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Monday, February 26, 2024

Bitcoin and Other Cryptocurrencies: Frequently Asked Questions Answered

Your friend asked you about Bitcoin and you want to start big now? We summarize some questions about cryptocurrencies.

The prices of many cryptocurrencies such as Bitcoin and Ethereum have been skyrocketing for months. At this point we try to clarify some frequently asked questions.

What actually is Bitcoin?

Bitcoin is the oldest cryptocurrency with the largest market capitalization – currently around 750 billion euros at a price of around 40,000 euros. In recent years, developers have created thousands more cryptocurrencies, including Ethereum with the second largest market capitalization.

What is a cryptocurrency?

Cryptocurrencies are decentralized, which means that there is no central body like a bank that carries out and monitors the transactions. Instead, all transactions are stored in a network that anyone can participate in – mostly in the form of a blockchain. A block contains a part of all transactions made in the network and always follows a previous block. Chained together (hence “chain”), the blockchain always knows which address has how many coins of a cryptocurrency, even without a central database.

If you want to buy, sell or pay with cryptocurrencies, you basically need an address that you either set up yourself using a so-called wallet or have an exchange set up. Such an address consists of an asymmetrical key pair (key) each with a private, i.e. anonymous, and a public part. The latter is visible in the transfer and thus identifies the sender and recipient. You access your wallet with the private key – never reveal it to anyone.

Why is the Bitcoin price soaring right now?

The entire crypto market is currently on the upswing. As an object of speculation, it is traditionally based on the stock market, which increased significantly in 2020 after a corona-related sag. In addition, large investors and companies have invested billions, Tesla, for example, recently bought bitcoins worth 1.5 billion US dollars and wants to accept the currency as a means of payment in the future. The rest is the usual (speculative) market events.

Should I still invest now?

If you want someone on the Internet to answer this question to you, the answer is probably “no”. Cryptocurrencies are extremely volatile – price fluctuations in the double-digit percentage range are the order of the day. Maybe you can make money quickly, but you can just as easily lose it. At the last Bitcoin soaring in late 2017, early 2018, for example, the price rose to almost 17,000 euros, but then crashed to less than 6000 euros and bobbed around until summer 2020 – at times below 3000 euros.

The mantra therefore is: only invest money that you are willing to lose. Always expect a complete loss.

No matter! How do I buy cryptocurrency?

There are numerous trading venues, so-called exchanges, for cryptocurrencies. Established providers are, for example, Binance, Coinbase and Kraken. Note: Most reputable exchanges require authentication in order to trade. Once verified, you can transfer (real) money and then trade.

I heard that you can also calculate cryptocurrencies with a PC?

Basically yes. Many cryptocurrencies use a so-called Proof of Work (PoW) to secure the network. Computers have to find a correct hash for a block before it is included in a blockchain. If you manage to do that, you will receive coins as a reward. With Ethereum, for example, this also works with fast graphics cards.

In Germany, however, this is only partially worthwhile because electricity costs are high in this country. Mining can be exciting for those who like to experiment with a powerful desktop, but it pulls a rat tail behind it in the tax return. A detailed article on mining follows.

I have bitcoins now! And now?

In principle, you can leave all purchased cryptocurrencies on the exchange. But then you run the risk of the provider being hacked and losing your virtual money. Hacks have also occurred at large exchanges such as Binance, which partially credit the losses with the help of profits. There is no guarantee of this, however – the market is largely unregulated compared to the banking system and stocks.

The safer option is to transfer all coins to your own wallet. In addition, you have access to all cryptographic keys with which you can prove the possession of the respective cryptocurrency. There are separate wallet websites and applications for each cryptocurrency; however, the safest variant is hardware wallets in the form of USB sticks, which work in a similar way to FIDO2 sticks . Hardware wallets from Ledger and Trezor are popular.

More on the topic: Top 10 Cryptocurrency to Invest in 2021: BTC, ETH, ADA, XRP, LTC, BNB, LINK, BCH, XLM & UNI – Crypto Price Analysis

How do I transfer cryptocurrencies?

Each wallet has an integrated function for transferring coins and comes with a public address at the same time. Enter such an address as the destination in the wallet and set the transaction fee, and you’re good to go. Exchanges automatically create wallets for every user for all purchased crypto currencies, to which you can make transfers, for example to sell coins.

Attention: Always make sure you have the correct address and never transfer a crypto currency to the address of another crypto currency – most blockchains are not compatible with each other.

Transaction fees? Huh?

With most coins, a transfer costs a portion of the cryptocurrency to be sent, which is usually given to miners as a reward. You can set how much virtual money you want to spend on a transaction. Depending on how much you spend, your transfer will be prioritized. The average costs depend on the utilization of the network. Many wallets automatically set a safe value for a quick transfer.

Are cryptocurrencies completely anonymous?

As long as you do not reveal your address to anyone as a participant in a crypto currency, transactions cannot be traced back to you because the blockchain only documents these addresses. However, conclusions can be drawn by analyzing transactions of certain addresses in the blockchain and correlating them with other information. Exceptions are cryptocurrencies like Monero, which can disguise transfers.

Help, I forgot my login details! What do I do now?!

If you have a stock exchange account, you can contact support. Self-created wallets can usually be restored using a certain sequence of randomly selected words that users see after opening. If you don’t have this “phrase” at hand, it’s game over. Whoever manages cryptocurrencies himself bears the complete responsibility. There is no “forgotten password” function or other trap nets that save your butt.

In general, when trading and shopping with cryptocurrencies, you have a lot more responsibility than with a bank transfer or a stock purchase. Therefore, always check the destination address several times during transactions. If you make a mistake, the coins are irrevocably gone – there is nowhere to call and ask for a chargeback.

“To the moon!” and the tax office

Cryptocurrencies count as objects of speculation. Profits that are achieved within a year and exceed the exemption of 600 euros must therefore be declared in the tax return. Trading from one cryptocurrency to another already counts as a taxable event, as does the purchase of your favorite coffee with a cryptocurrency. Read carefully and, if necessary, seek advice from your tax advisor.

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