By Hannah Parker
Cryptocurrencies like Bitcoin have rapidly gained attention from investors as an alternative asset to traditional financial investment. As more and more cryptocurrency projects emerge, the industry has blossomed into one of fintech’s most interesting markets.
While some might know that a cryptocurrency is a sort of digital asset, there are still nuances in what the industry entails and what makes it exciting as an investment type.
What is a cryptocurrency?
At the core of it, a cryptocurrency is any kind of money that exists digitally or virtually and uses cryptography to safeguard transactions. Mostly, a crypto network will use a decentralized protocol that tracks transactions – which are displayed publicly with anonymous details – and does not have one central authority issuing them.
Because it is decentralized from central control, it doesn’t rely on banks to validate the transactions. Rather, it relies on the technology that underpins the network – the blockchain technology – and operates at a peer-to-peer level. This means that anybody, anywhere can send and receive cryptocurrency payments without banking fees and limits. This depends on the regulation and legislation in a country.
In Germany, cryptocurrency is legal for investment and trade. Institutional investors are allowed to invest up to 20% of their assets into cryptocurrency – as part of the German Fund Location Act. Cryptocurrencies, including the leading tokens like Bitcoin and Ethereum, are not recognised as legal tender but are seen as “units of accounts”.
Is a cryptocurrency like digital cash?
Unlike cash, but not unlike electronic payments, cryptocurrencies do not exist as actual physical coins that can be transported and exchanged. Instead, they exist purely as digital entries on a database that lives online that records transactions. This database (called a public ledger) tracks all transactions on the network.
Cryptocurrencies are also different to how you own them. When you hold cryptocurrencies, you don’t actually own the cryptocurrency. Instead, you possess the key that allows you to transfer the cryptocurrency associated with the key.
To send a cryptocurrency, you use the details (referred to as the public key) of the recipient’s account and send from your wallet – which is associated with the key to the crypto. Their wallet will instantly receive the crypto and store it. To access the crypto, a private key is used.
How is cryptocurrency like Bitcoin created?
Bitcoin is created through a process known as mining. During this, computing power is used to solve mathematical equations which creates a block in the network. When a block is created, units of Bitcoin are created and are added into the supply.
Is cryptocurrency safe?
Blockchain technology is deemed as one of the safest ways to interact with money and data if you know how to. This is because blockchain transactions are time-stamped and recorded into “blocks” – and the transactions are almost impossible to hack or modify.
However, because it is so difficult to modify, once you have made a transaction, it is impossible to reverse it. This means if you’ve made a mistake sending your Bitcoin, you cannot reverse the transaction (like you might be able to with a bank) and you cannot get the crypto back into your account. It also means that if your wallet is hacked through online means, it is difficult to get access back to the coins or tokens if they have been stolen.
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“Undeniably, Bitcoin is one of the best ways to look at the future of money. Without the need for a third-party to look after your funds, you are in full control. This also means you’re fully responsible to store your money to protect it. Trading with the right platform and taking the right approach to house your money is crucial in your crypto journey.”
Trading cryptocurrencies
As a new emerging asset, cryptocurrencies are exciting for new investors and experienced traders.
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