Bitcoins have gained more and more attention in recent years. We will tell you how the internet currency works in this practical tip.

Bitcoins – A decentralised payment system

Bitcoins are virtual money. What makes it special is that it is not managed or issued by any central authority.

• This means that the means of payment is independent of states or banks.
• All transactions take place in a peer-to-peer network where anyone with the appropriate hardware and software can participate.
• Each user has his or her own wallet on which the funds are stored. This is encrypted and anonymous, so that it is not possible to trace it back to you personally.
• Payment transactions are stored in a database called the blockchain.
• This is created decentrally on all computers in the Bitcoin network, which means that manipulation can be ruled out.

Bitcoins – this is how they are created

Because there is no central bank or the like that issues bitcoins, the virtual coins have to be created differently.

• And anyone can do this in principle. All that is needed is a computer and a lot of time.

• Bitcoins can be calculated through so-called bitcoin mining. However, it does not make much sense to do this with a standard computer. The computing effort is so high that the electricity costs are higher than the profit from the Bitcoins.

• Generated coins are immediately added to the decentralised network so that no one else can randomly receive the same coin again.

Bitcoins – the advantages

The structure of the Bitcoin system comes with a lot of advantages.

• Thus, worldwide fee-free transfers are possible without any restrictions.

• Your privacy is also protected when making payments through wallets.

• Furthermore, no censorship or blocking is possible as everything is stored decentrally.

• It is also possible to make a profit with Bitcoins through targeted speculation.

Bitcoins – the disadvantages

However, Bitcoins also have disadvantages.

• For example, the price of Bitcoins fluctuates a lot. Particularly in the course of the Cyprus crisis at the beginning of 2013, the value of the online currency shot up from 3 to 5 US dollars to around 266 dollars within a short period of time – the bubble burst and the price fell to below 80 dollars.

• Speculating in bitcoins is therefore extremely risky, on large exchange platforms such as bitcoin.de the course of the price can be followed.

• Another disadvantage is that you have to take care of the security and encryption of your bitcoins yourself.

• Furthermore, the currency is only accepted as a payment method in individual shops.

Bitcoins – Conclusion

The idea behind Bitcoins, to develop a payment system from a decentralised peer-to-peer network, is without a doubt very interesting.

• The anonymity and privacy in particular make the digital currency attractive.
• However, you should not see Bitcoins as a long-term investment. The fluctuating exchange rate in particular poses a risk here.