The risky world of Bitcoin & Co

 Cryptocurrency like Bitcoin is highly speculative. Crypto assets such as security tokens grant rights to assets or securities.

    Blockchain, tokens, coins - a short introduction to the world of cryptocurrencies

    Tesla CEO Elon Musk has invested part of his company assets in Bitcoin and intensified a fireworks display. A unit of cryptocurrency cost more than $ 50,000 in February 2021, more than ever before. Many were enthusiastic about the crypto world.

    Tip: An interactive graphic in our Special Bitcoins shows how the Bitcoin course has developed: This is how cryptocurrency works.

    Blockchain should help to make processes more efficient

    The term "crypto" comes from Greek and means hidden. This world extends far beyond the currency Bitcoin and also includes rights to investments, securities, products, or services. They are stored in a blockchain, a chain of booking processes that are stored decentrally on a network of computers. There is usually no central control instance, but encrypted transmission protocols. Achim Himmelreich, Vice President of the Bundesverband Digitale Wirtschaft (BVDW) e. V., says: "Blockchain technology came into the world with Bitcoin, but it is now helping to make processes more efficient in many areas." He cites notarial contracts or supply chains as examples.

    Our advice

    Cryptocurrencies are high risk, total loss is possible. This also applies to crypto investments in the form of rights to assets (security tokens).

    Remember passwords. Keep your private key safe, it cannot be lost. Never give you access to third parties.

    Security tokens, deal primarily with risks. Often it is rights to subordinated debt securities; in the event of a crisis, you are in a bad position. Some of the companies are very young and their business models are untried. Sometimes the information is poor - there is no prospectus or anything like that.

    Tokens and crypto coins only exist virtually

    Rights to assets stored in a blockchain, called "tokens", are intended to make investments such as real estate or works of art easier and cheaper to access and trade for private individuals. An analysis of the market shows, however, that the potential advantages have so far hardly been usable.

    The crypto world was already a party topic when the Bitcoin price rose from around 1,000 to 20,000 dollars in 2017. Some promised that this would be the new gold. Others were skeptical of the huge fluctuations in the price of the “coins”, which only exist as a virtual character string. “Bit” is the term for the smallest digital unit.

    Ripple, Ethereum, Stellar

    There are thousands more blockchains and cryptocurrencies. Ripple, for example, is primarily intended for cross-border use. Ethereum, the basis of the cryptocurrency Ether, is suitable for digital contracts (“Smart Contracts”) and is, therefore, popular as the basis for rights to securities and investments (“Security Token”). This also applies to Stellar, through which transactions should run particularly quickly.

    The term currency is misleading. It is sometimes possible to pay with Bitcoin, but cryptocurrency is not legal tender. It is only of limited use for handling everyday business, which is due to the limited number of transactions. Bank booking systems are much faster. Added to this is energy consumption. It is estimated that a Bitcoin transaction needs as much electricity as a two-person household in Germany in just over two months.

    First rules introduced

    The comparison with gold also lags, because there is no value behind cryptocurrencies. The course is based solely on the hope that they will still be in demand in the future.

    A type of voucher for services and products are "coins" or "tokens" that companies issued in "Initial Coin Offerings" (ICO). Among them were many dubious providers, Finanztest warned against this in 2017.

    Now there are the first rules. A license from the Federal Financial Supervisory Authority has been required for the safekeeping of crypto assets since 2020. A bill provides for the introduction of electronic securities and crypto-securities, which are only available in digital form. This is considered a milestone because companies and investors can do business directly with one another.

    How cryptocurrencies are practically used

    In order to buy, hold and sell crypto investments including cryptocurrencies, special software is required as a digital wallet or locker ("wallet"). It must match the blockchain technology on which the cryptosystems are based.

    If a wallet owner purchases a cryptosystem, a long sequence of digits and letters is entered in the corresponding blockchain as evidence of their ownership, the public key, i.e. the public address of the wallet. When selling, the owner gives the order to transfer the cryptosystem to the buyer (this is how cryptosystems change hands). To do this, she needs her private key, a password made up of numbers and letters.

    The computers in the decentralized network that keep the "cash book" (Distributed Ledger) check whether everything fits. If so, they add a record to the blockchain. It can now be seen that the owner has changed and, for example, interest, dividends, or distributions may now flow to him.

    Do not lose your private key

    So whoever has the private key has access to the cryptosystems. Fraudulent brokers, for example, pretended to help their customers set up accounts, learned the private key, and cleared the accounts. Access is no longer possible without a key. Like a German programmer in California who forgot the password for a hard drive and can no longer get thousands of Bitcoin.

    In addition, blockchain technology is still young and comparatively untested. Attackers can also paralyze file-sharing networks with massive continuous inquiries. In addition, nobody can be sure whether a cryptocurrency will exist in the long term.

    Token for an artwork by Warhol

    The coins of cryptocurrencies are mostly created decentrally in complex computing processes. Initially, a simple PC was sufficient for Bitcoin. Powerful machines have long been necessary, there are specialized companies.

    With other cryptographic systems, it is not possible for third parties to create new tokens through computing processes. At the end of 2020, for example, the Hamburg investment platform Finexity offered “digital shares” for 44,000 euros in the screen print “Vegetarian Vegetable Soup (1969)” by Andy Warhol. The tokens do not grant co-ownership of the work of art, but rights to a subordinated debt. The investors lend money to a company. They do not have co-determination rights.

    Financial regulators see security tokens as a type of security

    The term subordination is explained in the conditions of the bond: the company may suspend interest and repayments if it becomes insolvent. In the event of insolvency, subordinate creditors are only given a chance when all of the senior creditors have been satisfied. Usually, there is nothing left for them.

    Token-based, subordinated debt securities are currently most common among security tokens, which grant rights to investments or securities. The financial supervisory authority Bafin classifies security tokens as a "security of its own type" because the tokens make assets that were previously difficult to trade similar to securities, at least in theory.

    Anyone offering them to the public must publish at least one securities information sheet (WIB) that summarizes the most important information. From a volume of 8 million euros, a securities sales prospectus with comprehensive descriptions of the business model, economic situation, and, above all, the risks are required.

    Like all token-based investments, however, they can only be stored in suitable wallets and not in securities accounts.

    This is how cryptosystems change hands

    Cryptocurrencies and other crypto investments can be passed on according to the same principle: Seller A gives the order to transfer to buyer B. Computers in a network check this. If you give your okay, the data of the transaction will be sent to the blockchain together with others in a new block noted.