Bitcoin could ever stabilize

Bitcoin: how does the virtual coin work?

In times of low interest rates, Bitcoin with high return expectations is increasingly attracting the interest of many investors. Last but not least, Tesla boss Elon Musk caused a stir with his interest in Bitcoin. But what actually is a Bitcoin and how can you invest in it or in other cryptocurrencies? What are the risks of investing in Bitcoins? We give an overview of basic questions about the virtual currency.

What are bitcoins?

There are around 4,100 different digital currencies. Bitcoin is the best-known cryptocurrency, but there are numerous others, such as Ripple, Ether or Dogecoin, that are currently attracting a lot of attention. Bitcoin goes back to the person or group of people Satoshi Nakamoto. Under this pseudonym, he or this group first published the Bitcoin white paper in 2008 and the first version of Bitcoin in 2009. As a digital means of payment, the “currency” only exists virtually in computers and in the digital network.

Anyone who initiates a new transaction with Bitcoins extends the technological chain of transactions that have already been saved. The technology on which Bitcoin is based is called blockchain (translated: blockchain). Online, all transactions that have ever been carried out with Bitcoins are stored in the blockchain. In order to protect the growing chain of transactions from manipulation, it is strongly encrypted, i.e. cryptographically secured. In addition, a large number of copies of this chain are distributed among nodes in trade registers (distributed ledgers).

In contrast to legal currencies such as the euro, Bitcoin is not created by the European Central Bank, i.e. a central bank or an authority. Rather, it is a decentralized network that creates bitcoins.

Like all virtual currencies, Bitcoin is based on the idea of ​​a non-governmental substitute currency with a limited amount of money: Worldwide there can and will only be around 21 million Bitcoin. This, too, distinguishes Bitcoin from classic currencies that can be minted or printed by central banks. If bitcoins are transferred from one person to the other, no credit institutions or other financial intermediaries are involved. The term “currency” is misleading in this respect, but is used colloquially.

How are bitcoins created?

Bitcoins are created by confirming several transactions (transaction blocks) using highly complex mathematical algorithms. As a reward for a confirmed transaction block, the miner, i.e. the person who has solved the task using his computer, currently receives 6.25 Bitcoin. Put simply, it means: This process ensures that a Bitcoin is not spent twice. Normal computers need an extremely long time for "mining" because the arithmetic tasks become more and more difficult as the amount of crypto money increases. However, you do not have to be part of the creation process to simply invest in Bitcoin. By the way: The annual electricity consumption of the Bitcoin network, which is mainly due to mining, currently exceeds the annual energy consumption of Norway.

Where are bitcoins kept?

Digital purses, so-called wallets, are used to store bitcoins or to pay with them. These are apps that can be downloaded from the Playstore or the App Store onto a smartphone or PC. A wallet can also be loaded onto an external storage medium, for example a USB stick. The passwords with which you can access the Bitcoin addresses are managed in the wallet.

What can you do with a wallet?

Similar to the banking app, a wallet controls access to the Bitcoin address (the public key). Because: Bitcoins "lie" in the network and are logged in the blockchain, that is, they are not stored on the hard drive. The wallet only stores the Bitcoin addresses (public keys) and private keys, which in turn can be accessed with a password. While the Bitcoin address can be given to anyone to receive payments, the private key should be kept secret. This is used to sign transactions and thus send bitcoins in the network. If the private keys are lost, for example because the laptop is stolen, the bitcoins are also lost. Some investors therefore print out their keys and keep them in a safe - as a "paper wallet".

You use the wallet when you want to receive or send Bitcoin payments. Instead of the name or other personal information, the wallet only has a number. The owner remains anonymous when sending and receiving. But if someone knows which person belongs to which Bitcoin address, they can read out the account balances and transactions on the blockchain.

Everything is possible: high profits and total loss through Bitcoin

When it was launched in 2009, Bitcoin had no quantified value, in 2013 it was worth around 100 euros. At the end of 2017, the price peaked at just under 16,600 euros. Within a very short time, Bitcoin lost almost 80 percent of its value in 2018 and fell to around 3,000 euros. It is currently 37,500 euros. Although the price trend shows that it can also go down very quickly, Bitcoin is currently becoming the center of attention for investors.

The volatility of Bitcoin is enormous: fluctuations in value within a day in the double-digit percentage range are not uncommon. One reason for the strong fluctuations can be the comparatively high concentration of Bitcoin ownership: There are far fewer buyers and sellers than in other markets who, as a whole, stabilize the price through their individual decisions. On the contrary: Many Bitcoins are in the hands of a few. While the Bitcoin rich, so-called “whales”, can depress the price by selling large quantities, price jumps are triggered by the purchase of comparatively fewer, but influential holders such as companies or investment funds. The news that Tesla is investing $ 1.5 billion in Bitcoin has seen the price rise 15 percent.

One thing must be clear to all Bitcoin investors: There is almost always the risk of extreme depreciation and even total loss. The Bundesbank and the Federal Financial Supervisory Authority (BaFin) are also warning against this. If the use of Bitcoin and the exchange into legal currencies were forbidden, as planned in India, for example, this would also certainly affect the value of the Bitcoin.

In general, you should only ever invest such a large amount of money in risky financial investments that you can do without in the worst case. So if you want to put money into your retirement savings, you should stay away from investing in bitcoins. In this case, it is better to use safer alternatives.

How do you buy bitcoins?

If you want to invest directly, you can do so via Bitcoin trading venues. Well-known platforms are, for example, Bitwala, eToro, Bitpanda, Binance, Bison or Bitcoin.de. Here you register, link your checking account and buy bitcoins for a fee, which you can then keep in your wallet. Since the fees differ between the trading venues, it is best to compare the costs in advance.

Beware of fraudsters!

If you come across extremely lucrative investment offers on the Internet, you should always remain skeptical. In advertisements or e-mails, investments in cryptocurrencies or special securities are recommended, among other things, with which bets are made on price developments of cryptocurrencies. However, it is not uncommon for investment fraud to be concealed behind this. A financial investment with very high potential returns is always accompanied by a correspondingly high risk of loss.

The important thing is to always position yourself broadly in your investment. Investing in Bitcoin should only make up a small proportion of your investment amount.

What should be considered from a tax point of view with cryptocurrencies?

For those who invest privately in shares, fund units and other regulated investment products, the banks pay the withholding tax to the tax office and, if necessary, offset profits against losses. From a purely legal point of view, however, cryptocurrencies are treated as other economic goods. Profits and losses can be relevant for the tax return. For example, if Bitcoins are sold at a profit within the one-year period, these capital gains are speculative gains that are subject to the regular income tax rate. It is therefore important to document the process of acquiring the bitcoins. Because in order to determine the taxable amount, you need the acquisition costs. After one year, however, possible profits are tax-free. Further helpful information is available here.

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