How does the crypto currency work

Bitcoin & Co .: Crypto currencies simply explained

© iStock / ktsimage / 2018
by the KlarMacher editorial team, 02/06/2019

You read the news on the net. Again news about these bitcoins. At Amsterdam Airport you can now exchange your remaining money at machines. Another business portal is writing a portrait of someone who has even become a Bitcoin millionaire. Prices seem to be rising rapidly. Maybe you should invest in digital currency too? However, you are not yet entirely clear: what exactly is a Bitcoin? And how does a cryptocurrency actually work? You can find the answers here.

KlarMacher video: What is a cryptocurrency?

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Bitcoin mystery: what is it and who invented it?

In order to better understand the Bitcoin phenomenon, it is worth taking a closer look at the term: The word is made up of the terms bit (a digital storage unit) and coin. So it is a "digital coin". This describes very well what this is about: around virtual money. There are no coins or notes to touch in this payment system. Everything is purely digital.

The fundamental difference between cryptocurrencies like Bitcoin and conventional money is that digital means of payment are complete regardless of banks or states function. State and central banks such as the Deutsche Bundesbank or the European Central Bank (ECB) usually determine the money. For example, they determine how much money is in circulation and influence the value of a currency.

Guardian of the euro: these are the tasks of the ECB

Guardian of the euro: these are the tasks of the ECB

Read more about the masters - and mistresses - of our currency

In the case of cryptocurrencies, there is no such organization that has control over digital money. Everything takes place in digital networks. Anyone with a computer and software can participate.

It is still not clear who exactly invented the first crypto currency. In 2008 someone published under the Pseudonym Satoshi Nakamoto a document that describes a digital currency. In 2009 the associated Bitcoin software was made public.

From nerd gimmick to investment: the rapid rise of bitcoin

What began as a gimmick by some computer experts has turned into a gigantic success story. The following anecdote illustrates the rapid rise of bitcoin:

In May 2010, Florida programmer Laszlo Hanyecz offered 10,000 Bitcoins in an Internet forum to anyone who ordered him a pizza. A Brit accepted the deal and ordered two pizzas for Hanyecz online. As promised, he received 10,000 Bitcoins for this, which at the time had a value of 30 euros.
The programmer made the man a millionaire: Today, 10,000 Bitcoins, depending on the exchange rate, are worth 50 to 150 million euros!

© iStock / franckreporter / 2017 Laszlo Hanyecz paid 5,000 bitcoins for a pizza in 2010. If he had pinched that, he would be at least 25 million euros richer today.

The first cryptocurrency: why bitcoins?

Bitcoin is the first so-called cryptocurrency, which has been followed by many more. But what is cryptocurrency? The word sounds mysterious - and that fits its meaning too. Because the term cryptography comes from the Greek and means secret writing. So one Encryption of information.

Bitcoin & Co. is primarily about information security. Nobody should be able to manipulate the digital currency. That is why it is encrypted in a very complicated way. By definition, cryptocurrency is encrypted digital money. One advantage of cryptocurrencies is that they allow anonymous payments. This initially made Bitcoins & Co. a popular means of payment, especially for criminal transactions on the Darknet.

The cash book for bitcoins: the blockchain

When Bitcoins are mentioned, the term blockchain, translated as block chain, is usually not far away. The blockchain is like the cash book or journal of a cryptocurrency. All Bitcoin transactions are recorded in this database. It is saved who owned how much crypto money when and where it was transferred - of course everything is encrypted.

Because there are countless Bitcoin transactions every day, a normal database would quickly reach its limit. Therefore, the information in individual blocks saved. If such a block is full, it is sealed so that it cannot be changed afterwards. Then a new block is started and appended to the old one - just like a chain.

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Two links in the chain are linked by a specific code that is created from each completed block. So each block relates to the previous one. And all transactions that have ever been carried out with the cryptocurrency can be traced back in the chain.

The specialty: the blockchain is not only stored on one computer, but on all of them Computers in the Bitcoin network. Therefore it is very difficult to manipulate the system. All of these computers help to convert the transactions into encrypted data blocks - so to speak, to keep the Bitcoin cash book. Computer geeks around the world are helping to secure the Bitcoin network. As a reward, these so-called “miners” receive a reward in the form of Bitcoin shares. This is how new bitcoins are created.

Bitcoin costs huge amounts of electricity

Bitcoin costs huge amounts of electricity

Anyone considering quitting their job and getting rich as a Bitcoin miner will now be disappointed: an extremely large amount of electricity and enormous computing power are now required to create new Bitcoins. According to a study by Morgan Stanley, 140 terawatt hours, i.e. around 0.6 percent of global electricity consumption, could be consumed by so-called Bitcoin mining in 2018. If this forecast is correct, the production of Bitcoins will consume more electricity than Argentina every year. As a private person, Bitcoin mining hardly pays off.

On- and offline: This is how you pay with Bitcoins

Of course, digital currencies are mainly used for paying online. You can do this, for example, via the Bitcoin client - the software with which you manage your Bitcoin account. Every Bitcoin user has a kind of account number here, which consists of a cryptic code. You can use these addresses to transfer digital money to other Bitcoin users very easily - in much the same way as with online payment services.

The acceptance of the currency is increasing not only among private individuals, but also in online trading. Even big companies like Expedia, airBaltic and Edeka accept bitcoins as a form of payment. You can find information here, for example, in which restaurants and shops in the real world you can pay with the cryptocurrency:
BTC-ECHO: Database for Bitcoin acceptance points in the DACH area.
Coinmap: International map showing bitcoin-friendly shops

If you want to pay with Bitcoin in business, you need a so-called Wallet (English for purse). This is an app that is installed on the smartphone and serves as a digital wallet. With it, you can manage your digital money and spend it in the store. A QR code is created at the checkout that you can scan with your mobile phone camera. Then exactly this amount is transferred to the recipient's Bitcoin account.

Important: once spent, the money is irretrievably gone. The A payment cannot be reversed.

© iStock / weedezign / 2018 More and more restaurants and retailers are accepting cryptocurrencies as a means of payment.

Let's go: buy and manage cryptocurrency

There are several digital platforms on which cryptocurrencies are traded. Payment is made either with conventional money, for example in euros or dollars. But it can also be exchanged for another crypto currency. Which merchants you can trust can be found in the article Buy cryptocurrency? These 5 dealers are serious !.

Some trading platforms offer an integrated wallet in which you can “park” your digital money first. This is useful, for example, if you want to speculate on this crypto platform like on the stock exchange.

Or you can load the cryptocurrency into an external wallet app. This means that you have your crypto money in your own hands and can use it to pay on the go. It is important to note that the wallet should be well secured. Be sure to copy the wallet.dat file to a second data carrier, for example a USB stick. So you don't look into the tube if your smartphone and wallet app is lost or your hard drive quits.

Always keep in mind: You are solely responsible for your digital money. There is no external protection for cryptocurrencies, as is customary in the case of credit card misuse, for example.

© iStock / hocus-focus / 2018 Anyone who buys Bitcoins stores the key in their digital wallet.

Mega hype: which cryptocurrencies are there?

In addition to Bitcoin, there are various cryptocurrencies. Some of the most famous are ...

  • Ethereum (cost between 250 and 400 euros in summer 2018),
  • Ripple (fluctuates around 30 cents per unit) and
  • Litecoin (cost up to 80 euros in July 2018)

And how many cryptocurrencies are there actually? The number fluctuates as does the course. Today, in 2018, around 4,500 different cryptocurrencies are used. You can find out which of these you should keep an eye on in the KlarMacher article Digital Money of the Future: 8 Cryptocurrencies with Potential.

Cryptocurrency: advantages and risks at a glance

advantages of the cryptocurrency:

  • Cryptocurrencies are available worldwide and valid across countries.
  • Transactions are quick and easy.
  • Blockchain technology is considered very secure.
  • Payment is possible independently of financial institutions.

But there is also Risks:

  • If your private key is lost from the wallet, the digital money is gone.
  • The course fluctuates extremely.
  • Despite the high level of security, there is a possibility of hacker attacks.
  • There are no legal claims or safeguards.
  • The legal status is largely unclear.
  • The distribution and acceptance of cryptocurrencies are limited. Should the internet collapse, the currency would be useless.

Conclusion: Cryptocurrencies are a fascinating thing. However, you should only buy bitcoins when you have the money to spare. Your money is really safe elsewhere, for example in a Hanseatic Bank savings bond.

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