Are Bitcoin and Co. any good as a substitute for “real” money?
Since the beginning of the sanctions against Russia due to the Ukraine crisis, the term “cryptocurrency” has repeatedly appeared in the media. We therefore explain what cryptocurrencies are and how the trading system works.
Cryptocurrencies are digital assets that only exist virtually. They are digitally generated through computing power.
Cryptocurrencies are based on a decentralised system. So there are no central banks or other entities that control trading. Instead, the community oversees the digital financial transactions.
The blockchain is a technical solution for storing data in a decentralised infrastructure in a tamper-proof and transparent way. Data is combined in blocks and strung together in an unchangeable chain. The individual chain blocks are provided with a hash value (a kind of check number) that also contains the hash values of the previous transaction. This hashing process and the decentralised distribution of the blockchain ensure that it is tamper-proof.
Cryptocurrencies can be traded or exchanged like official currencies. However, they are not recognised as an official form of money by most states. As a result, they are not subject to the control of governments or financial institutions.
How is digital money created?
Cryptocurrencies are mined (crypto mining). In theory, anyone with a computer and an internet connection can do this. First you open a deposit, a so-called eWallet, in which you can store the mined currencies. A special programme takes over the generation of the currency by solving complicated calculation tasks for the blockchain. The first person to do this has, for example, created Bitcoins. However, as the calculations become more and more complicated, more and more computing power is needed to be among the fastest. Due to the hardware required for this and the high electricity consumption, private prospecting in Germany is no longer profitable (because of the electricity costs).
Bitcoin & Co
The best-known and most frequently traded cryptocurrency is Bitcoin, but Ethereum is also well-known. In total, there are over 16,000 cryptocurrencies.
While bitcoins have been legal tender in El Salvador since September 2021, in Germany you can only pay with them to a limited extent, e.g. at a large delivery service. This is due to the high exchange rate fluctuations, but also has tax reasons: Payments with cryptocurrency are considered barter transactions from which one can make a profit. The profit is taxable. So every transaction would have to be documented for the tax office.
The e-Yuan recently made headlines. There was speculation whether Russia would try to switch to the Chinese digital currency after the Swift exclusion in order to circumvent sanctions. The e-Yuan is not a cryptocurrency in the classical sense. It is issued as a digital means of payment by the Chinese government and all information about transactions made with it is stored by the Chinese central bank. This also makes it possible to exclude trading parties.