By Oliver Schmaering | September 11, 2023, 6:07 p.m
Opinions differ when it comes to cryptocurrencies. Opinions range from promises of freedom to fraud when it comes to the new digital money. The crypto landscape, which now seems unmanageably large, seems intimidating to some, but to others it is pure promise. TECHBOOK with an overview.
What exactly is a cryptocurrency? As the name suggests, it is a means of payment that is transferred from one party to another via blockchain as part of a cryptographic process. Such a digital transaction is initially nothing unusual. Any conventional currency is transferred digitally using credit cards, for example. And yet there are some differences.
Cryptocurrencies are not governmental, but private or accessible to all currencies. Many of these currencies start as projects by companies, foundations or developer teams and go through a decentralization process. In the end, the creators of the currency often lose power over their product. And with full intention! Decentralization is one of the primary goals of crypto ideology.
What types of cryptocurrencies are there?
Initially, cryptography had nothing to do with currencies. When corresponding procedures were invented in the 1970s, the aim was to exchange encrypted messages. In the 1990s there was the first forerunner of cryptocurrencies: Ecash. Pioneers in the field of development were so-called cypherpunks (from English “Cyhper”, German “number, cipher”), mostly programmers who, out of idealistic motives, campaigned against state control and for strict privacy.
Due to the financial crisis in 2008, the cryptocurrency movement gained momentum. Bitcoin was born in 2009 and has been the most important cryptocurrency ever since. A mysterious founder named Satoshi Nakamoto is considered the inventor. His identity remains obscure to this day.
Soon after, other cryptocurrencies emerged – there are now more than 20,000 different ones! The exact number is not easy to determine for several reasons. It depends on the allocation and it grows daily. Cryptocurrencies can be systematized according to various measures.
From a technical point of view, it is advisable to sort according to the respective consensus mechanism with which the blockchain works. There are Proof of Work (PoW), Proof of Stake (PoS) and some other procedures. Another distinction is that in Coinswhich have their own blockchain, and Tokenswhich run on a third-party blockchain.
The decisive feature is the intended use
However, it is most common to distinguish cryptocurrencies according to their essential goals, features or functions. Bitcoin, for example, is considered a store of value and therefore more of an investment product than a means of payment. You can now pay with Bitcoin in many places around the world. But the strong fluctuations in value do not make it an ideal currency. Stablecoins are better suited for this. These are cryptocurrencies such as USDT or USDC, which are usually based 1:1 on the value of the US dollar. A very popular category is meme coins such as Dogecoin or Pepe. They usually have few or no innovative technological concepts and no specific benefits. Instead, they live from the cult of well-known Internet memes that serve as currency symbols.
There are dozens of other systematizations, such as the division into so-called crypto ecosystems, or into Layer1 and Layer2 blockchains, into governance coins, smart contract platforms, DeFi tokens, game tokens, zero knowledge, privacy coins, wrapped tokens and many more . You can get an overview on Coinmarketcap or Coingecko, for example.
Also interesting: The best apps for buying and selling crypto
Where can you buy cryptocurrencies?
Cryptocurrencies are usually bought online at centralized crypto exchanges. This is the easiest way to get into the crypto system using a credit card or bank transfer with euros or other currencies. Until recently, such transactions were refused by some banks or savings banks. For many customers, this was reason enough to change their financial institution. However, this behavior is now becoming increasingly rare, as banks are now often invested in crypto themselves or even offer special crypto services.
Crypto exchanges that have received a BaFin license and adhere to correspondingly high standards are considered particularly secure. These include the US crypto exchange Coinbase, the Austrian crypto exchange Bitpanda and the German crypto exchange Bison. After the so-called KYC procedure has been completed, in which everyone officially registers, you can get started. With the deposited euro balance you can now choose from long lists of cryptos.
In addition to purchasing from centralized crypto exchanges, there are other methods to purchase cryptocurrencies. In Germany alone, dozens of so-called Bitcoin ATMs have been set up where you can buy Bitcoins. They are usually found in large cities around technology markets such as Saturn or Media Markt.
Decentralized crypto exchanges and even some crypto wallets also have so-called fiat on-ramps (from fiat money and English “on ramp”), which make it possible to use the Internet via international payment service providers such as Moonpay or Kado Euro or other currencies to enter the crypto system.
What are the benefits and risks of cryptocurrencies?
Although the EU has become the most regulated area of the world when it comes to crypto with its MiCA law, the majority of the population still seems unsure whether to invest or not. Despite sometimes tough ban policies, crypto adoption is many times higher in some countries outside of Europe. How does this happen?
We often forget that having a checking account and sending money around the world is something we take for granted. It does take a while for the shipment to arrive, but for most people this isn’t a problem. The situation is different in many countries in the so-called Third World.
Cryptocurrencies as an opportunity in developing countries
Often only the wealthy sections of the population have a bank account. In addition, remittances from temporary workers from the USA or Europe to their respective home countries are commonplace. The banks have adapted to this and often collect huge amounts of money for money transfers. What an immense advancement it is for these people to be able to send their income to their family at any time, seven days a week, for the lowest possible fees. The blockchain makes it possible. “Banking the unbanked” is therefore one of the crypto movement’s best-known declarations of war on the financial establishment.
Investment opportunity with pitfalls
In the wealthy West, cryptocurrencies are primarily an issue as an investment. The dynamics of the prices offer opportunities that no other investment product can offer. And this is exactly where the risks lie. Because where things go up quickly, they can go down just as quickly. The volatility of the market is immense. There are also so-called rug pulls, in which malicious developers make off with the value of their cryptocurrency and leave investors with nothing. However, this is just one of many scams.
For a newcomer to the market, it is difficult to assess which project is serious and which is not. A total loss of the investment is always possible. There are also other risks such as possible bankruptcies of crypto service providers and even crypto exchanges. A market that can make millionaires overnight can of course also turn millionaires into beggars overnight. Diversification is absolutely necessary to minimize risks. If you don’t want to deal with the details at all, the following applies: stay away from crypto. If you don’t want to be deterred, you should always heed the most important rule: Don’t let anyone talk you into anything, just DYOR – do your own research.