Sometime in early 2009 they suddenly appeared: the first 50 Bitcoins in history. Back then, it was mainly absolute IT fans who were concerned about the new digital money and transfer system, which was supposed to be safe from manipulation – and state control. In the meantime, Bitcoins have left their niche existence. Even normal savers suddenly became interested in the digital currency.
Between January and early December 2017, the price had increased tenfold. Finally, the digital coins in the spring and summer of 2019 enjoyed greater demand. Consumers should not simply get carried away by the hype about Bitcoins, but should also know the risks and side effects. Very important: Bitcoins are not suitable as a financial investment.
What are Bitcoins?
Literally translated, Bitcoins are coins that only exist on computers – i.e. only digitally. Equivalent to the digital coins, some also speak of the digital currency or Internet currency. The idea behind Bitcoins is that the owners can pay with them once – as an alternative to state money.
In addition, Bitcoins also stand for a secure exchange system. The idea: Members of the network can transfer money to each other worldwide and check all transactions themselves – no bank is required. Even in retrospect, no one in the network should be able to manipulate Bitcoins transfers.
The means to this end is the so-called blockchain. It is the digital register in which all Bitcoin transactions are stored. All members of the network can verify transactions (peer-to-peer technology), and powerful computers embed these transactions in a complex calculation task. This makes fraud more difficult.
Note: Bitcoins are often referred to as a crypto currency. By cryptography, experts today generally understand the technology of transmitting information securely and making it resistant to manipulation. You can read more about how the block chain works exactly and how Bitcoins are created in the first place below.
What’s the Price of a Bitcoin?
The price of Bitcoins is based on supply and demand. Due to increasing media coverage, interest (and thus demand) has been steadily growing in recent years. At the same time, supply is limited because the Bitcoin network can only gradually produce new coins. (Read more about this below). Another power that influences the price of BTC is the derivatives and Futures market where Bitcoin is traded on high leverage. The spot markets and derivatives markets kind of influence each other in a certain way.
Bitcoin Enthusiasts versus pure Price Speculators
When the digital currency was launched in 2009 and hardly anyone knew about it, supply and demand were low – the exchange rate at that time was less than USD 1. At that time, it was mainly the persuaders who bought. They dreamed of a currency that was independent of central banks and commercial banks.
Since 2017, speculators have also increasingly invested. They saw the next “hot thing” in Bitcoins and the computer technology behind it, invested and thus drove up the price. On December 11, 2017, the US options exchange CBOE in Chicago allowed bets on the price of Bitcoins for the first time, and other major futures exchanges followed.
A look at the development since then shows how much the Bitcoin price can fluctuate: By the beginning of December 2017, the Bitcoin price had increased more than tenfold compared to the beginning of the year. On December 16, 2017, it reached its temporary high. At that time, one Bitcoin cost almost 16,000 euros.
By the beginning of February 2018, the price had then more than halved. After that it went even further downhill: large investors sold their Bitcoins and took profits, private investors followed. Only with the political tensions in spring 2019 did the demand for alternative money rise again. In June, Bitcoin broke the 10,000 Euro mark. In March 2020, the Bitcoin price fell again in the course of the Corona crisis to just over the 4,000 Euro mark.
Are Bitcoins a good Investment?
The idea of Bitcoins may be fascinating for you too. However, there are some good reasons why you should not use digital coins as a financial investment or as a basis for private retirement planning.
Bitcoins do not work as a means of payment – if you buy Bitcoins because you hope to use them soon to shop in a department store, pay your rent or taxes, you are wrong. Not many shops or online retailers accept Bitcoins – especially not the landlord or authorities.
But this has also to do with the fact that most people who own BTC don’t see it as a means of payment but rather as a long term investment asset, similar to gold. Who would go into a shop and want to pay with a piece of gold? So Bitcoin does not really fulfill the function of a means of payment, although it could. But people see it as digital gold.
Bitcoins are not secured – anyone who buys a government bond and thus lends money to the federal government for a few years knows that he or she is entering into a secure transaction.
Bitcoins are much more uncertain: There is no state or central bank behind the digital coins. No one guarantees that your Bitcoin balance will generate secure income and that you will be able to exchange it back into euros after a few years.
Bitcoins have no material value – If you have a share in your deposit, you are participating in a company with all its assets. If you store gold in the vault, you can assume that you can pay with it in case of a crisis – the material value would be recognized.
Bitcoins is different. There is only one (very young) idea behind it. Bitcoins only have a value as long as people believe in the success of the cryptocurrency. As soon as speculators turn their backs on Bitcoins, the Euro value of Bitcoins can quickly slip away. They risk losing everything.
Start Trading at most with small Amounts of Money
You know the risks of Bitcoins, but find the idea of digital currency exciting and want to stay with the topic. Then you should only invest a small amount of money in Bitcoins, i.e. smaller sums that you might otherwise have spent at the carnival – and whose loss does not burden you.
Where can you buy Bitcoins?
Investors can buy and sell Bitcoins in various trading venues on the Internet. There are numerous Bitcoin exchanges around the world where investors can exchange the digital coins for their local currency. Well-known exchanges are for example Kraken, Gdax with Coinbase as user interface or Litebit. At all exchanges you can exchange Bitcoins for Euro.
Stock Exchange versus Bitcoin Exchange Platform
One of the big marketplaces is Kraken.com. Kraken is not a real stock exchange, but an exchange platform (“marketplace”). Investors can register themselves and adjust purchase or sales offers in euro. Buyers and sellers determine themselves which price they want to have for the Bitcoins. Users can compare the offers directly.
In order to estimate whether you get a good price on exchange platforms like Kraken, it is worthwhile to take pages like bitcoincharts.com for help. They offer an overview of the current price for a Bitcoin on various exchanges and exchange platforms.
With stock exchanges like exchange platforms applies: Who would like to invest smaller amounts – approximately 100 USD – in Bitcoins, gets for it only a fraction of a whole Coins. So pay close attention to the amount.
Without an identity check it is not possible
If you want to trade Bitcoins on the stock exchange, you always have to deposit a bank account and verify it first. The exchanges are obliged to verify and store the identity of buyers and sellers. Among other things, this is intended to prevent money laundering. So you cannot start immediately, but have to wait for the identity verification. All in all, it can take a few days until the account is active.
At Kraken you can initially trade Bitcoins without the verification process. However, trading is then only possible for small amounts. It is also possible that marketplace participants may not want to do business with you until you have fully identified yourself. If you want to trade without restriction, you must subsequently provide full legitimation.
Many investors buy Bitcoins on the stock exchange or via the marketplace, then leave the digital coins on their account there. In this case, users could quickly get rid of their shares in case of doubt – but the digital money is not really safely stored there.
After all, the websites of the stock exchanges are not necessarily secure. In the past, hackers have already managed to paralyze stock exchange sites, hack users’ accounts and withdraw the Bitcoins. The coins are then gone, and investors usually don’t get a replacement.
To prevent this from happening, users should always transfer their Bitcoins to a so-called wallet instead of their stock exchange account. A wallet is a digital purse. Instead of putting real notes and coins in a leather wallet, the wallet contains digital currency.
Which Wallet is the right one?
There are different providers of such digital wallets and different places where users can store them: the personal computer, the smartphone or an external hardware drive that looks like a USB stick. If you choose one of these options, you can be sure to keep your wallet with you. The idea is that only the individual user has access to his laptop, mobile phone or external storage device.
Another possibility is to open an account on the Internet – and use it as a digital wallet. If they have an Internet connection, investors can access it from anywhere at any time. However, similar to the stock market, there is then the risk that fraudsters will crack the online account and make off with the Bitcoins stored there. The more practical variant is therefore also less secure.
How do you open a Wallet?
To open a wallet, investors must first select a provider and download a program to the selected device. Overview pages on the Internet help in choosing the provider. For mobile phones, you can find wallet apps in the Play Store or App Store.
Unlike with the Exchange, users do not have to store any personal data. Anyone wishing to open a wallet simply has to set a personal access PIN and note down a combination of randomly strung together words (offline key). The user interface can then be used immediately.
Bitcoins can be gone without a backup copy
Users should make a note of the offline key (handwritten at best) and keep it in a safe place. It is also the backup copy for the wallet. So if the hard drive or mobile phone should ever break or the special USB stick be lost, users can only access their Bitcoins again via the word code.
How does a Bitcoins transaction work?
The special thing about Bitcoins transactions is that they should be particularly secure. In particular, only the owner of the Bitcoin wallet should be able to actually use the Bitcoins in it.
What role does the secret Bitcoin key play?
Each owner of a digital purse is assigned several Bitcoin addresses, i.e. a set of account numbers. They each consist of a long series of randomly generated numbers and letters, for example 97noVc7mlkr2kGGuqjPL9XRTPnmjuW9B. From one address to another, wallet owners can then send each other money in Bitcoins.
To secure the transmission, a so-called private key is also required. It is generated when the wallet is created. The private key is built directly into the hardware – and is secret. Nobody can reveal it without further ado. A transmission is only released at the end if the private key matches the wallet exactly.
Once released, transfers cannot be changed or reversed.
Bitcoin transactions are not anonymous
In principle, only members of the network can track transactions. They see the Bitcoin address, from which they usually cannot deduce the identity of the user. However, there are two backdoors:
Transfers from the exchange to the wallet – If a user transfers Bitcoins from the exchange account to a wallet, the Bitcoin community can usually link the sender address with the real user name. The data is stored on the exchange platform.
Transfer from Wallet to Wallet – Users must briefly connect their Wallet to the Internet for a transaction. If the user’s server is not anonymised, it is possible to find out the IP addresses of the computers involved.
Experts therefore often say that the Bitcoin system works with pseudonyms (Bitcoin addresses) but cannot guarantee complete anonymity.
If Bitcoins are sold at a profit within one year of their acquisition, this is taxable as a private sale transaction. There is an exemption limit of 600 Euro per year.
How long the transfer takes and what it costs
At best, it takes about ten minutes for a transaction to be booked in the Bitcoin network. The reason for this is that the transfers are integrated into a multi-stage calculation process that must first be completed. You can read more about this in the following chapter on the block chain.
A so-called network fee is charged for each transfer. This varies and depends on how quickly the user wants his transaction to be executed. If you transfer from a stock exchange to a wallet, you usually pay more – the transfer should be completed in ten minutes if possible. The exchange sets the fee. On the other hand, if you transfer from wallet to wallet, you can set the fee yourself. Users who want to pay less then simply wait longer for the transaction.
What is the Blockchain and how does it work?
The block chain can be imagined as a digital register in which every single bitcoin transmission is stored. Behind this is a concept (block chain technology) that makes fraud much more difficult. Put simply, it works like this:
Check 1: Transmission is ok?
The digital register blockchain consists of individual tabs that are digitally “filed” one after the other as in an order. A series of transfers is stored on each tab. When the tab is full, the Bitcoin community checks whether the instructed Bitcoin amount is actually present in the wallet and whether the user has actually instructed his Bitcoins only once. Only if everything fits, does it continue.
The tab is now presented with a tricky calculation. To solve it, many computers in the network are competing for the money. In the end, one of them finds the clear solution to the task. This solution serves as a kind of seal for the tab. In the Bitcoin world, the sealed card is called a block. Many sealed cards “filed” one after the other form the chain.
Check 2: Correct solution?
If someone were to manipulate a transfer on the tab afterwards, the tricky arithmetical problem would change – and so would the solution. The digital register would suddenly contain a wrong solution. Because every full member of the network has the block chain data record on their computer at home and can view it, this change would be immediately noticeable.
Note: Full members of the network have the block chain stored on their computer. They are therefore nodes and usually use wallets that run directly on the computer. Those who store Bitcoins on their cell phones or online use Bitcoin technology, but have usually not fully downloaded the block chain and therefore cannot actively intervene in processes. Nor can they produce new Bitcoins.
How are new Bitcoins created?
New Bitcoins are created as a reward for the network member whose computer was the first to succeed in finding the unique solution to the tricky math problem, thus sealing the tab (i.e. creating a block). A reward is appropriate because it takes enormous computing time and energy (electricity) to determine the solution.
Scraped – and not stirred
The Bitcoin language compares the complex calculation of the unique solution path with the work of a miner. The owner of the computer that solves the task collects the reward for his work: He has “mined” new Bitcoins.
The Bitcoin network has set itself the limit of 21 million Bitcoins, but it will take decades to reach it. This corresponds to the original idea of the Bitcoin payment system, which does not believe in inflation. In November 2017, 16.7 million Bitcoins were in circulation.
If you want to know more about this topic, you should take a look at a blog post by Indian developer Mohit Mamoria. Simply formulated and with many examples he presents the Blockchain in a Beginner’s Guide in English.