A crypto or cyber currency is digital money. Cryptography is the science of encrypting information. The digital currencies are based on their principle. All data on owners and movements are stored encrypted. And not just on one server, but on several thousand at the same time. Each transaction is stored locally in a network. Therefore it is almost impossible to forge transactions. This system is called blockchain.
Proponents see cryptocurrencies as the answer to traditional finance. Because digital money is no longer required by banks, the owners themselves become financial institutions. A central body that controls the flow of money and currency is missing. The buyers are always in control, but are also responsible for the security of the property.
How long has cryptocurrency been around and who invented it?
In the early 1990s, a group of programmers and cryptographers used email to discuss ways of protecting privacy in the digital space. Based on the term «cyberpunk», they called themselves cypherpunks. A well-known representative is the British Adam Back. He developed the first proof-of-work method on which cryptocurrencies are based. Put simply, the sending computer proves that it needed a certain amount of computing power for the outgoing message. The proof-of-work method was originally intended to avoid spam.
An active member of the Cypherpunk movement is the anonymous inventor of Bitcoin: Satoshi Nakamoto. However, the name is a pseudonym, the identity is still unknown. Because of the proof-of-work method, it is speculated that Adam Back is hiding behind the pseudonym. Others are convinced that Satoshi Nakamoto is not a single person, but a group.
On November 1, 2008, Satoshi introduced the idea of a cryptocurrency in “The Cryptography Mailing List”. He called it Bitcoin. The first transaction with Bitcoin was carried out just two months later, on January 12, 2009. Since 2011 the inventor has withdrawn more and more and leaves the further development of his ideas to others. Anyone interested in the detailed history of Bitcoin can find out on this interactive timeline.
What cyber currencies are there?
There are now over 3000 cryptocurrencies. But only around 100 achieve a daily trade turnover of more than 1000 US dollars. While Bitcoin is the best known as the first cryptocurrency, Ether, Ripple and Litecoin are also fighting for their place. Curious currencies like Cryptokitties are also gaining popularity. This is about breeding special virtual cats as possible and then selling them profitably.
How does Bitcoin work technically?
The most important technical basis for cryptocurrencies is the blockchain. This “block chain” is based on three concepts. The first is the open cash book. Every transaction within the blockchain is publicly viewable for every network participant. Invalid transactions are rejected as such within a short period of time thanks to this multi-eye principle. For example, if someone wants to transfer more bitcoins than they have, the transaction is not carried out.
In order to prevent this open cash book from being manipulated, it is decentralized with the second concept. The information is stored not only on one computer, but on an entire network of devices. Every person can keep a copy of the open cash book. This complete copy of the blockchain is called a full node.
But how do you ensure that every participant in the network has an identical copy of the cash book? This is where the miners come in. These keep the network up to date and monitor it. To confirm a transaction, you must first check whether it is valid; that is, whether the sender has enough money. Second, the miner must calculate a key code that allows him to enter the transaction in his cash book. This is where the proof-of-work method comes into play. Because a certain amount of computing power is required for the solution. Once the code has been found, the transfer is entered in the miner’s cash book. The code, also called the hash value, is then sent to all the nodes of the network. So every copy of the blockchain remains identical.
What are the advantages of Bitcoin?
Bitcoin’s main advantage is independence from financial institutions. Transactions are carried out directly between buyer and seller. If you want to make an international transfer today with the help of a bank, you need patience. There are also exchange and bank fees. A bank account can also have a limit. Bitcoin has no such restriction: If you want to sell all of your crypto money, you can do it within a few minutes.
The generation of new bitcoins is based on a complicated algorithm. This is designed so that there will never be more than 21 million bitcoins. Proponents of the cyber currency see this as an advantage over classic currencies. After all, central banks can decide how much money is printed. According to the proponents, the price of Bitcoin should stabilize as soon as all 21 million bitcoins are in circulation.
Thanks to the public blockchain, Bitcoin is transparent. This public also makes the cryptocurrency very secure. Nobody will be able to manipulate all full nodes at the same time. Despite this open bookkeeping, the owners of bitcoins remain pseudonymous. Because you don’t manage your assets with your own name, but with an identification code. Bitcoin can also be used worldwide, it does not have to be changed to other currencies first.
And what are the disadvantages of Bitcoin?
Even the biggest fans of the cryptocurrency know: Bitcoin is still in its infancy. Much is still unclear, requires clearer rules and, above all, time. In the early years, Bitcoin was used to traffick drugs and weapons illegally. The tax authorities are also a thorn in the side of the tax authorities, because clear laws are still missing.
At the moment, Bitcoin is not necessarily suitable as a means of payment, the exchange rate fluctuations are too big for it. That may be the reason why Bitcoin is hardly accepted as a means of payment outside the digital world. If you pay with it anyway, you can’t avoid the fees. These are used for the payment of miners.
If a financial institution ceases to exist, the owner also assumes responsibility: Those who lose the code for their bitcoins have no way of getting them back. The case of a British man who threw away a hard drive with 7500 bitcoins in 2013 became famous. Today (as of December 29, 2017), this hard drive would be worth over CHF 100 million.
The enormous power consumption of the cryptocurrency is also criticized: blockchain and mining use the same amount of electricity every year as the whole of Denmark. This enormous consumption also serves as protection. Hackers will hardly be able to muster that much energy.
Should I invest in cryptocurrencies?
In mid-December 2017, the EU Commission warned of the risks of cryptocurrencies. Investors should be aware that the price can go down as fast as it goes up. Precisely because the price has risen so sharply in recent months, experts warn of a bubble.
Despite this criticism, many investors have already made significant profits with Bitcoin. Because cryptocurrencies are no longer just a playground for computer fans and monetary policy revolutionaries, the value of Bitcoin multiplied in 2017. Basically, the same applies as for other investments: Only invest as much as you are willing to lose.
Where can you buy bitcoins?
According to a survey, eleven percent want to invest in bitcoins in Switzerland in 2018, nine percent already own some. * But how do you buy cryptocurrencies?
The easiest way is to go to a digital exchange. There are national and international exchanges for every cryptocurrency. There you define how many francs you want to buy bitcoins for, for example, and pay with your credit card. But not every stock exchange is serious, which is why you should inform yourself well before buying.
The most famous exchange is Coinbase. It comes from the USA and is supported by 32 countries. Here you can trade Bitcoin, Ether and Litecoin. Those who prefer a European stock exchange can register with bitcoin.de. The Bitcoin Suisse AG is located in Switzerland and a member of the Association for Quality Assurance in Financial Services (VQF). The Bity stock exchange is also headquartered in Switzerland.
How do I keep bitcoins safe?
After you have bought cryptocurrencies on a stock exchange, your balance is managed by this stock exchange. The bitcoins are yours, but they are in the account of the exchange, the so-called wallet. In the past, it was primarily stock wallets that were the victims of attacks. It is therefore advisable to transfer the bitcoins to a personal wallet. You get the unique code of your coins. Save this on multiple devices. These devices should best be offline. But note: if you lose the code, your money is gone.
As the course for bitcoins continues to rise, so does the interest of hackers. The blockchain itself is secure, but the personal computer is not always. Here is a comparison: The Swiss franc as a whole currency is very difficult to manipulate. But that doesn’t stop pickpockets from stealing a note from your wallet. Your bitcoins are only as secure as your virtual wallet. That is why there are now insurance policies for cryptocurrencies. Your crypto money is also insured within the Safe Pay Cyber Insurance of Basler Insurance. If someone misuses your data, gains access to your wallet and transfers your crypto money, Basler will compensate you for this financial loss of up to CHF 20,000.
Selling Bitcoins and Paying with Bitcoins
Bitcoins are also sold on the stock exchanges. This is very easy, for example, via Bitpanda. Here you only register with your own email address. You can be paid either via Sofort-Überweisung, PayPal or Amazon vouchers. Btcdirect works without any registration. The amount is paid out via bank transfer. Bity manages a very quick payout; sometimes you get the money the same day. The exchange even offers coin ATM at various locations in Switzerland.
As mentioned, bitcoins are not a stable means of payment at the moment. Nevertheless, you can also pay with the cyber currency in certain stores in Switzerland and even at the SBB ticket machine.
A transaction directly between two wallets is made possible via QR code and the crypto wallet app. After the transaction is confirmed by miners, the buyers and sellers wallets are adjusted. This check takes about ten minutes.