Chapter 1
1.1 - What is Bitcoin, Ethereum and Co. anyway?
1.2 - What use are cryptocurrencies and what can I do with them?
1.1 - What is Bitcoin, Ethereum and Co. anyway?
I would like to give you a short introduction to the crypto area because this topic alone would be enough to write a book on.
Every cryptocurrency has a specific purpose for which it was created. Each cryptocurrency is an idea, how things can be improved in the most diverse ranges of application with their technology.
Bitcoin is probably by far the best-known cryptocurrency worldwide. Its inventor, known in the crypto world as Satoshi Nakamoto, whose identity is still unclear, launched Bitcoin in the wake of the 2008 World financial crisis in January 2009. The smallest unit of Bitcoin is named after him.—the Satoshi. A Bitcoin consists of exactly 100,000,000 Satoshi, or in other words, one Satoshi is 0.00000001 Bitcoin.
The basic idea behind this is to create a store of value and establish a payment system that is not subject to inflation, similar to gold.
Bitcoin, like gold, as raw material, is only available in limited quantities in the world. The limit for Bitcoin is 21 million Bitcoin. Currently, the following are (as of 08/20) about 18.4 million Bitcoin in worldwide circulation.
How come the Bitcoin price has seen a constant rise in value?
A certain increase in value results inevitably from the limitation of certain property and the associated rising demand for this property. Also, the creation of a Bitcoin, also known as mining, on the blockchain is becoming increasingly difficult because the tasks to be solved to find a block on the blockchain is becoming more complex.
The creators/miners also only have about 10 minutes each to find a block on the blockchain.
To illustrate this a little better, I would like to give you an example.
Let us assume that the first block had to be found in January 2009 with the task 1 + 1=2. This could have been solved without a computer and as a reward, the person who solved the task in less than 10 minutes received about 50 Bitcoin. At today's Bitcoin rate (08/20), this would be around $460,000, which the person who was able to solve the task in 10 minutes would receive as payment. . Unfortunately, the price for a Bitcoin at the time of creation was very low. It was just $0.01 then.
Although the price at that time was so low at $0.01 per Bitcoin, the miners were able to work very profitably, because it was easy to earn money with it then. The expense such as graphics card, PC, power consumption, etc. was relatively low and the tasks to be solved were completed in minute intervals. Today, a good 11 1/2 years later, the block tasks to be solved have become so complex and difficult that a well-equipped PC is already far from being sufficient to find a block in 10 minutes. On top of this, horrendous electricity costs would be incurred, because the PC should be at the mine day and night, which makes profitability impossible for a private miner. For this reason, over the years, various cloud mining providers have established themselves in this area, they make up the majority of mining. The increasing demands on hardware and the associated electricity costs for ongoing mining alone would raise the price of Bitcoin to around $1,100, assuming that one could still get around 50 Bitcoin per block found.
However, due to the calculation algorithm, which has implemented a halving of the Block Reward (distribution) approximately every 4 years, the reward of the distributed Bitcoins per block decreases. This means that each person who solved or found a new block on the blockchain has received, e.g. starting from November 2012, only 25 Bitcoin per block found, from July 2016, only 12.5 Bitcoin per block, and from May 2020 only 6.25 Bitcoin per block.
The Block Reward is therefore so important to counteract inflation and to maintain the purchasing power of 1 Bitcoin. The situation is completely different from the normal Fiat currencies, which lose far more than 2% of their purchasing power per year due to inflation. The British pound is still by far the most stable currency since its creation, with about 90% inflation/loss of purchasing power. Other Fiat currencies are in the 300% - 1000% range or more.
At this point, let's compare Bitcoin to gold. Due to the recurring halving of the newly distributed Bitcoins per block, there is a shortage of newly available Bitcoins, with the same or increasing demand similar to the situation with gold. For both gold and Bitcoin, the quantity of the available goods decreases over time. Gold is increasingly difficult to find since many gold mines are already depleted and therefore an increased effort must be made to develop new gold deposits. Both Bitcoin and Gold are available in limited quantities and the cost of mining them is increasing year by year.
1.2 - What use are cryptocurrencies and what can I do with them?
Some cryptocurrencies only function as pure means of payment, cryptos such as Bitcoin or Bitcoin Cash. Others, on the other hand, are moving in the banking sector to stabilize and accelerate the increasing electronic payment traffic, such as Ripple (XRP). IOTA (MIOTA) is focused on the telecommunications sector and has been working for some time with the leading companies in this sector, to name just a few examples.
With a few exceptions, most cryptos were primarily created for the sole benefit of their founders. These companies had founded themselves to raise money for their start-up project through the specially created coin or crypto.
In 2017, the biggest crypto-hype year to date, the number of newly founded com...