Table of Contents
What is Bitcoin
As a purely digital means of payment, Bitcoin is the first cryptocurrency ever to use blockchain technology. Individual units, the bitcoins, like Rupees or dollars, can be transferred from a bitcoin account to another bitcoin account by “transfer”.
Unlike traditional means of payment, however, there is no central instance or clearinghouse that ensures the legality of transactions and stocks. Because Bitcoin works decentrally.
How can investors store and use bitcoins?
Bitcoins are stored in Bitcoin accounts called “addresses”. The Bitcoin wallet of an address results from the difference between all inflows and outflows that are stored in the transaction history of the Bitcoin blockchain. An address consists of two “keys”, a private key to be able to instruct transactions and a public key to be able to receive payments.
In contrast to conventional bank accounts, there is no fundamental separation between “account number” and “secret number”. Both keys already contain the information of the “account number”. However, the private key also contains the “secret number” at the same time and thus enables complete access to the entire address of the cryptocurrency list, whoever is in possession of the private key.
Since addresses can be created at will and free of charge, the holdings on one address can be transferred to a new address in the shortest possible time. Once initiated, transactions are fundamentally irrevocable.
Therefore: Regardless of how the private key is protected, whether personally or by an intermediary: The technological principle remains the same: Anyone who is in possession of the private key can both see the amount of the holdings and instruct transactions. Protecting the private key is therefore essential. A private key looks relatively inconspicuous, no matter how high the Bitcoin stock is on it:
Storage Options for Investors
Once this principle has been internalized, the storage options and the associated risks are easier to understand. In the case of cryptocurrencies, one speaks of “wallets”, which are capable of storing several currencies:
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Paper wallets:
One of the safest ways to store them, but with the lowest level of convenience. The private key is written down on paper or printed out and then locked in the (physical) safe.
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Hardware wallets:
Similar to USB sticks, they are just as secure as paper wallets. But a little more convenient to use and do not have to be kept in the safe. The private key is stored on the USB stick and cannot be read out. But use is only permitted by entering a previously determined secret number on the device.
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Online wallets:
Online services that store the private keys on their servers. And which the user with a user account can use to access his or her holdings. An online service can be used conveniently from anywhere, but it entails much higher risks than paper or hardware wallets. Hackers can attack them with the aim of reading out private keys on the server. Malicious employees (or even entire companies) also have the chance to completely empty customer accounts.
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Cryptocurrency exchange:
They are even more convenient than online wallets. As cryptocurrencies can be exchanged directly for other cryptocurrencies or regular currencies. The risk is again significantly higher than with online wallets. Because here for operational reasons – customers do not have separate addresses, but assets are pooled and therefore large assets are stored at a few addresses.
In most cases, purchases and sales of cryptocurrencies, especially Bitcoin, are made via digital crypto exchanges. Classic currencies can be deposited and exchanged like in a foreign exchange transaction, even in very small fragments. To do this, you have to create an account with a crypto exchange provider and, for money withdrawal reasons,
go through a full identification. After the exchange, the corresponding number of Bitcoins is freely available and you can transfer them to other addresses. These can be your own Bitcoin addresses (for secure storage). Or the address of a trading partner for paying for goods or services.
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