Should I invest in cryptocurrencies?
Investing in cryptocurrencies: everything you need to know
Lana Iliev, April 30th, 2021
Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), Litecoin (LTC), Monero (XMR), IOTA (MIOTA) - Cryptocurrencies are ubiquitous in the media. Spectacular Success stories and profitsthat run into the millions, if not billions, have been reported - but it is advisable to go into that virtual money to invest and is digital currencies a new financial instrument?
What is a cryptocurrency?
Cryptocurrency is the umbrella term for virtual currencies that are used as digital means of payment can act.
No banks are required for the payment processes. It takes the place of financial institutions decentralized network, whose participants manage transactions and generate new units of currency. That makes it possible Blockchain technologyunderlying every cryptocurrency.
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 branch of computer science that deals with the encryption of secret data.
A blockchain (made up of “block” and “chain”) is often referred to as a “collective accounting system”. In data blocks, it contains encrypted information about all transactions that have been carried out with a specific cryptocurrency. It functions as a database, the blocks of which are not on a central server, but on the computers of the large number of participants it manages.
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 crypto currency. This process is called "mining".
Once a transaction has been written into the blockchain, it can no longer be changed by any participant. This protects it and individual currency units cannot be used more than once. For this reason, there is no longer any need for established institutions that were previously always involved in monetary transactions.
Why are there cryptocurrencies?
The goal of the first crypto currency Bitcoin was simply to create a payment system that works without financial institutions, in order to allow consumers a certain amount of informational self-determination and anonymity. As a result, Bitcoin has been used, among other things, as a means of payment for illegal transactions in recent years. Although this fact 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 are a secure, fast and cost-effective alternative for transferring sensitive data.
For example, in a pilot project, the United Nations World Food Program is using 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 reach those in need directly and corruption is no longer a problem for the organization.
Facebook also wants to introduce its own digital currency with 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 of the plans of the social media giant.
What cryptocurrencies are there?
In 2009, the first and probably best known crypto currency was created: Bitcoin (BTC). In terms of market capitalization, the crypto firstling still makes up the largest share of the virtual currency market today. 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 crypto currencies worldwide and it feels like the number of virtual currencies is growing every day. But why are there so many different currencies anyway?
First of all, the technology has been improved and further developed since the appearance of Bitcoin. This paved the way for currency alternatives that offer many advantages over Bitcoin and have their own focus.
Litecoin, for example, is faster than Bitcoin, with Ethereum not only currency transactions can be carried out, but also contracts, so-called “smart contracts”, and Ripple is to be used by banks to accelerate regular transfers.
Bitcoin boom and crypto madness
In addition to technological progress, came the Bitcoin boom. In mid-December 2017, a single bitcoin was worth almost $ 20,000. In the following months the value plummeted. At the end of 2018, a Bitcoin was sometimes worth less than $ 3,000 - that's a loss of 85% in value. By March 2021, the value of a single bitcoin had risen back to over $ 50,000. The record-breaking assets of the alternative currency make the market particularly interesting for speculation and create incentives for developing further crypto currencies and issuing new crypto units.
New ideas, plans and business models for cashless digital currencies are constantly emerging. Whether crypto currencies that are in diamonds ("Carat"), crypto money that is given as a reward for good deeds ("Hullcoin"), or a currency that is simply a parody of Bitcoin ("Dogecoin") - the imagination seem no limits.
How does a 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 widely accepted, 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 very much. In this respect, it is often risky for retailers to accept cryptocurrencies, for example. Nevertheless, more and more online shops are offering to settle outstanding 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.
The wallet and the crypto values in it can only be accessed using the key. If the owner loses the numeric code, he can no longer access his wallet.
How can I invest?
Currently, the total market capitalization of all cryptocurrencies measured in US dollars is over two trillion and where there is so much capital in circulation, money can also be invested there. There are different ways in which cryptocurrencies can be turned into money.
|Currency trading||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 regulations that monitor the money supply and intervene 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.|
|Crypto mining||Another possibility is that already mentioned above Mining of cryptocurrencies. In this case, participants in the decentralized crypto network generate new units of a currency that they can then sell at a profit.|
|Stock exchange|| There are also various options for investing indirectly in digital currencies via the stock exchange. There are Bitcoin futures with which stock exchanges can bet on fluctuations in Bitcoin.|
Corresponding ETFs (Exchange Traded Funds) are also largely in the planning stage - however, such a financial product has not yet been approved by the US Securities and Exchange Commission. However, in 2020 the world's first Bitcoin ETF was launched in Brazil and another ETF for the Canadian market followed in 2021.
In Europe it is now possible to invest in crypto ETN (Exchange Traded Note). But be careful: ETN and ETF are not the same. While the money invested in an ETF is treated as a separate asset and is protected in the event of the ETF issuer's bankruptcy, this does not apply to an ETN.
|shares||In addition, there is the possibility of investing money in stocks of companies that are active in the field of cryptocurrencies. For example in the Bitcoin Group, which manages the online trading platform bitcoin.de.|
|ICO||In the case of Initial Coin Offerings (ICO), crowdfunding is used to generate capital for the new issue of another cryptocurrency. Investors' capital is then paid back 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 brings with it. So far, no one can predict with certainty how the virtual currencies will develop.
That is always the case, especially in action Risk of total loss, because the market value of a crypto currency 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 by nature evade any regulation 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.
In principle, the value of a cryptocurrency is based on trust and acceptance. In contrast to established currencies such as euros, dollars and Co., which are monitored and secured by central banks and states, a crypto currency is merely a technical system in which everyone can participate and for which the stability of the currency does not play a role.
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 led them to withdraw billions from the heated crypto market. As a result, the rates of the individual currencies collapsed as quickly as they had risen.
Cryptocurrencies are extremely volatile and rates can change at a radical rate. 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 investments. If you keep a cool head with daily price fluctuations in the double-digit range, an investment in cryptocurrencies may be an interesting, speculative addition to the other investments in your portfolio.
Individuals who own a large stake in a currency could use it to manipulate rates to their advantage. In the case of cryptocurrencies, there are neither laws that prohibit this, nor control 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. Most of the time, you have to exchange for one of the larger crypto currencies such as Bitcoin in order to then sell it for euros. This can be a problem, especially with young currencies from one of the numerous new issues.
In some cases, transactions take a long time because the blockchain is overloaded. During the time you wait for the transfer, the high volatility can cause prices to fall and you can 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 crypto currencies guarantee anonymity, it is not necessarily traceable who owns them. That makes them perfect prey for cyberattacks. In January 2017, what was probably the biggest robbery to date took place: Hackers relieved the Japanese crypto exchange Coincheck and its customers by 500 million NEM, at this point the equivalent of around € 500 million.
The oldest blockchain has been around since 2009 and has been working on it ever since. So far, there have been two incidents that affected the Bitcoin based on it. It is not yet foreseeable whether this will repeat itself in the future or whether far-reaching errors will occur.
In addition to the drastic investor risks, cryptocurrencies are characterized by another disadvantage: their management and generation requires massive amounts of electricity.
Cryptocurrencies: a new financial instrument?
It seems that crypto technology has a lot of potential. This is the conclusion of a study by the Hasso Plattner Institute from 2018. At the moment, no one knows what role crypto currencies will play and whether one of the more than two thousand that are currently there will 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 has so far been 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 crowdinvesting, in which a classic investment instrument is combined with a digital platform. By using the platform, private investors can invest quickly, easily and at no cost in mezzanine capital, an asset class that was previously only reserved for large investors.
BERGFÜRST is one such online platform that specializes in projects in the real estate sector. Already from 10 € Investors can invest in investment opportunities that come with a Fixed interest from 5.0% to 7.0% p.a. are equipped.
This is in contrast to cryptocurrencies a regulated market, because in recent years more and more laws on equity crowdfunding have been passed. In addition, the platforms are now obliged to issue information sheets (VIB) that are permitted by BaFin (Federal Financial Supervisory Authority).
Discover real estate crowdinvesting now
Image Copyright: Yuri Shebalius / Shutterstock.com
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