. “In addition, there is still a lack of state acceptance and a certain amount of regulation.”

You might also be interested in: Devaluation: Everything You Need To Know About Inflation

Markus Richert from Portfolio Concept Vermögensmanagement contradicts: “It is definitely a speculative asset class”, since it has its own stock exchanges and trading. “However, the intrinsic value is missing.” Stephan Witt from Finum Private Finance goes one step further and sees cryptocurrencies as a separate asset class that has established itself over the past few years. “Even banks and commercial enterprises are now using and investing in this asset class.”

How safe are cryptocurrencies? Can’t they just be hacked?

Usually this is almost impossible, as the transaction histories of the Bitcoins are always scattered over the entire network, i.e. on numerous individual computers. For a hacker attack not only would the encryption have to be bypassed, these computers would also have to be identified and individually hacked at the same time. But it is of course possible for hackers to attack individual crypto owners or trading platforms.

What does the future of cryptocurrencies look like?

With the rise of cryptos and blockchain technology, nothing less than a new era in finance has begun. The idea of ​​banks becoming redundant as intermediaries in financial transactions could revolutionize the entire sector. In addition, cryptos represent a frontal attack on the monetary monopoly of the central banks. Numerous central banks around the world are therefore already working on their own digital currencies, which, due to their central control, cannot be equated with crypto currencies. Meanwhile, not only are more and more companies accepting cryptocurrencies – El Salvador became the first country in the world to introduce Bitcoin as legal tender last week. Since then, every trader who is technically capable of doing so has to accept Bitcoin, and taxes can also be paid in the cryptocurrency.

Hasan Sheikh
Hasan, who loves technology and games, is studying Computer Engineering at Delhi JNU. He has been writing technology news since 2016.


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