Cryptocurrencies are on everyone’s lips, especially because of Bitcoin. At GIGA, we take a closer look at this relatively new technology and explain what lies behind it.

Bitcoin is now known not only to technology lovers and brave investors. Due to the sometimes highly fluctuating process, everyone has at least heard of this before. But while some celebrate bitcoin as a revolutionary innovation, others see it as nothing more than risky speculation.

But in addition to Bitcoin, there are numerous other cryptocurrencies that have set themselves the goal of igniting contracts or the art industry in addition to the classic trading of coins. In the following, you will find an overview of the most well-known cryptocurrencies as well as the first steps to becoming an active investor yourself.

Cryptocurrency – What is it anyway?

One of the best known and strongest cryptocurrencies is of course Bitcoin. It was introduced in 2009 under the pseudonym Satoshi Nakamoto, although it is still unknown whether an individual or a group is behind it. On the other hand, it is known that Bitcoin is a digital currency based on a decentralized blockchain.

What is all this for? This should make it possible to conduct business independently of banks, governments or financial institutions.

Blockchain

What is meant by a blockchain? Blockchain is a database, so to speak, where each transaction is recorded on a database block of this blockchain. As soon as a block is full, it is archived and encrypted in a very complex way. Complexity increases over time.

For the computing power provided to solve this encryption, the respective owner is rewarded with bitcoins, which is also described as “mining”. This dividend is halved every four years, which is called halving in crypto-speak.

This procedure prevents a single entity from controlling the currency. This also puts an end to fraud, as the encrypted blocks in the blockchain are considered very secure due to the very complex computing tasks involved.

When it comes to climate protection, mining is usually heavily criticized because digging is associated with very high energy consumption. Bitcoin now uses more power than e.g. Finland.

But crypto can also do more

Coins are all cryptocurrencies that you can use as a means of payment. However, these coins do not have any physical equivalent value to gold coins, they only exist digitally. The exchange rate then reflects how much a single coin would be worth compared to the euro or dollar.

In addition, crypto tokens have emerged, which are mainly used in stock trading, for tracking digital art or for insurance.

Coins, tokens, NFTs – what please?

So what specifically differentiates tokens from coins? Basically, tokens do not have their own blockchain technology, but can be created with a small effort on existing blockchains of other cryptocurrencies.

You can imagine the token as a kind of package that you can fill with different things. These packages can be moved on the blockchain in real time. So tokens represent a type of asset and are often traded like shares for a specific project.

Just as the internet has given us new ways to trade and invest, tokens will continue to proliferate. Tokenization does not even stop at the art world, where trends accumulate under the keyword NFTs (Non-Fungible Tokens). BoredApe’s cartoon monkeys and CryptoPunks’ pixel art have been seen all over the world. But NFTs can also take precedence over official documents such as diplomas or digital admission tickets.

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Another advantage: Values ​​can be exchanged 24/7, banks and exchanges are no longer needed for this. A big plus point for many: It can be verified anonymously who is behind which transactions and who owns which securities.

Unlike classic securities trading, the investor does not receive a certificate, but a token, and the data is not stored online in a securities register, but on the blockchain.

How do the major cryptocurrencies differ from each other?

Currently the largest coin cryptocurrencies Bitcoin, ether and tether. Because the company Limited as tether seller, is often criticized, let’s also look at the smaller cryptocurrency instead Litecoin in the following overview:

Litecoin
  • Transactions are done much faster than Bitcoin
  • lower fees than bitcoin
  • Litecoin is often a model for changes in Bitcoin
ether
  • more versatile than bitcoin as smart contracts can also be entered into due to the eco-network
  • Smart contracts are contracts whose data is protected on the blockchain and is therefore protected against subsequent changes
  • particularly interesting for tokens
Bitcoin
  • largest and best known cryptocurrency
  • Organized decentralized on the blockchain and thus protected from control or manipulation by central banks or institutions
© IMAGO / Lobeca

How do I start investing?

First things first: You have to choose between centralized and decentralized exchanges.

If you are a little more advanced, ie. you want to manage your coins and tokens yourself, there are options for this decentralized exchanges on. Well-known examples of decentralized exchanges are Binance DEX, AirSwap and Uniswap. With these exchanges, you usually do not need to identify yourself.

The most obvious difference here is that you store your wallet on your own hard drive. This means that each individual PC is part of the system, which makes these platforms significantly more secure against hackers.

Investors are thus offered a great deal of freedom, but under certain circumstances this can unfortunately also be attractive to many criminal enterprises.

on centralized You can easily buy or sell cryptocurrencies on trading platforms such as Coinbase, Etoro, Justtrade or Kraken. You must be aware that you must identify yourself, so they are in no way anonymous.

What characterizes these large exchanges is a high trading volume, a strong credit rating and sometimes even insurance on the wallet. In addition, they are usually easily accessible and offer many trading features. The downside here is the security of use as central storage is susceptible to hacks.

The mentioned coin cryptocurrencies such as Bitcoin, Ether and Litecoin are basically offered by all market-leading exchanges. So if you want to invest in a particular coin, you must check in advance whether it is even offered on the respective platform.

These exchanges are particularly suitable for newcomers, and as long as there is an internet connection, you can access your coins anywhere.

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Do I have to pay tax?

The short answer is yes, profits from selling cryptocurrencies are taxable. Unlike profits from classic share trading, however, taxes are not automatically deducted. As a buyer, you are responsible for paying the applicable taxes.

However, this is only the case if the profit is made within one year of the purchase. The ordinary income tax rate then applies here, as the income is considered speculative profit. Profits remain tax-free up to the exemption limit of 600 euros.

© IMAGO / Steinach

How do I deal with other investors?

You can buy cryptocurrencies with conventional currencies (also called fiat money) on exchanges like Kraken or Coinbase and then transfer them to your wallet (= digital wallet).

You should also consider the fees of the trading platform. However, don’t be fooled into looking only for low fees. The size of an exchange’s trading volume is always an indication of how much is actually traded there. If you choose a platform with low volume, it can take much longer to find a buyer for your currencies than with large providers.

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