Are Bitcoins practical?

Bitcoins were the first virtual currency to be launched in 2008. Initially more something for Internet freaks, the digital money has since developed into a speculative object. Central bankers are watching the development of Bitcoins closely.

Although there are neither coins nor bills and no central bank cares about the money supply, Bitcoins are a commodity. In recent days, prices have reached almost fantastic heights. For the first time, more than USD 2,000 or euros were paid for a Bitcoin in May; in the initial phase, the price had been languishing at zero for a long time. Initially, the money could not be exchanged for other currencies at all.

Sustainable price increase or bubble?

btc bubbleThe recent Bitcoin boom probably has two main causes. In early April, Japan declared digital money an official means of payment, making it a global pioneer. And in the U.S., there are rumors that the U.S. Securities and Exchange Commission could soon allow an index fund denominated in Bitcoins for the first time. Both measures are and would be important steps to further promote the acceptance of Bitcoins on the financial markets and in international payment transactions. This explains the price hype.

Whether these “peak” prices are sustainable or a bubble remains to be seen. It would not be the first time that a spectacular price increase is followed by a drastic price drop. Already at the end of 2013, the Bitcoin price had skyrocketed to over 1,100 US dollars, only to lose almost 80 percent of this value again by the beginning of 2015. The old highs were not reached again until the turn of the year 2016/2017. Since then, it has gone steeply upwards.

More than just a price risk

Independence from central banks is an argument that attracts many Bitcoin players. At a time when central banks are manipulating currencies on a large scale with their monetary policies, there is a growing desire for money that is free from such influences. Another advantage is that transactions are ultra-fast with virtually no fees. Borders don’t matter with Bitcoins. In early April, Japan declared digital money an official means of payment, making it a global pioneer.

  1. Still, virtual money is not without risks. In addition to the price risk, there have been multiple bankruptcies of Internet exchanges where Bitcoins were traded in the past – with losses for Bitcoin owners.
  2. The exchanges are also not always secure against hacker attacks. Larger amounts of Bitcoin have already been stolen through such attacks. To find a reliable exchange, visit this site.
  3. The anonymity has also earned the virtual money the accusation of encouraging criminal transactions and money laundering, read more.

In Germany, Bitcoins still lead a shadowy existence. So far, just one hundred companies accept the virtual currency and report only very modest customer response. Bitcoins have yet to prove their practical suitability here. We can be curious.

What is a Blockchain?

BlockchainThe term “blockchain” is currently on everyone’s lips in the financial industry. Many are hoping for new applications and perspectives from the “blockchain” – as it is translated in German – while others see it as a threat to the business model. But what is the term all about?

The blockchain principle is an invention of the digital world and first appeared in connection with the virtual currency Bitcoin. It does not require any financial intermediaries at all and functions exclusively via the networking of the currency participants. The blockchain thereby ensures that transaction security is guaranteed even without “financial intermediaries” – an essential prerequisite for the cyber currency to function.

Blockchain is generally understood to be an expandable list of data records that is secured against subsequent manipulation in such a way that a checksum (hash) of a previous data record is stored in the respective subsequent one. Practically, it works like this:

At the beginning, there is a single data record that is stored decentrally and publicly accessible. It contains, for example, verified information about the identity of a user. If a transaction is carried out, the original data record is extended by a transaction data record. Each new data record contains the checksum of the previous blockchain. This makes it possible to systemically trace the completeness and “conclusiveness” of the respective data record at any time.

To participate in a blockchain application, users need special access software – also known as a wallet. It consists of a key pair – consisting of a public key that is visible everywhere and a private key. The private key is used to sign the transaction, making it valid in the first place. If the public and private keys match, the transaction can take place. The associated information is then created in a new block, which also contains the checksum of the entire previous blockchain. A so-called miner verifies and seals the data. Only then is it “attached” to the blockchain. When the public and private keys match, the transaction can occur.

This process makes the transaction factually secure against forgery and tampering, because a “forger” would need access to all servers where the blockchain is stored to do so. This is factually impossible. In terms of financial transactions, the blockchain can also be interpreted as a digital account statement that “books” every change and stores it in an equally decentralized (further information) and transparent manner.

Many business models called into question

From this, it becomes clear why the blockchain principle can become a threat not only to the financial world. Because it eliminates the need for complicated verification, authorization and auditing institutions that are often part of the business model. Other industries and professions are also affected, in principle all those in which transactions play an important role. The spectrum ranges from booking portals on the Internet to the classic notary.