The info portal for tokenization & digital change

Encrypted money: how do cryptocurrencies work?

Cryptocurrencies are also changing the financial world in America, England and worldwide. You can trade with them. Make profits or losses. But hardly pay yet. The blockchain takes care of digital crypto transactions and is considered secure. Nevertheless, there are dubious deals and dubious providers. We clarify.

Have you ever heard of crypto coins, bitcoin or Ethereum? These are cryptocurrencies. You can exchange and trade these digital tokens just like any conventional currency. Cryptos only exist digitally – they don’t exist in physical form like paper money and coins, for example. Unlike dollars, euros, or Swiss francs, crypto coins are outside the control of financial institutions and governments.

If you want to buy a digital currency, you open an account with a crypto exchange. But now you can’t do it without conventional money: you deposit a certain amount to be able to buy crypto tokens. You trade with the cryptos via a so-called wallet.

Blockchain takes care of the transactions

The term “cryptography” stands for the encryption of data. Digital currencies work according to this principle. The information about holders and transactions is stored in encrypted form via the so-called “blockchain”. And this is not only on a single server, but on many servers simultaneously. In this way, every movement can be stored decentrally in the network. This is what makes digital currencies so secure. Counterfeiting is practically impossible, because the data is still available on other computers.

FAQ – Frequently asked questions

What if I lose the access code to the trading platform?

If you lose the password for online banking at your bank, you will receive a new one. Transactions with cryptocurrencies are different: there is no central bank. You yourself are responsible for your digital payment means and access to the trading platform. If you lose your identification code, the cryptocurrency is lost.

Will I remain anonymous when trading crypto-coins?

Crypto-coins, such as bitcoin, have an open ledger. However, the blockchain does not manage the assets with one’s own name, but with an identification code. This is the pseudonym of the holder. One therefore remains anonymous.

Are there any legal consequences with crypto coins?

Precisely because you remain anonymous, fraudsters use cryptocurrencies for illegal activities. In many countries, there is a lack of laws and regulations on trading with digital money. This makes trading with crypto tokens a problem for every tax advisor and also for the tax authorities.

A financial system without banks

We can also understand the cryptocurrency as an alternative to the traditional financial system in America, England and worldwide, for the following reasons:

  • Digital money can be managed completely independently of banks.
  • The holders themselves are the financial institution.
  • There is also no central body controlling the currency and transactions.
  • The responsibility lies in the hands of the buyers. They also ensure the safety of the assets.

The origins of cryptocurrencies

As early as the 1990s, cryptographers and programmers were discussing options to improve privacy. A representative of the “cypherpunks” is the Briton Adam Back. He also came up with the first proof-of-work method – the basis of cryptocurrencies. The principle of cryptography is basically quite simple. The sending computer provides proof of the computational effort it took for the outgoing message. This was mainly to avoid spam in the beginning.

Who invented Bitcoin?

The identity of the Bitcoin inventor is still unknown. He calls himself (pseudonym) Satoshi Nakamoto. Some experts speculate that Adam Back is behind this pseudonym. However, this has not been clarified to this day. It is also possible that a whole group of developers is behind this pseudonym. The idea of a cryptocurrency was presented in “The Cryptography Mailing List” on November 1, 2008. It was called “Bitcoin”. Just two months later, the first transaction was made.

There are over 10 000 crypto coins

Today, Bitcoin is far from being the only cyber currency. There are now more than 10 000 coins and currencies on the market. However, the actual number is far lower. The supply is subject to constant change:

  • At most 100 of these currencies bring it to a trading turnover of more than 1000 US dollars per day.
  • In addition to Bitcoin, Ripple, Litecoin and Ether are also among the better-known cyber currencies.
  • Crypto coins that eat less energy, for example the Polkadot coin, are also trending.
  • Cryptocurrencies also include curiosities, such as cryptokitties. Here you can breed virtual cats and sell them as profitably as possible.

How can I recognize dubious crypto transactions?

The consumer center in Germany advises caution against non-transparent transactions with cryptocurrencies. There is a lot of questionable advertising for financial investments circulating on the Internet and in social networks:

  • Dubious providers promise very high returns.
  • Most of the time, however, it remains unclear what you are supposed to earn money with and what the business model is.
  • In many cases, these are probably prohibited pyramid schemes.

Negative example: the crypto company Envion, based in Zug, Switzerland. The company promised dream returns thanks to Bitcoin. According to the “Berner Zeitung“, more than 30,000 investors followed the lure and paid in around 100 million francs. But Envion never started business – the investment ended in disaster for the gullible investors.

Publicly visible: the cash book

Yet crypto technology itself is considered safe. Crypro currencies work according to blockchain technology. Translated, this term means “blockchain.” This relies on several important functions. For example, the “open ledger” is publicly visible to every network participant in a blockchain. It is stored on multiple computers. Therefore, invalid transactions can be rejected immediately. For example, anyone who transfers more Bitcoins than they actually own cannot make a transaction.

Prevent manipulation: The full-node copy

Another crypto concept is the so-called full-node copy. What is behind it? To prevent tampering with the open ledger, the system stores the information on a network of computers. Each crypto participant can keep a copy of the cash book. This copy is called a “full node.”

Control by the miners

Now it is necessary to ensure that each network participant has the same copy of the cashbook. This is done by the so-called miners. Each transaction is confirmed only after its validity has been checked. The miner also calculates the key code that allows the entry in the cash book. This is done via the proof-of-work method.

The blockchain system calculates the code and enters the transfer into the miner’s cashbook. This code is called a “hash value.” This is then passed on to the full nodes of a network. This way, each recipient has an identical copy of the blockchain. For verifying the transaction, the first miner receives a fee in bitcoins.

Where can I pay with crypto coins?

Outside of digital crypto trading, there are only a few outlets and stores that accept cryptocurrencies as payment. Crypto tokens are subject to significant price fluctuations. This can lead to some risk in accepting them as a means of payment.

Environment: cryptocurrencies are power hogsHow

great the power consumption for the "mining" and transactions of bitcoin? A computer at Cambridge University calculates this around the clock. Result: the consumption is just under 117 terawatt hours per year. The mining energy is not green. The energy for the cryptocurrency business does not come from clean sources. Half of it comes from China - and thus from coal-fired power plants. But fossil energy sources intensify climate change. Specialists at the University of Hawaii calculated that bitcoin alone blows 69 million tons of CO2 into the air every year.

Thomas Grether

Journalist | Editor | Entrepreneur & Environmental Scientist.
Main focus: Tokenization | Digital Transformation Processes in Companies | Internet and Web Publishing | Environment

Thomas Grether

Journalist | Redakteur | Unternehmer & Umweltwissenschaftler
Schwerpunkte: Tokenisierung | Digitale Transformationsprozesse in Firmen | Internet und Webpublishing | Umwelt