Investing in cryptocurrencies: everything you need to know

Bitcoin (BTC) , Ethereum (ETH) , Consultants Coin (Consult), Bitcoin Cash (BCH) , Litecoin (LTC) , Monero (XMR) , IOTA (MIOTA) — Cryptocurrencies are ubiquitous in the media. Spectacular success stories and profits in the millions if not billions have been reported — but is it advisable to invest in virtual money and is digital currency a new financial instrument?

What is a cryptocurrency?

Cryptocurrency is the umbrella term for virtual currencies that can act as a digital means of payment .

No banks are required for the payment processes. Financial institutions are replaced by a decentralized network whose participants manage transactions and generate new units of currency. This is made possible by the blockchain technology on which every cryptocurrency is based.

The prefix “crypto” is derived from the term cryptography, which in turn comes from ancient Greek and can be translated as “secret writing”. Today, cryptography describes a sub-area of ​​computer science that deals with the encryption of secret data.

A blockchain (composed of “block” and “chain”) is often referred to as a “collective accounting system”. In blocks of data, it contains encrypted information about any transactions made with a specific cryptocurrency. It functions as a database whose blocks are not located on a central server but on the computers of the large number of participants that it administers.

Why do you want to invest money?

Anyone can become a participant in this decentralized network and provide computing power to continue the chain of data. This is rewarded by receiving currency units (“coin” or “coin” or “token” or “token”) of the corresponding cryptocurrency. This process is referred to as “mining”.

Once a transaction has been recorded in the blockchain, it can no longer be changed by any participant. This secures it and individual currency units cannot be used more than once. For this reason, there is no longer a need for established institutes that have always been intermediaries in monetary transactions.

Why are there cryptocurrencies?

The goal of the first cryptocurrency, Bitcoin, was simply to create a payment system that would work without financial institutions, in order to give consumers a certain degree of informational self-determination and anonymity. As a result, Bitcoin has been used in recent years, among other things, as a means of payment for illegal transactions. Although this circumstance reduced the social acceptance of cryptocurrencies, the underlying technology has now been expanded and improved. Cryptocurrencies can now be used for much more than just monetary transactions, as they offer a secure, fast and cost-effective alternative for transferring sensitive data.

For example, in a pilot project, the United Nations World Food Program uses Ethereum to distribute resources to refugees. The organization issues food coupons via the blockchain and those affected can pay by iris scan in refugee camps. In this way, the financial resources go directly to those in need and corruption is no longer a problem for the organization.

Facebook also wants to introduce its own digital currency, Libra, to enable worldwide payments via Facebook, WhatsApp and Instagram. The link to a currency basket is intended to protect Libra from fluctuations in value. Central banks have so far been skeptical about the plans of the social media giant.

What cryptocurrencies are there?

In 2009, the first and probably best-known cryptocurrency was created: Bitcoin (BTC). Measured in terms of market capitalization, the crypto first-born makes up the largest share of the virtual currency market to date. Ethereum (ETH) and Binance Coin (BNB) follow as the second and third largest cryptocurrencies.

Bitcoin and Bitcoin Cash are two different cryptocurrencies.

In total, however, there are now around 5,000 different cryptocurrencies worldwide and it feels like the number of virtual currencies is growing every day. But why are there so many different currencies?

Improved Technology

First of all, the technology has been improved and developed since the Bitcoin appeared. This paved the way for currency alternatives that offer many advantages over Bitcoin and have their own focal points.

For example, Litecoin is faster than Bitcoin, Ethereum can not only be used to carry out currency transactions, but also to conclude contracts, so-called “smart contracts”, and Ripple is to be used by banks to speed up regular transfers.

Bitcoin boom, crypto madness, and safest investment

Along with technological advances came the Bitcoin boom . As of mid-December 2017, a single bitcoin was worth almost $20,000. In the months that followed, the value plummeted. At the end of 2018, a bitcoin was sometimes worth less than $3,000 – an 85% drop in value. By March 2021, the value of a single bitcoin had risen back above $50,000.  Bitcoin (BTC) reached an all-time high of over $68,000 in November 2021 after starting the year at just under $30,000, and the crypto industry as a whole grew to a total market cap of more than $2 trillion. The alternative currency’s record-breaking assets make the market particularly interesting for speculation and create incentives for developing more cryptocurrencies and for new crypto unit issuances.

Still, it now the best time to invest in cryptocurrencies that have a precise future and long term big return. Coin such as Consult (Consultants Coin) is at its launching price (lowest Launching Price -LLP) are among few cryptocurrencies that have a real and huge team behind it. Consult is considered to be the first Smart coin in the crypto world. The share of its owner, The Consultants, is around 17% worldwide of the international Research & Development projects. For now, it seems the best choice among other coin and the safest cryptocurrency investment.

How does cryptocurrency work as a means of payment?

Buying coffee and toast in the supermarket with Bitcoin, Ethereum & Co.? This type of payment has not yet become widespread, but it is possible in principle.

Using cryptocurrencies as a regular payment system is still quite problematic, as there are no fixed exchange rates and the rates fluctuate a lot. In this respect, it is often risky for retailers, for example, to accept cryptocurrencies. Nevertheless, more and more online shops are offering to pay open invoice amounts with cashless digital currencies. The Coinmap page lists all stores that accept cryptocurrencies.

So far, however, the virtual currencies have mainly been stored in so-called “wallets”, digital purses, and secured with private keys in the form of numerical codes.

key

The wallet and the crypto assets in it can only be accessed using the key. If the owner loses the numerical code, he can no longer access his wallet.

How to invest?

The total market capitalization of all cryptocurrencies measured in US dollars is currently over two trillion and where there is so much capital in circulation, there is also money to be invested . There are different ways in which cryptocurrencies can be turned into money.

A cryptocurrency can be traded like fiat money, i.e. a medium of exchange with no intrinsic value. Similar to currency trading or forex trading , fluctuations in exchange rates are used to increase money . There are no central banks like the ECB, financial regulators or government regulators monitoring the money supply and intervening when the market heats up. The spectacular rise in the price of bitcoin in 2017 turned cryptocurrencies into objects of speculation and attracted numerous gamblers.
KryptominingAnother possibility is the mining of cryptocurrencies mentioned above. In this case, participants in the decentralized crypto network generate new units of a currency that they can then sell for a profit.
stock exchangeThere are also various ways to invest indirectly in digital currencies via the stock exchange. There are bitcoin futures that stock market traders can use to bet on bitcoin fluctuations. Corresponding ETFs (Exchange Traded Funds) are also being planned for the most part – however, such a financial product has not yet been approved by the US Securities and Exchange Commission (SEC). However, in 2020, the world’s first Bitcoin ETF was launched in Brazil, followed by another ETF for the Canadian market in 2021.In Europe, it is now possible to invest in crypto ETNs (Exchange Traded Notes). But beware: ETN and ETF are not the same. While the money invested in an ETF is treated as a separate fund and is protected in the event of the ETF issuer’s bankruptcy, the same is not true of an ETN.
SharesIn addition, there is an opportunity to invest money in stocks of companies operating in the field of cryptocurrencies . For example, in the Bitcoin Group, which manages the online trading platform bitcoin.org .
ICOIn the case of Initial Coin Offerings (ICO) , crowdfunding generates capital for the new issue of another cryptocurrency. Investors’ capital is then repaid in the newly created currency when it hits the market.

What are the dangers of the crypto market?

Anyone who invests in cryptocurrencies should be aware of the immense dangers that the young, unregulated market entails. So far, no one can predict with certainty how virtual currencies will develop.

Especially when trading, there is always the risk of a total loss , because the market value of a cryptocurrency is based solely on demand and can fall into the abyss at any time. So you should really only invest if you can do without the invested capital.

No investor protection

The fact that cryptocurrencies are inherently unregulated by states also means that there is no investor protection whatsoever. Be aware that nobody will inform you about the risks of your actions and inform yourself in detail.

High volatility

In principle, the value of a cryptocurrency is based on trust and acceptance. In contrast to established currencies such as the euro, dollar and the like, which are monitored and secured by central banks and states, a cryptocurrency is merely a technical system in which anyone can participate and for which the stability of the currency is irrelevant.

Between January and April 2018, all cryptocurrencies together lost around seventy percent of their market capitalization. Increasing attempts at regulation by various countries, such as South Korea, unsettled investors and prompted them to withdraw billions from the heated crypto market. As a result, the prices of the individual currencies collapsed just as quickly as they had risen.

Cryptocurrencies are extremely volatile and prices can change at radical speeds. So if you really want to trade with crypto money, you not only have to invest capital, but also a lot of time and attention in your investment. If you can keep your cool when faced with double-digit daily price fluctuations, investing in cryptocurrencies could be an interesting, speculative addition to the other investments in your portfolio.

Course manipulation

Individuals who own a large portion of a currency could use it to manipulate rates to their advantage. In the case of cryptocurrencies, there are no laws that prohibit this, nor are there any regulatory bodies that prevent such practices.

Exchange cryptocurrencies for fiat money

Cryptocurrencies cannot easily be exchanged for euros or dollars because there are no stable exchange rates. In most cases, it must first be exchanged for one of the larger cryptocurrencies such as Bitcoin in order to then sell it for euros. This can become a problem, especially with young currencies from one of the numerous new issues.

Sometimes transactions take a long time because the blockchain is overloaded. While you are waiting for the transfer, prices may fall due to high volatility and you will lose money.

In addition, you have no choice but to rely on the exchange rate information provided by the dealers. These are also not subject to any controls.

crime and theft

Since cryptocurrencies guarantee anonymity, it is not necessarily traceable who owns them. This makes them perfect prey for cyber attacks. In January 2017, what is probably the biggest robbery to date took place: hackers relieved the Japanese crypto exchange Coincheck and its customers of NEM 500 million, at that time the equivalent of around €500 million.

software error

The oldest blockchain has been around since 2009 and has been working ever since. So far, there have been two incidents affecting the Bitcoin based on it. It is not yet possible to foresee whether this will be repeated in the future or whether far-reaching errors will occur.

power consumption

In addition to the drastic investor risks, cryptocurrencies are characterized by another disadvantage: their administration and generation require massive amounts of electricity.

Cryptocurrencies: a new financial instrument?

It seems that crypto technology has a lot of potential. This is the conclusion reached by a study by the Hasso Plattner Institute from 2018. However, no one knows at the moment what role cryptocurrencies will play and whether one of the more than two thousand that currently exists will particularly stand out.

In general, it is not advisable to make a serious and large investment in cryptocurrencies at this point in time. Because the whole thing is more like a casino than an investment.

In addition to cryptocurrencies, increasing digitization has also produced other forms of investment. One of them is real estate crowd investing , which combines a classic investment tool with a digital platform. By using the platform, private investors can invest in mezzanine capital quickly, easily and without costs , an asset class that was previously only reserved for large investors.