What is Bitcoin – a Virtual Currency or is There More To It?

A Bitcoin is a virtual payment unit and the mother of all digital currencies. The market capitalisation of Bitcoin (BTC) today (as of the beginning of July 2017) is around 36 billion euros, which is a staggeringly high figure. There are many different names and views for this: Crypto currency, virtual money, virtual investment, speculative transaction, risk transaction, alternative means of payment, etc.

The currency is not based, like the Euro, on physical coins or banknotes that have a value. The Bitcoins are a worldwide decentralized means of payment that can be traded exclusively online on the Internet (with a few exceptions that we will discuss later). Decentralised in this context means that issuing and trading are not monitored and settled by states or banks, but by a central control element, namely the block chain.

Why were Bitcoins invented?

Since the Internet was introduced in the 90’s, access to this medium has grown tremendously. The door for the virtual world and thus a worldwide trade is open. The worldwide trade with different currencies makes payment transactions more difficult, as often high fees and a processing time of several days are not uncommon.

With Bitcoins, these worries are a thing of the past. With the virtual currency it is possible to send a transaction from Germany to Japan within a few minutes for an incredibly low fee. Here no intermediaries like banks and the state are needed, but it can be sent directly from a wallet (“virtual purse”) to a destination address of another person.

The disadvantage of this, of course, is that an Internet connection must be available, regardless of whether it is provided via the laptop, the tablet or your own mobile phone. Furthermore, crypto currencies are popular attacks for hackers. It was not uncommon to read in the headlines that large crypto exchange exchanges such as Coinbase or Poloniex had stolen considerable amounts of money. This makes it all the more important to have a hardware wallet. This means that you carry your current account balance on a USB stick or other storage device including your passwords.

How does Bitcoin work and what technology is behind it?

Put simply, the core of the Bitcoin consists of a payment system and a monetary unit, which is not managed centrally as in our banking system, but decentrally in a computer network with the help of its own software. This system is based on a decentralised database managed jointly by the participants. Here all transactions are stored or tracked on the so-called blockchain.

The only condition for participation in the blockchain is a so-called Bitcoin client, which is either stored on the local hard drive or provided by an online service provider. The Bitcoin system is therefore not subject to any geographical restrictions and can be used anywhere on the planet – the only prerequisite is the existence of a stable Internet connection.

The peer-to-peer structure of this system leads to a complete decentralization of the Bitcoin ecosystem. Similarly, the provider Bit-Torrent can be cited, which also uses this logic.

Is Bitcoin real money?

It is not possible to answer this question with a clear “yes” or “no”. There are advocates as well as critics and institutions who all pursue different interests in order to clearly represent their point of view. Bitcoin is regarded as the currency of the future, a virtual currency that is not centrally controlled and therefore free from the influence of governments and other forces.

The European Central Bank defines Bitcoin as follows:

Virtual currencies like Bitcoin are not real money as defined in economics, nor are they money or a currency from a legal perspective.

This means nothing other than that the ECB does not accept Bitcoins or Bitcoin units as money. However, Bitcoin units can be exchanged for a variety of services or goods and the number of acceptance points is steadily increasing. The country of Japan is particularly noteworthy, as Bitcoin is already recognised as a legitimate means of payment.

The biggest difference between a real government currency is the legal obligation to accept the national currency as payment for any debts.

To find out how to buy Bitcoin, please refer to our detailed step-by-step Bitcoin Buying Guide.

Fees and costs of a Bitcoin transaction

The local proximity does not matter for the amount of the fees of the transaction. There is only one fee in the Bitcoin network for sending Bitcoin and/or one miner fee. The miner fee is paid to the person who first confirms and processes the transaction. The person who processes the transaction cannot be determined in advance. The fee is an expense allowance for the hardware, electricity costs and other fees incurred by the miner.

However, the transaction fees represent only a small part of the actual costs of the transaction. The miners receive a fixed reward in the form of newly created Bitcoin units. This process leads to an expansion of the money supply and thus to additional costs which are passed on to all market participants (i.e. persons who own Bitcoin) by inflationary forces.

How much costs should be spent on a transaction can be determined by each individual. However, the lower the reward for the transaction, the longer it takes for the Bitcoin units to make their way from sender to destination.

The prevailing minimum fee for a transaction is approx. 0.5 cents. However, the recommended minimum fee is much higher and is approximately 5 cents (0.0001 BTC). These values fluctuate naturally and should not be regarded as fixed. This fee is also preset for most wallets. This means that a transaction confirmation can be issued within minutes, depending on the load on the block chain. A bank transfer usually takes at least one day and international transfers can be subject to high fees.

Can Bitcoin be used completely anonymously?

Since Bitcoin can be traded anywhere where the Internet is available, this is already an indirect answer to this question. A certain anonymity is given, but we leave digital fingerprints everywhere we go on the net. Even if we use the most secure and encrypted way (encrypted Tor browser, or software that obscures our IP), IT experts are likely to be able to track any transactions in an emergency.

Nevertheless, a certain anonymity is given. The data along the blockchain is passed through an encrypted private key. This makes it difficult, especially for private individuals and companies, to trace transactions without further effort and additional information about the Bitcoin sender and recipient as well as the amount of the transaction.

However, it should be borne in mind that this anonymity also has limits. All transactions between two participants are logged in a public booking system (the blockchain) and are thus permanently stored in the entire network. No personal data is stored here, but it is possible to read out who has completed the transaction from these addresses. Thus the respective sender or recipient can be determined specifically on sovereign demand.

This makes Bitcoin more verifiable than, for example, the exchange of cash between individuals or companies. Operators of Bitcoin exchanges that allow the exchange of cash into other currencies are subject to strict legal regulations in order to combat money laundering.

How secure is Bitcoin?

The complete ecosystem of the Bitcoin network is very complex and cannot be sketched in one sentence. Security can only be guaranteed if all relevant parameters and elements communicate smoothly with each other. More and more digital providers are accepting Bitcoin as a means of payment. For example, it is possible to pay the delivery service Lieferando with Bitcoin units. But also local shops, especially in Switzerland and occasionally in Austria, offer payment by wallet. You can find a secure Bitcoin Wallet here.

Of course, hackers investigate all possibilities along the consumer chain to uncover possible weak points and steal money. As already mentioned, some large file-sharing networks were the target of large hacker attacks.

As a rule, the websites are attacked with so-called DDos attacks. This is also the reason why you get a message on Poloniex or on access to Anycoin.eu saying that a check for a DDos attack is performed.

Such an attack is a kind of overload attack on a single website. This is a mass of requests to the server on which e.g. poloniex.com is located. This leads to an overload of the website. Now it can become possible to spy out the computer network and to get to stored data.

There is therefore no 100 percent security when using the Bitcoin network or exchanging data on online exchanges. In any case, it is highly recommended to use a hardware wallet. This way you can protect yourself a bit and it is in any case safer than using online wallets from already mentioned exchange exchanges.

Is Bitcoin worth an investment?

This question is also difficult to answer. The price of all crypto currencies is very volatile (can fluctuate strongly) and is therefore not very stable like the price of gold (although it is admittedly subject to fluctuations). Fluctuations at Bitcoin of several hundred dollars are not uncommon.

So if you trade with Bitcoin or want to invest in BTC, you should only spend money that you can lose in an emergency or suffer personal financial damage. There are success stories again and again and the crypto currency has already born some millionaires. You can read the current Bitcoin course here.

Forecasts say that Bitcoin’s exchange rate can still rise strongly in the future, but of course there is also the risk that the exchange rate will collapse from one day to the next.

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