Digital units of value with distinct differences
The most important points at a glance:
- Unlike government currencies such as the euro or dollar, cryptocurrencies are not issued by a central bank or other central institution.
- There are thousands of cryptocurrencies. Each has its own characteristics. By far the best known is Bitcoin.
- The collective term for all other crypto assets is altcoins. Some of them are joke or even scam projects.
How to proceed
- What applies to other forms of investment is even more true in the crypto sector: there is no return without risk. Be critical and skeptical.
- Cryptocurrencies are speculative. Invested money can be lost.
- The focus of your finances should be a mix of daily money, fixed-term deposits and low-cost index funds (ETFs).
A means of payment that is not subject to the control of a state. A store of value that functions completely digitally. And in the best case, a unit of account for goods and services. These are ideals that countless cryptocurrencies strive for.
In reality, however, the group is completely mixed. The idea of cryptocurrency can be implemented in completely different ways. In its – still short – history, there have already been enormous opportunities for returns, but also dramatic collapses and fraud.
What is a Cryptocurrency?
A cryptocurrency is, in simple terms, an asset that can be traded. The linguistic proximity to money and currency does not appeal to everyone (more on this question below). You likely have images in your mind of Bitcoin or Ether coins since many articles or films are illustrated with such symbolic images. However, cryptocurrencies exist only in digital form and not as cash. Each cryptocurrency has a blueprint or a kind of constitution that defines its purpose and functionality and addresses questions such as:
How are new units of the cryptocurrency created?
How are transfers verified, processed, and documented?
How can the constitution of the cryptocurrency be changed?
These aspects are also regulated for traditional currencies. However, their constitution is not summarized in a single document or program code but arises from a multitude of laws or simply from general customs. For example, only the European Central Bank is authorized to issue new cash in euros. It has received its mandate from the parliaments of the Eurozone countries, which could change or theoretically revoke it or, as currently discussed, expand it to a digital euro. Individual commercial banks can create book or giro money when they issue loans (meaning: if someone deposits 100 euros into a bank account, the bank does not keep the entire amount but lends out multiples of it to other customers who take out loans). Payment transactions in euros are verified and documented differently depending on their nature: a tip payment at a café is processed technically differently than the transfer of your salary or pension.
How Many Cryptocurrencies Are There?
Are Cryptocurrencies Actually Currencies?
The term cryptocurrency is viewed critically by some. We have chosen to use it in our texts because it is catchy and widely recognized, but we would like to address a few limitations.
Let’s first look at the word component currency: Traditional or state currencies share with Bitcoin and similar cryptocurrencies the fact that they can be used as speculative assets. Accordingly, there are traders who bet on the price movements of yen, francs, or dollars. The exchange itself feels similar, as there are current exchange rates and specialized traders. However, there are important differences.
When you consider the guarantee implied in the term currency, it operates quite differently. A state credibly guarantees the value of its currency to some extent. The value of a cryptocurrency is not guaranteed by any state authority. Depending on the concept of the respective cryptocurrency, there may be accompanying guarantees: for example, Bitcoin’s code stipulates that no more than 21 million units will ever exist. However, this does not say anything about the exchange value of Bitcoin in everyday goods. In the case of stablecoins, it is regulated in some form that their value is pegged to another asset, such as Tether being linked to the US dollar.
In broad terms: The guarantee provided by the Swiss National Bank for the franc is likely more credible than that of a dictatorship or a developing country. Similarly, the value proposition of the Bitcoin concept is certainly more robust than that of any joke coin.
In addition to their function as a medium of exchange and store of value, traditional currencies have a third role: that of a unit of account. This means that prices are stated in the respective currency or recorded in contracts (for example, monthly salaries in euros or a barrel of crude oil in dollars). Cryptocurrencies rarely assume this role, not least due to their significant price volatility. Even Bitcoin is typically exchanged at the current daily rate of a state currency like the euro.
The word component crypto is also questioned—though less frequently. The argument is that while cryptographic technologies usually underpin these projects, their use should not be considered “hidden” or “secret.” A central component of a cryptocurrency is ultimately a database, often realized as a blockchain. It is therefore fundamentally possible to trace each individual transaction seamlessly—quite different from cash. With the help of pseudonyms, this is not as critical in everyday practice, but it is still a noteworthy objection.
Alternative terms for cryptocurrencies include crypto money (which also faces some criticisms) or crypto unit of value (or Krypto-Asset in German), and crypto asset in English.
State currencies like the euro and franc are referred to in the crypto industry as fiat currencies. This distinction is intended, for example, in phrases like “here you can deposit fiat currency and exchange it for Bitcoin.” The term “fiat,” Latin for “let it be,” emphasizes that they are not tied to a commodity—which raises the question of whether cryptocurrencies should also fall under this definition. As you can see, terminology can be somewhat confusing; however, context usually clarifies what is being referred to.
Which Cryptocurrencies Are Most Important?
The oldest and by far most widespread cryptocurrency is Bitcoin. Its share of total market capitalization is roughly 40 percent. In second place is Ether (Ethereum) with about 15 percent share. The other cryptocurrencies in the top tier follow at a distance.
| Cryptocurrency | Abbreviation | Market value in billion euros |
|---|---|---|
| Bitcoin | BTC | 935 |
| Ether (Ethereum) | ETH | 326 |
| Binance Coin | BNB | 50 |
| Solana | SOL | 43 |
| Ripple | XRP | 28 |
| Cardano | ADA | 20 |
| Avalanche | AVAX | 13 |
| Tron | TRX | 11 |
| Dogecoin | DOGE | 11 |
| Chainlink | LINK | 10 |
Those: blockchaincenter.net
Stand: 20. February 2024
Bitcoin
The name of the oldest, most well-known, and relevant cryptocurrency is formed from the unit of measurement “bit” for digital data and the English word “coin.” Bitcoin is abbreviated as BTC.
Since 2009, Bitcoin has been tradable. The blueprint for Bitcoin is documented in open-source software. New Bitcoins are created through cryptographic calculations, the difficulty of which increases over time—requiring large data centers and significant energy consumption. Transaction confirmations and their archiving in the blockchain ledger are also carried out through these calculations. The technical term for this method is “Proof of Work.” According to Bitcoin software, a maximum of 21 million BTC can be created, no more.
Ether (Ethereum)
Ether is the cryptocurrency of the Ethereum blockchain. Ether is also used for payment transactions, but its specific application area is smart contracts—digital contracts that function like software and can process data. Ether holds particular significance in the realm of NFTs (non-fungible tokens). To create these digital certificates, you must pay transaction fees in Ether. The abbreviation for Ether is ETH.
Dogecoin
Dogecoin epitomizes the category of joke coins, often referred to more critically as shitcoins. Another collective term is meme coin, derived from the English word for often humorous or ironic references in social networks. Launched in 2013 as a parody of Bitcoin, Dogecoin has consistently remained among the most traded cryptocurrencies.
Hardly any text about Doge omits a symbolic image of a coin with a dog face—a Shiba Inu. Unlike Bitcoin, Dogecoin has no upper limit on the total number of units that can be created. The correct pronunciation for Dogecoin involves saying “dou” first, so it rhymes with “show,” followed by a soft “sh” as in “garage.”
Stablecoins
A stablecoin is a cryptocurrency that is pegged to another asset, often the US dollar. Stablecoins serve as a kind of bridge between other cryptocurrencies and the analog currency world. They facilitate exchanges from one cryptocurrency to another when users want to hedge against excessive value fluctuations. However, there are different concepts among stablecoins regarding how the peg to the dollar or other assets is regulated. Tether (USDT), USD Coin (USDC), and Binance USD are the most well-known stablecoins.
Where Can You Buy Cryptocurrencies?
Although neither die-hard crypto fans nor supporters of traditional currency systems particularly like the comparison, there are similarities with conventional exchange offices. Major currencies like the US dollar or euro can be exchanged at many locations, while more exotic currencies from smaller countries are much rarer. Most cryptocurrency platforms offer Bitcoin and Ether (Ethereum), but beyond that, there is significant variety. Some exchanges list over 100 different cryptocurrencies; Binance claims to have over 600 on its list.
DC Invest AG has reviewed recommended platforms for trading Bitcoin, focusing particularly on regulation in Germany or another EU country. You can read more information in our guide on buying Bitcoin.
You should definitely avoid trading platforms that have little or no independent media coverage. This relatively young market has many fraudsters operating within it. You should also ignore promotional emails that tout investments in Bitcoins.
