Cryptocurrencies: Opportunities, risks, and safe handling
Understanding cryptocurrencies: Seizing opportunities, minimizing risks, and securely managing digital assets
Learn how Bitcoin & Co. work, what risks lurk, and how to protect your crypto assets with secure wallets and smart strategies.
Financial independence, fast transactions, and high profits: digital currencies promise many advantages, but they also carry significant risks. Those who are aware of these risks can take advantage of the opportunities offered by the crypto world without losing control of their digital assets.
Anyone trading Bitcoin, Ethereum, or Tether today will hardly notice anything of the altruistic motivations behind the beginnings of these digital currencies. When, in 2008, a group that remains unidentified to this day, operating under the pseudonym Satoshi Nakamoto, launched the first cryptocurrency in the form of a white paper, investment security and price gains were not an issue. Instead, the inventors were bothered by the dominance of banks in the field of financial transactions and wanted to create an independent, yet secure and globally available alternative currency: Bitcoin was born.
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Structure and functionality
Cryptocurrencies are digital means of payment based on cryptographic methods and blockchain technology. They are not controlled by central banks or states, but are managed decentrally in networks. In this way, cryptocurrencies enable online payments without a third party, such as a bank. In return, no one can intervene to control the system if errors occur in the handling of the cryptocurrency.
The best known of these is Bitcoin, but there are thousands more, whose reliability and stability can vary greatly. Their asset value is purely virtual and is determined exclusively by supply and demand, which can lead to significant price fluctuations.
The blockchain technology on which cryptocurrencies are based functions as a public, distributed ledger that documents transactions transparently and in a tamper-proof manner. The blockchain is a constantly growing chain of data blocks in which transactions are stored. These blocks are managed decentrally on many computers and must be verified by every node in the network. This makes it virtually impossible to manipulate transactions retrospectively. Cryptocurrencies enable online payments without intermediaries such as banks.
Ownership of and access to crypto assets is secured using a key pair consisting of a public and a private key.
CBDC and stable coins
The term “cryptocurrency” is typically limited to digital money products that are operated in a decentralized manner and independently of banks. This is distinct from central bank digital currency (CBDC). This is electronic money issued by a central bank and intended to be available to a large group of users. The primary goal of CBDC is to serve as a digital supplement to cash – and possibly even replace it in the longer term. In contrast to actual cryptocurrencies, control lies entirely in the hands of the state and can therefore also be used for monetary policy purposes.
Stablecoins are positioned between CBDC and cryptocurrencies. The focus here is on stability rather than sharp price fluctuations as with Bitcoin and other cryptocurrencies. For this reason, stablecoins are usually pegged to a more stable currency such as the US dollar or the euro. They are generally issued by private companies, some of which are from the crypto industry, e.g., Tether.
Risks and precautions when investing
Caution is advised when dealing with cryptocurrencies. Anyone wishing to invest should thoroughly research the currency in question and its issuer – there are thousands of different cryptocurrencies. A healthy dose of skepticism is particularly appropriate when it comes to tempting offers on social media. Once transactions have been made, they cannot be reversed. Investments should therefore only be made with amounts that you can afford to lose. Purely marketing-driven currencies such as “Trumb Coins” are naturally not suitable for serious investments.
Crypto wallet: The digital wallet
To manage cryptocurrencies, you need a so-called crypto wallet. This does not store the currencies themselves, but rather the private and public keys that enable access to the digital assets. The public key serves as a receiving address, while the private key authorizes transactions. Losing the private key leads to the irretrievable loss of the associated digital assets, and losing the access code to a wallet means losing access to the assets stored in it.
There are different types of wallets that vary in terms of security, user-friendliness, and accessibility. Software wallets are programs that are installed on computers or smartphones. They are easy to use and enable fast transactions, but are vulnerable to malware and data loss in the event of device failure without a backup. Online wallets, also known as web wallets, can be accessed via a browser and store data in the cloud. They are particularly suitable for beginners, but carry a higher risk of hacker attacks and require trust in the provider. Hardware wallets are physical devices that store private keys offline. They offer the highest level of protection against online threats, but are more expensive and, if lost without a backup, the assets are also lost. Paper wallets, on the other hand, consist of a printout of the keys on paper. They offer maximum security against online attacks, but are impractical for frequent transactions, and if the printout is lost or damaged, the assets are also lost.
Security tips for handling wallets
When managing wallets, a distinction is made between self-custody and third-party custody. With self-custody, the user has full control over their keys, but also bears full responsibility. This method offers the highest level of security, but requires careful backup and management. With third-party custody, a service provider such as a crypto exchange takes over the management. This is more convenient, but carries risks such as hacker attacks or the insolvency of the provider.
To ensure the security of your own wallet, it is advisable to use a hardware wallet for larger amounts and to store access codes offline, for example on paper in a safe. These should never be shared or entered on unsecure platforms. Backups of the wallet and keys are essential in order to regain access in case of loss.
Bequeathing cryptocurrencies
An often neglected topic is estate planning. Unlike traditional assets such as bank accounts or stocks, there is no central authority for cryptocurrencies that could verify and grant the monetary entitlement of heirs.
Technically, access to the monetary values is only possible with the corresponding access data, such as private keys, passphrases, etc. It must therefore be ensured that descendants receive the necessary access data (e.g., physically in a safe) and also know how to gain access. Instructions are helpful here. If the crypto assets are held by a third party (e.g., an online exchange), there are often guidelines for what to do in the event of death, similar to those of traditional banks, which must be observed.
From a legal perspective, it is advisable to clarify the ownership structure in good time and to record it in a will, for example. Tax implications must also be taken into account.
Anyone who decides to enter the world of cryptocurrencies should obtain comprehensive information and always remember: my wallet, my responsibility.
When investing in and using cryptocurrencies, please note:
- Cryptocurrencies are very volatile. Large price fluctuations within a short period of time are to be expected. Therefore, only invest amounts that you can afford to lose.
- Before investing, research and inform yourself about the respective currency and the identity of the issuer, and consult your financial institution.
- Remember that once transfers have been made, they cannot be reversed.
- Keep the access codes to your crypto wallets extremely secure. If you lose the access code, the money is also irretrievably lost. You should also make arrangements for their inheritance.
- A healthy dose of skepticism is warranted when it comes to seemingly lucrative offers and promises of high returns, e.g., on social media channels such as Facebook, YouTube, Twitter, etc. Quick money without any risk of loss is an illusion.
Author: Björn Näf, Lecturer in Cyber Security & Cybercrime, “eBanking – aber sicher!” team (www.ebas.ch), Lucerne University of Applied Sciences and Arts – Computer Science
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