What are cryptocurrencies good for?

What are cryptocurrencies? Answers to the 10 most important questions

If one topic besides Corona dominated the media at the start of 2021, it was the new highs for cryptocurrencies. The price of a Bitcoin recently climbed above the $ 60,000 mark for the first time in history. But what are crypto currencies and why are prices and popularity rising so rapidly?

What is a cryptocurrency?

The word cryptocurrency denotes one digital currencywhich is encrypted by a complex algorithm (cryptographically). Cryptocurrencies are used to store value or trade. To a certain extent, this is reminiscent of traditional state currencies. However, cryptocurrencies have not (so far) been issued by central banks and are therefore not subject to state control. Nevertheless, in the past countries have restricted the trading of cryptocurrencies with bans.

Cryptocurrencies are based on blockchain technology. A blockchain is a decentralized database that is distributed across numerous computers at the same time and records transactions. This decentralization also makes the security of the blockchain technology.

A distinction must be made between private tokens and classic independent cryptocurrencies. More and more companies have also issued their own cryptocurrency, which is usually referred to as a token. These tokens can either certify a share in the company (security token) or enable the company to purchase goods or services (utility tokens).

Why are cryptocurrencies expensive?

In terms of their valuation, cryptocurrencies behave in the same way as precious metals such as gold and silver. The price is determined by supply and demand. Therefore, we are currently seeing a sharp increase in prices due to the sharply increasing interest in many crypto currencies. The reason for this is simple: demand is increasing rapidly while supply remains de facto constant.

However, unlike stocks, most cryptocurrencies have no intrinsic value. Siemens shares, for example, build on the value of employees and company assets, among other things. This is how stocks differ from cryptocurrencies.

How do cryptocurrencies work?

Cryptocurrencies are no longer kept in a bank, but everyone has their own wallet. There are now numerous providers and different types of wallets. The wallets differ in particular in terms of security and user-friendliness. Each transaction then takes place directly between the wallet of the sender and that of the recipient of the cryptocurrency.

Your assets are stored directly in the wallet. A central bank, clearing houses or the traditional SWIFT network are no longer necessary. This way, crypto transactions tend to be faster than transfers in fiat currency. In addition, there are no fees for transfers to distant countries. And, in contrast to the euro, cryptocurrencies can in principle be traded at any time, so that after Friday evening you don't have to wait until the bank counters open again on Monday. A transaction on Sunday arrives at the recipient just a few minutes later.

Which and how many cryptocurrencies are there?

The CoinMarketCap platform currently lists around 8,000 cryptocurrencies. However, the number is growing every day. The cryptocurrencies and tokens differ considerably in their properties, their history and use. The five largest cryptocurrencies make up more than 80 percent of the industry's market capitalization.

In addition, many of the crypto currencies in circulation were created as "forks" from another crypto currency. For example, Bitcoin Cash and Bitcoin SV have split off from the original Bitcoin BTC (a so-called fork).

What are the most famous and most liquid cryptocurrencies?

The seven largest cryptocurrencies have a market capitalization of over $ 20 billion and are as follows:

  • Bitcoin
  • Ethereum
  • Binance Coin
  • Tether
  • Cardano
  • Ripple XRP
  • Polkadot

Advantages and disadvantages of cryptocurrencies

Cryptocurrencies are independent of government organizations and are therefore not subject to the influence of political decisions and creative will. In addition, many cryptocurrencies are (pseudo-) anonymous. In contrast to a bank transfer, they cannot be traced back or can only be traced with great effort.

One of the disadvantages, for example, is the still comparatively low acceptance of cryptocurrencies by retailers. In order for a currency to be used for trading, it must be accepted by traders. Although there are now more and more providers who accept cryptocurrencies, we are still a long way from a mass market. After all, Elon Musk recently announced personally that he is investing 1.5 billion US dollars from the assets of his company Tesla in Bitcoin and that new Teslas can also be paid for with the digital currency in the future.

  • regardless of state influence
  • rapidly increasing popularity
  • Blockchain is seen as a big trend for the next few decades
  • 24/7 availability of trading opportunities
  • sometimes extremely high power consumption
  • still low market penetration for online payments
  • low usability of many offers
  • Whoever loses their access data will irrevocably lose them and with it access to their money / investment
  • no state-guaranteed security for your assets

Why are cryptocurrencies becoming more popular?

On the one hand, because of the advantages of decentralization and independence, cryptocurrencies are becoming increasingly popular. On the other hand, the speculative thought is also in the foreground for many investors. At the moment there seems to be no stopping the price of many cryptocurrencies. Bitcoin's price rose by over 200 percent in the past few weeks alone. Many other and unknown crypto currencies have recently risen extremely strongly and in some cases even more clearly than the key currency of Kypto. These success stories attract many investors.

In a research report from the beginning of the year, the analysts of the US bank JPMorgan Chase forecast a long-term Bitcoin price target of 146,000 US dollars, based on the assumption that the cryptocurrency will gain popularity as an alternative to gold and that professional investors will increasingly invest.

How can I invest in cryptocurrencies?

If you want to invest in cryptocurrencies for the first time, you first need a wallet. This is practically a digital wallet and there are plenty of free options online. However, there are also wallets as hardware that look like a USB stick. These offer more security, but are no longer free. If you only want to invest a small amount for testing, you can even simply use the integrated wallet of many trading platforms. Because in order to acquire crypto currencies, you need a corresponding trading platform.

There are now numerous service providers from all over the world who offer this service. The largest trading venues are operated by the US company Coinbase and the Binance exchange, launched in China, with new headquarters in Malta. Both companies do not currently adhere to German legal norms, as they do not offer an imprint on their website. However, there are also German providers, such as the Bison app from the Stuttgart Stock Exchange.

What is the criticism of cryptocurrencies?

Although cryptocurrencies are enjoying a rapidly increasing popularity and a true price rally, there is also criticism of cryptocurrencies again and again. At least in the past, it was often claimed that these are mostly used for illegal business due to the possible anonymity. As with cash, this can never be completely avoided, but now you have to identify yourself on most platforms before you can buy cryptocurrencies.

A completely different point of criticism is the power consumption: The University of Cambridge recently published a study and put the power consumption of the most popular crypto currency Bitcoin in relation to states. Bitcoin shows a higher annual electricity consumption than the Netherlands and is roughly on par with Argentina (44 million inhabitants). However, many cryptocurrencies have recognized this point and rely on a comparatively different algorithm in order to significantly reduce power consumption.

Can the value of cryptocurrencies drop to zero?

While it is very unlikely that the value of the major cryptocurrencies like Bitcoin and Ethereum will immediately drop to zero, in theory this cannot be ruled out either. It is also very unlikely that the value of the other lesser-known cryptocurrencies will drop to zero. In the case of smaller currencies, however, it is conceivable that the value will collapse sharply and only remain just above a value of zero. However, this is the worst-case scenario, which is important to know, but is very unlikely for the well-known crypto currencies.

Reading tip: Bitcoin soaring: what's next in 2021?

What are the dangers of investing in cryptocurrencies?

Cryptocurrencies like Bitcoin and Ethereum are currently experiencing a real high. Some cryptocurrencies climb several hundred percent in a matter of weeks or months. How sustainable this development is remains to be seen. For some market participants, Bitcoin is the new gold, others see a big bubble through the cheap money of the central banks.

“For me, Bitcoin is not an investment vehicle, but a pure narrative, a highly contagious one at that. Nobel laureate in economics, Robert Shiller, to whom I owe this thought, sums it up: ‘Bitcoin has no value until people think it has one’. If no one can be infected ’by this story, it will be over”,

explains Dr. Hans-Joerg Naumer, Global Head of Capital Markets at Allianz Global Investors. Anyone who is new to investing in crypto currencies should at least be aware that there have often been large and very sudden setbacks in the past. It is therefore advisable for new investors to enter the market very slowly and only ever invest the amount that can be lost painlessly. Alternatively, you can wait for a reset and take the chance to get in then.

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