After cryptocurrencies were known to only a small handful of encrypting fans for years, the prospect of earning big money by investing in this “new currency” also aroused public interest. Since then, Bitcoin, Ether, and Co. have been part of the business news coverage – but the complexity of related issues such as blockchain technology makes it difficult to understand what opportunities and risks are waiting for investors.
What are cryptocurrencies?
Cryptocurrencies are digital means of payment, which are created by complex mathematical calculations, or in this case, are being “mined”. The prefix “Crypto” refers to cryptography, a branch of computer science. Secret data is encrypted. A cryptocurrency is based on the so-called blockchain technology, a cryptographic method that ensures the security of the data about their owners and their transactions.
Unlike common currencies, cryptocurrencies are not issued by government organizations such as central banks. That way, the influence of governments and similar organizations should be avoided. However, one drawback is that there is no consumer protection – because of their private nature, investment in cryptocurrencies is not under the supervision of authorities such as Bafin. Instead of being printed by an official agency, all cryptocurrencies are created by mathematical calculations, which are based on a complex algorithm. To create new units of cryptocurrencies, plenty of complex computer calculations are necessary. As the basic idea of the cryptocurrency inventor Satoshi Nakamoto suggests, this mentioned work in the form of computing power emphasizes their value. This should make the cryptocurrency counterfeit-proof.
To avoid inflation of cryptocurrencies, the set of maximum possible units is predefined in the calculation logarithm. When this maximum is reached, no new units can be mined.
Data security for cryptocurrencies
Another important factor that makes up cryptocurrencies is data security. For example, anyone who buys bitcoins can store them privately in a digital wallet, the so-called “wallet”. It is secured by a complex code and usually additional security measures. This code is known only to the owner – if it is lost, it is no longer possible to access the wallet.
Trading with cryptocurrencies
After logging into their “wallet,” owners can pay with their units, do business with other owners, or sell their units on one of the various crypto exchanges, convert them into other currencies, or buy even more units of the same currency. All these transactions are backed up in a global cash book: the blockchain. The special feature of this cash book is that copies of it are on each computer that has downloaded the cryptocurrency software in question. The information in the blockchain is constantly updated and copied to millions of machines. Therefore, the information of every transaction is completely transparent. At the same time, however, the data is encrypted and anonymous – so it is not easy to access this information.
Although Bitcoins were already publicly traded in 2009, it was the astronomical value increase in recent years that enlarged the public interest in cryptocurrencies and the associated blockchain technology. Although Bitcoin was the first and best known of these currencies, there are a number of others.