Cryptocurrency meaning: What is it actually?

 At first, men exchanged goods. Then came the age of metal currencies like gold and silver. Today we pay with banknotes, credit cards, or use virtual currencies on the Internet. There are very many of them these days. These three cryptocurrencies are the most discussed: Bitcoin, Ethereum, and Ripple.

But: what actually is a currency? What makes the $23 in your hand worth $23, or why is $23 actually worth $23? The philosopher John Searle says: "Just because we all believe that the paper in our hand or the numbers in our account have real value, they have that value." This has worked really well so far. You go to a supermarket with your $23 and also receive goods worth $23. Just because the dealer also believes that the $23 in your hand is actually worth $23.

Advocates consider cryptocurrencies to be the next big revolution in global payments. Even if the new currency is not used much in everyday life, a large religious community has already emerged. The value of Bitcoin rises and falls and had reached its highest value to date of just over $33,000 per coin at the beginning of January 2021 (as of February 3, 2021). That's a pretty strong belief. That is why we explain the most important aspects of cryptocurrencies to you here.

Cryptocurrency: what is it?

Cryptocurrencies like Bitcoin, Ethereum, or Ripple ONLY exist virtually. As the money in your bank account, virtual currencies are physically non-existent. The difference to your money in the bank is that you can always convert your numbers in the account into cash. This is not possible with cryptocurrencies, as they only exist digitally and are not deposited with a bank. Virtual currencies don't need a bank at all. A transaction takes place solely within the so-called blockchain. The blockchain is the only system for cryptocurrencies that enables trading and all transactions for virtual currencies. As a means of payment, cryptocurrencies have the decisive difference that they work without banks. The money in your pocket or in your account, on the other hand, is always a securitized debt that the bank has to redeem for you.

In the past, for example, with the possession of a dollar, the owner was assured that he could exchange it for gold at a bank at any time. However, the “gold standard” that established this value was abolished in the twenties of the last century. Today central banks and states guarantee value retention. So there is always a certain material value in relation to money. In the case of cryptocurrencies, this protection is completely omitted. This is also where critics see the greatest risk.

For a purely digital currency, the equivalent comes from trust in a shared network: the blockchain. The blockchain is the central instrument and foundation for every digital currency. Every transaction is encrypted and combined into so-called data blocks using complicated arithmetic operations. These are stored decentrally and can be viewed by every user. When it comes to security, the blockchain has a decisive advantage. In the case of cryptocurrencies, the data blocks generated are stored on different computers. Each user becomes a backup for the entire network (the chain). If someone wants to intervene in this system, they have to hack practically all computers participating in the blockchain. This is impossible, especially with large blockchain associations with millions of participants such as the Bitcoin blockchain.

How does cryptocurrency work?

Since virtual currencies such as Bitcoin and Ethereum are stored digitally in the blockchain, nobody can manipulate them just like that. The blockchain is a kind of open book that generates virtual currencies, assigns them to owners, and documents every transaction. Digital means of payment can only exist as digital currency within the blockchain and change hands. Proponents see the greatest advantage here: The movements of the cryptocurrencies can be traced at any point in time and everyone can see how many virtual currencies (for example in Bitcoin) are in circulation. In addition, the maximum amount that can be generated for Bitcoin is specified in advance. The code of the digital currency is limited to 21 million Bitcoin (BTC for short). Nobody like the European Central Bank (ECB), the American Federal Reserve Bank (FED for short), or other state institutions can intervene in this system and multiply money unhindered. In crisis areas, trade and transactions can be carried out even if the banking system there collapses. In general, the transactions are possible across all national borders. There are usually little or no fees. 

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But how does the transaction actually work?

Trading cryptocurrencies has become a very popular hobby. The speculation on Bitcoin or Ethereum is enormous. Bitcoin is now home to over USD 170 billion in market capitalization. In the case of Ethereum, it is at least 34 billion. Those who invest in cryptocurrencies wash money into the system for virtual currencies. So you exchange real euros for BTC and Co. This happens on a coin exchange, also called a coin exchange. Providers like Coinbase or Kraken are the first gateway to digital currency. You can also get your so-called wallet here. A Bitcoin wallet is comparable to an account with your bank. It is a code that is only assigned to you and represents your address or account number for cryptocurrencies. You can use a coin exchange to deposit virtual money in the form of cryptocurrencies at this address. You are now part of the blockchain and can send virtual currencies back and forth. All you need for the transaction is the recipient's wallet address. Everything you buy in Bitcoin can only be transferred digitally. When choosing the coin exchange, you have to make sure that the means of payment, i.e. the cryptocurrency requested by the recipient, is also in your wallet. Since each currency uses its own system, no conversion takes place. If someone requests Ripple and you send Ethereum, the money is just gone!

Bitcoin mining

Trading, storing, and sending digital currencies requires hardware and energy. This is where the Bitcoin miners come into play. They provide computing power to ensure the smooth flow of transactions and to create new bitcoins. They are members of the decentralized network of the blockchain and validate - i.e. confirm - the transactions that go from one wallet to the other.

In addition, all transactions are documented in a - also virtual - "ledger" (payment book). This ledger lists all movements with the amount of the transaction, the wallet numbers of the sender and recipient. The miners also provide computing power for this purpose. You will be rewarded with Bitcoin for this. The mining itself will be stopped when the specified upper limit of 21 million virtually generated Bitcoin has been reached. With the maintenance of the ledger, you can still earn money in the form of BTC afterward. What many do not know: EVERYONE can become a Bitcoin miner. All you need is a mining client and you have to join a mining pool and you can earn money with the new currency without any risk.

There is one catch, however: the more participants a blockchain system has, the more difficult it is for individuals to actually earn money with it. This money-making works by a user verifying and legitimizing transactions. The more computing power is available, the faster it works. The rule is "whoever can deliver the fastest gets the contract". However, since very powerful systems also have very high power consumption, the bottom line - especially for "lone fighters" - is little profit left - if they don't even pay extra.

Are cryptocurrencies legal?

In the United States, the answer is clear: yes! Countries in which the topic of cryptocurrencies is a problem are Morocco, Algeria, Nepal, Bangladesh, Kyrgyzstan, Paraguay, and Ecuador. This affects the ownership, trading, and mining of digitally generated money. Bitcoin mining is actually allowed in the world except the above. However, it is a legal gray area. Anyone who wants to earn money with mining, i.e. the virtual management and generation of cryptocurrencies, should definitely register a business. Many do not know whether this is even worthwhile because electricity prices in the united states are quite high in international comparison. In most cases, generating bitcoins does not offer a chance of great wealth.

Illegal ways to get money

As mentioned earlier, the cost of energy to mine cryptocurrencies can quickly wipe out any profits. What could be more natural for someone with enough criminal energy than to try to minimize electricity costs and the expense of purchasing expensive hardware? This is where what is known as crypto-jacking comes into play. In this type of attack, criminals are not targeting passwords, credit card details, or confidential information, but computing power.

For this purpose, own mining clients are installed unnoticed by malware on third-party systems, which then happily mine coins in the background. Users usually don't notice much of this - except that the system may react more slowly than normal in between and the fan suddenly turns faster. This can be worthwhile for criminals - especially when thousands of computers are connected to a network at the same time, which can then have considerable combined computing power. The individual computer does not even have to be a high-performance machine. True to the motto: "Small cattle also make crap". Companies whose servers were used for crypto mining unnoticed have already been particularly lucky - or unlucky. Not only does the unnoticed mining lead to a loss of performance, but it also quickly drives the victims' electricity bills to dizzying heights. Not to mention the increased wear and tear.

Future security

Especially in times when Bitcoin or other cryptocurrencies are very popular, many people smell the "quick money". When the price suddenly climbed to over € 30,000 overnight, there were suddenly a lot of Bitcoin millionaires. That in turn inspired others who also wanted to benefit from it and speculate on high prices. The prices fluctuate very strongly in some cases so that even large profits can quickly vanish into thin air. If you want to use Bitcoin as an investment, you should treat it like any other high-risk business: You should only use money that does not hurt too much to lose.

And: if you have a wallet, you should keep it in a form that is still accessible in the distant future. At the end of 2020, reports made the rounds of a Bitcoin millionaire who still had $ 250 million in Bitcoin stored on an old hard drive. The catch: he couldn't get the money. The hard drive was encrypted and he had forgotten the password.