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Do you always switch off mentally when friends talk about Bitcoins and other cryptocurrencies?? Have you not yet understood how it works and what is so great about it?? Don’t worry, with this guide you’ll be smarter in ten minutes.
All the time, these Bitcoins, Ethereum, Ripple and other cryptocurrencies are in the news. Sometimes the price rises, then it falls, then someone calls it a bubble, a danger, then states want to ban it and others become billionaires. Don’t you have a clue what’s behind it either and go unobtrusively to the kitchen when someone says the word "Bitcoin" at the next party? in the mouth? Don’t worry, you’ll feel better after these seven answers.
Bitcoin, Ethereum, Ripple, cryptocurrencies: What it actually is?
Something like cryptocurrencies in a very simple form we all know: play money. Quite a few board and video games use their own currencies that you can use to pay within the game world. These are the banknotes in Monopoly as well as the gold coins in the Super Mario games.
Cryptocurrencies are now simply a serious form of play money, because they don’t want to serve as a means of payment in a game, but in the real world. A cryptocurrency is characterized by two features: First, it is digital, so there are no printed coins or bills, and second, transfers in this currency are encrypted (hence the prefix "crypto") so they cannot be hacked.
Why do we need digital currencies?
Euros and dollars have also long been able to be used digitally as a means of payment. So why do we need the more than 4.500 cryptocurrencies that currently exist?
Now, cryptocurrencies have a few advantages over conventional money. They are traded on a network directly between the sender and the receiver, there is no longer a bank in between that you have to create an account with and that carries out each of your transfers. There is also no central bank that can control and manage the currency.
This provides a cryptocurrency with greater independence from authorities. It’s a bit like traveling: You used to almost always have to book your vacation through a travel agent, but now you can go online and book your flights and hotels directly. In this analogy, however, the central bank is now missing.
How does something like that work technically??
The technical basis for all cryptocurrencies is the blockchain. It’s not that hard to understand. Basically, you can think of it as a series of blocks connected by a chain. Each block contains details of transfers that people have made with this cryptocurrency – to prove its validity.
Each block has an unchangeable and unique number. When a new block is added to the chain, the numbers of all previous blocks are stored in it. So it is not possible to remove or change blocks from the chain afterwards, because then the numbers in all following blocks would not be correct anymore. This makes the system very secure.
So all my transfers are public to everyone?
Yes and no. All cryptocurrency transfers are public, just like your account balance is visible at any time. But: cryptocurrency accounts are anonymous, they only consist of a number. Nobody knows which account is yours. In the blockchain blocks, for example, it only says that account 23 transferred 5.5 bitcoins to account 77 yesterday – no one knows who sent money to whom and for what.
Incidentally, this anonymity makes cryptocurrencies popular in places where people are heavily monitored – in China, for example. Stupidly, however, it also makes digital coins popular for criminals, because their transfers are equally untraceable.
I keep hearing that Bitcoins are mined will be. What does that mean?
In a conventional currency, a central bank, for example the ECB, constantly issues new money. It is the only one with the right to mint coins and print bills and also controls the money supply.
With cryptocurrencies, this instance is already missing in the concept, so someone else has to take over this task. For this purpose, the creators of cryptocurrencies have come up with a kind of lottery. It works like this (using bitcoin as an example):
All transfers with Bitcoins are first written to a publicly accessible list. Currently there are about 30.000 transactions in it. These are not valid yet, so the recipient has not received any Bitcoins yet.
They only become valid when someone takes any number of the transactions and adds them to a new block on the blockchain, appending it to the end of the chain. But this is not so simple.
To attach a block, a random number must be formed from the number of the old block and the data of all transactions of the new block, a so-called hash. This is basically a jumble of letters and numbers, which an algorithm calculates based on the data. This algorithm in turn contains a random element. So if you were to tell him the word "Bitcoin" ten times he would create ten different hashes from it.
The Bitcoin blockchain now specifies that a new block may only be appended if its hash meets a certain condition. This could be, for example, that with a "0 starts or a maximum of five times an "A" contains. The condition is constantly changing and it is chosen so that about every ten minutes a computer manages to fulfill it.
So the owner of this computer gets to append a new block. It also makes a certain number of transactions valid with it, so it makes sure that people get their money from transfers. That’s why it’s rewarded: if you attach a new block, you currently get 12.5 Bitcoins credited to it and also get all the fees for the transactions you’ve written to the block.
Cool, so I can also mine new Bitcoins?
Theoretically yes, you just need a free downloadable program for it. However, we advise against it. Worldwide, so many data centers are already constantly calculating new hashes that there are currently 12.000.000.000.000.000.000.000 hashes are needed before a new block is created. Even with a high-end PC, you need 20 years to do this. The probability of calculating a new block in this calculator lottery is vanishingly small and hardly worth the effort.
In addition, the yield is constantly decreasing: While there used to be 50 bitcoins for a new block, there are now 12.5 and will be even less in the future because the total amount of bitcoins is limited. However, with the popularity of the currency, of course, the transfers increase and with them the amount of fees.
Why do cryptocurrencies rise and fall in value so rapidly??
At the beginning of 2017, one bitcoin was still worth $964; at the end of the year, it was worth around 19.000 dollars. Now it is about 8.000. Sometimes the price rises or falls by 20 percent in one day. The expert also says: it is very volatile.
There are two reasons for this: First, there is precisely no central bank, whose job with conventional currencies is also to keep the exchange rate as stable as possible. The euro or dollar will virtually never fluctuate in value as much as bitcoin, because the ECB and Fed actively prevent it from doing so. A stable exchange rate is the basis for a currency to be used as a means of payment across the board.
However, the fact that the Bitcoin exchange rate has risen to as much as 19.000 per coin is simply due to the laws of the market. The amount of Bitcoins is limited, but the popularity of the currency, i.e. the demand for it, is growing faster and faster. More and more people are interested in cryptocurrencies and want to own some themselves – so the price is rising.
Is this a bubble?
As a "bubble" is the term used by experts when the price of a certain good rises much higher than its actual value. The real estate crisis in the USA, for example, was a bubble because banks paid and demanded horrendous sums for mortgages that were basically worth nothing because the homeowners could not pay them at all.
With cryptocurrencies, it’s not so clear, because it’s hard to say what the exact value of a Bitcoin is. The estimates of experts range from 20 to 100.000 dollars per bitcoin.
In a "bubble" the theory also assumes that the value will rise until the market realizes the insanity in it. Then "the bubble bursts" and the value of the good falls in the worst case to 0. This is not to be feared with Bitcoin for now, after all, the number of places that accept the digital currency as a means of payment is growing, and its popularity will not drop completely to 0 either. However, the price will continue to fluctuate sharply.
Where can I actually pay with Bitcoins?
A currency is only useful if you can also pay with it. This is currently primarily online. Microsoft, Expedia and Lieferando are about three stores where you can at least pay with Bitcoins. Many organizations – from Wikileaks to Greenpeace – also accept donations in this form.
Outside the Internet, there are currently about 200 stores in Germany that accept Bitcoins. These are spread across the country many restaurants and cafes, but also tax consultants, a bouncy castle rental and the Flirt Institute in Cologne.
Who actually thought up these cryptocurrencies??
Bitcoin as the first cryptocurrency has been around since 2008. A programmer named Satoshi Nakamoto introduced it in an essay a month after the bankruptcy of the U.S. bank Lehman Brothers, and in January 2009 brought the first 50 Bitcoins among the people and started the blockchain for it.
Bitcoins – and cryptocurrencies as a whole – are thus also a kind of reaction to the global financial crisis and a protest against banks and governments. This is reflected in the concept of the absence of both institutions.
Satoshi Nakamoto is not a real person, by the way, but a pseudonym. To date, no one knows who is actually behind it, although there are many rumors. He did not create Bitcoin out of thin air. The idea of the blockchain dates back to the 1990s and cryptocurrencies already existed before that, but only as a concept. Nakamoto is the first to implement it consistently.
Why are there 4 today.500 cryptocurrencies? Wouldn’t a handful do?
Since the software to create a new cryptocurrency is freely available, theoretically anyone can create their own coins. The fact that there are so many is also due to a tricky construct.