This is how the cryptocurrency works

 Bitcoins are considered the new gold. How does crypto money work? Where can you get bitcoins? Read here whether it is worth investing in cryptocurrencies.

Cryptocurrency bitcoin golden coin

Bitcoin: simply explained

Do you just want a brief overview of the topic? Then read our financial test special Bitcoin: Simply explained.

    Bitcoins - the digital coins

    In October 2021, Bitcoin hit a new all-time high of more than $ 66,000. Its price has more than doubled since July. One reason for the renewed hype: In the USA, the first Bitcoin ETF started trading in mid-October 2021. You can read how it works in the chapter on financial products with bitcoins.

    Bitcoins have only been around since 2009. At the beginning of 2011, the Bitcoin exchange rate was one dollar, now the crypto money is worth more than 60,000 times. For comparison: The value of the share of the most expensive company in the world, Apple, has "only" increased by 1,440 times since its IPO around 40 years ago, including dividends.

    Tip: Our special Bitcoin: Simply Explained offers a brief introduction to the subject of Bitcoin.

    Cryptocurrency soaring

    chart shows how Bitcoin has developed
    The chart shows how Bitcoin has developed from October 2013 to December 2, 2021, per day (source: Statista).

    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. Possibly this is a group of people.

    Bitcoins, or BTC for short, have no coins or 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 record a transfer with Bitcoins, complicated invoices have to be solved. If you are the first to do this, you will receive Bitcoins as a reward. One speaks of mining, in United states the "digging for bitcoins".

    Bitcoins - you should know that

    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 Bitcoin 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. More on this in our special on cryptocurrencies: Coins and tokens - speculation or fraud?
    Crypto investments.
    Our special crypto investments: The risky world of Bitcoin & Co shows how the crypto world works in relation to investments.

    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 anonymously to a large extent. Bitcoin also hit the headlines in connection with ransom demands.

    It's over at 21 million bitcoins

    According to the website Coinmarketcap, there have been a good 18.8 million Bitcoins so far, with the end of 21 million. The growth continues to slow down. You can also trade fractions of bitcoins, for example, millibitcoins.

    Glossary - cryptocurrency, blockchain, wallet

    • Blockchain: The blockchain consists of data records that are strung together. 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.

    Other cryptocurrencies

    The increase in the price of Bitcoin attracts imitators. There are now said to be more than 6,000 cryptocurrencies. Bitcoin is the market leader with a market capitalization - the number of coins multiplied by their current value - of around $ 870 billion. Ethereum is in second place with $ 412 billion, followed by Cardano with around $ 81 billion. Almost 100 digital currencies now have a market capitalization of more than one billion dollars, including Tether, Solana, Ripple, and the fun coin Dogecoin. A few years ago, only around two dozen cryptocurrencies had a ten-digit market capitalization. There are still numerous small currencies that are less than a million dollars in weight.

    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 or the fear of government regulation. Time 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 the 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 computers 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 has to 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 have to 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.

    Financial products with bitcoins

    Not only private investors are interested in Bitcoins, 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. Banks issue certificates. The first ETFs on Bitcoin started trading in the USA in October 2021.

    This is how the Bitcoin ETF from ProShares works

    The ProShares fund does not invest in bitcoins but in futures. With them, you do not rely on the current, but on the future price of Bitcoin. The advantage: An ETF is a regulated financial product and therefore safer than buying Bitcoin via unregulated platforms on the Internet or wallets, digital purses that can be emptied by hackers, for example.

    Due to the construction with futures, however, the ETF does not develop in the same way as Bitcoin itself. When a future expires, the money must be invested in the next future. So-called rollover losses can arise. The process of commodity ETFs is well known, which also do not invest in the commodities themselves, but in the future. For example, the Bloomberg Commodity Index, which tracks the price development of raw materials, has risen 85 percent since its low at the end of March 2020. The comparable index on the futures has risen by only 63 percent.

    Bet on bitcoins with certificates

    One of the papers with which investors can speculate on Bitcoin growth is the Bitcoin certificate from 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 buying and selling prices.

    The Swiss bank Vontobel is also starting with certificates with which investors can participate in the price development of Bitcoin. Two of them (Isin DE 000 VL3 TBC 7 and DE 000 VL6 LBC 7) expire in mid-September. The last prices were around 3,700 euros. Another certificate (DE 000 VX1 BTC 7) in smaller denominations is new on the market, the price was most recently around 400 euros.

    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 in the event of the issuer's bankruptcy. The way in which the certificate providers map the performance of the cryptocurrencies can also differ. There is no one official Bitcoin rate.

    ETC work in a similar way to certificates

    The British company HANetf, for example, offers the HANetf BTC, etc Bitcoin exchange-traded crypto (Isin DE 000 A27 Z30 4) also a participation paper on the Bitcoin: Investors participate in the development of the cryptocurrency. Legally, however, it is not a fund with a special fund. An ETC is not an ETF, but a bond with similar functionality and risks as certificates. According to the provider, the paper is backed 100 percent with Bitcoin for the purpose of security. The annual total expense ratio (TER) is 2 percent.

    Bitcoins in funds

    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 money, for example using Bitcoin certificates or ETC. This is what the Actis Datini Valueflex mixed fund did, for example. The second-largest single position in the fund is a Bitcoin certificate. Other mixed fund managers are also showing interest in investing in Bitcoin certificates.

    Caution, the danger of falling

    Anyone who buys Bitcoin directly or indirectly speculates on price gains with certificates, for example, should only use money that they do not need. A total loss is possible, prices fluctuate sharply and quickly - much more than other investments.

    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.

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

    Legal tender in El Salvador

    In early September, El Salvador introduced Bitcoin as legal tender. The residents of the Central American country can now pay for their daily purchases with Bitcoin and also transfer their taxes in the digital currency. The state had its own app programmed for it. Vending machines have also already been set up.

    In view of the strong fluctuations, acceptance in the population has so far been moderate. Paying in Bitcoin could save Salvadorans, many of whom work abroad, from fees for money transfers. People without a bank account may now also have access to the banking system - provided they have the technical equipment.