In 2017, cryptocurrencies overran the world in a huge hype. Then came the correction phase, and prices plummeted. Nevertheless: Bitcoins and Co. are the future. The reason for this is not so much the currencies themselves, but primarily the technology – the blockchain.
A price increase of over 1,000% and a record high of USD 20,000 – that’s what the cryptocurrency Bitcoin achieved in 2017. Even after a dramatic price correction of cryptocurrencies of about 75% in 2018, the spell remains unbroken.
What are Bitcoin and who is behind it?
Behind Bitcoins and Co. is a technology called blockchain. The blockchain is a decentralized data register through which information – such as financial transactions – is transferred.
Multiple transactions are stored in a “block”. This block is attached to existing blocks, which is why the technology is called blockchain. Everything follows a linear structure – meaning the records can always be traced. Each block is given a timestamp. The new block is linked to the previous block using a cryptographic “check value.” This check value is called a hash value. Plus: it contains a checksum of the entire information. This prevents duplications and ensures that new data records are appended in the correct sequence.
The advantage: All transactions of the participants are stored decentrally on different node computers (“nodes”). The more node computers participate in confirming transactions, the better the decentralized database can protect itself against manipulation attempts.
Example: Imagine an endless checkout roll in the supermarket. Each activity creates a new line on the paper. No old line can be deleted without destroying the roll. For security, the information is recorded identically in many different “cash registers” at the same time. All transactions are therefore transparent, unchangeable and traceable.
How can the individual blocks in the chain be verified?
This is done by the so-called “miners”. They provide the computing power of their computers. For the energy- and cost-intensive creation of blocks, they receive newly mined Bitcoins (block reward) as payment. In total, there are only 21 million Bitcoins that can be mined. According to calculations, this maximum will be reached in 2130. The price of a Bitcoin is determined by supply and demand on the crypto market.
Who invented the Bitcoin?
So far, it is unclear or disputed who is responsible for the Bitcoin blockchain Under the pseudonym Satoshi Nakamoto, the first specification of the blockchain technology as a decentralized database management system was published in a white paper in 2008.
Cryptocurrencies: Flash in the pan or breakthrough innovation?
Bank Austria expert Walter Pudschedl: “The advantages of virtual money are obvious: double transactions cannot occur, as a transfer can technically only go to one recipient. In addition, there is no possibility of credit or debt, as there is no overdraft facility. Payment transactions are transparent, as each payment is traceable to a Bitcoin address and can be viewed by any user. In addition, the very nature of blockchain technology ensures that the transaction is immutable, untraceable and irrevocable.”
- But there would still be the issue of irreversibility: payments cannot be reversed, and energy consumption is disproportionately high. In addition, cryptocurrencies also face the risk of total loss, or theft, and hacker attacks are also possible.
- A problem that has arisen especially during the absolute peak so far: The miners needed to process transactions sometimes have difficulty creating enough new blocks due to high transaction numbers. This leads to higher transaction costs and long waiting times.
Are Bitcoins recognized as a means of payment?
It is not yet possible to say how Bitcoins will develop. However, the fact that the blockchain is interesting was only proven by the World Bank in the summer of 2018. It issued the first bond based on blockchain technology in August.
The Austrian National Bank denies Bitcoins the characteristic of classic money due to the strict quantity limitation and the lack of central regulation and supervision. The FMA also announced already at the beginning of 2018 that Bitcoins are not e-money as defined in Section 1 (1) E-Money Act, not a means of payment as defined in Section 1 (1) Z 6 Banking Act and not a payment instrument as defined in Section 3 Z 21 ZaDiG. Moreover, due to the strong exchange rate fluctuations, the function as a means of payment and store of value is generally viewed with great skepticism. Nevertheless, numerous acceptance points can already be found that accept Bitcoins as a payment option. Moreover, the practical application of virtual money as a means of payment suffers from the fact that more than 1,000 other cryptocurrencies have now emerged alongside Bitcoins. Bitcoins and other virtual currencies are officially regarded primarily as speculative investment products for risk-conscious investors. Therefore, great caution is also required for financial products based on Bitcoins.