Will cash be worthless? How to Protect Your Money With Digital Currencies
Inflation is being felt more strongly than it has been for a long time. Electricity prices have been soaring since the beginning of the year. Since the war in Ukraine at the latest, gas prices, heating oil prices and gasoline prices have also been rising sharply. Rents are still rising in many places.
Together, electricity, gas, rent and fuel account for more than a third of the representative basket of goods. The price increases had a correspondingly significant impact on the inflation rate.
In February 2022, consumer prices in Germany rose by 5.1% year-on-year, in the euro zone by 5.8% and in the USA by as much as 7.9% – the highest inflation rates in decades.
Do we need to brace ourselves for further price rises? Can the central bank do anything? What inflation means and what you can do to protect your money with digital currencies, we explain in this article.
What is inflation?
“Inflatio” comes from Latin and means to inflate or swell. When we talk about inflation today, we mean that the prices of certain consumer goods are swelling, i.e. rising. You can buy less for the same amount of money: Your money loses value.
What is driving the high inflation?
At 5.1% year-on-year, inflation remained at a very high level in February 2022. We feel this especially in gas and heating oil, gasoline and some food. According to the Federal Statistical Office, this is where the most striking price increases occurred.
Yet prices were already rising in 2021 – and not just in this country. The recent developments show that the inflation rate for 2021 for Germany, the euro zone and the USA is significantly higher than in previous years.
What does high inflation mean for me?
First of all, goods and services become more expensive, while wages often don’t rise at the same rate. So you tend to be able to afford less – depending on what your personal basket of goods looks like. However, most people suffer from rising energy, rent and fuel prices. The state has therefore now planned partial relief.
You are also affected as a saver: If you have a lot of money in your checking account and do not receive any interest on it, this money automatically becomes worth less, unlike digital currencies. If you have 1,000 euros in your account and an inflation rate of 5%, for example, your money will only be worth a good 780 euros in purchasing power after five years. With 2% inflation, you will still be short more than 100 euros after five years.
In addition, you benefit as a borrower: your loan amount remains the same on paper, but the money you take in hand to pay off the loan is worth less. When high inflation is accompanied by very low interest rates, as is the case at the moment, banks also offer you more favorable terms for loans.
This was also true for real estate loans for a long time. As recently as spring 2021, construction interest rates were less than one percent – lower than ever before. In the meantime, however, banks are pricing in expectations of rising interest rates and are again charging significantly more than one percent. Moreover, caution is called for, because low construction interest rates are of no use if the property is offered at too high a price.
A favorable construction financing may therefore only be worthwhile if interest rates are still low enough and you also believe that the property will increase in value in the future – and is not already being offered at an overpriced price.
How can I protect myself against inflation?
Investments in gold are often regarded as crisis currency and inflation protection par excellence. The scarce commodity always retains a certain intrinsic value – would probably be accepted as a means of payment in case of doubt. Other commodities such as silver can also provide inflation protection.
Stocks and digital currencies are also considered tangible assets that offset rising inflation. With these investments, of course, the risk remains that the securities will fluctuate in value in the meantime. In that case, it helps to diversify your investments.
Finally, real estate can also be stable in value – or even increase in value. However, it always depends exactly on the property, the location, the equipment, etc. If you live in your own home, at least you don’t have to worry about rising rents.
Digital Currencies against inflation!
The reasons for individuals to invest in cryptocurrencies or digital currencies and their mass adoption are varied. While some invest in crypto simply because it has become a reliable asset class, others do so to diversify their portfolios.
However, more and more individuals and institutional investors are looking at digital currencies as a hedge against rising prices. In October, inflation in the United States hit a 31-year high, which is a cause for concern. Could digital currencies provide the cushion we need?
A growing sentiment among economists and the crypto community is that the alternative digital currency can help countries that are understating an inflation crisis. For example, Turkey’s national currency, the lira.
Michael Saylor, the CEO of MicroStrategy, tweeted, that Bitcoin, the world’s largest cryptocurrency by market capitalization, is the only hope for Turkey.
Not long ago, JP Morgan, in a note shared with its clients In October reported, “Bitcoin is increasingly looking like the new gold when it comes to hedges against inflation. The resurgence of inflation concerns among investors has renewed interest in using Bitcoin as an inflation hedge. “
It’s important to understand what makes many believe digital currencies can save the day when inflation rises.
Seek refuge in digital currencies
Cryptocurrencies have proven to be a better alternative in countries prone to hyperinflation and political turmoil over the past decade, such as Zimbabwe, Argentina and Venezuela.
The hyperinflation in Venezuela and Zimbabwe since 2008 can serve as a reminder of the fragility of fiat currencies. The value of fiat depends on the good faith and credit of the citizen in the economy. But when countries print excess money, people lose faith in the bill, and it devalues overnight. When the value of fiat currency depreciates, it leads to rising inflation, and digital currencies can be the solution to deal with such a crisis.
Crypto emerged as an alternative to the crippled traditional banking system, particularly in Venezuela when hyperinflation and U.S. sanctions disrupted the economy. From sending remittances to protecting wages from inflation to helping businesses manage cash flow in a devaluing economy, crypto became the currency of choice and empowerment.
What makes digital currencies immune to inflation?
As shown in the countries above, cryptocurrency can potentially be an alternative to a central bank regulated economy. Here’s why:
Finite supply
One of the main reasons digital currencies offer better protection is their limited supply. Most cryptocurrencies have a fixed supply, which means that new coins/tokens cannot be put into circulation, limiting the possibility of rising inflation.
On the contrary, countries can increase the money supply by issuing or buying government bonds at lower interest rates with fiat. However, this reduces purchasing power and could cause inflation.
Decentralization at the Core
While each country’s central banks control the money supply in fiat currencies, cryptocurrencies or digital currencies have no centralized entity to control supply. Instead, supply rules are built into the code and not limited to conventional economics. Furthermore, the protocol and process in cryptocurrencies are completely transparent, allowing average citizens to monitor and track the creation of new coins in real time.
What do digital currencies mean for the masses?
Let’s explore how digital currencies can change the average man’s daily life:
- Banking the unbanked: digital currencies can benefit the unbanked or underbanked population around the world who do not use traditional financial services. This category lacks the basic ability to store, send and receive funds. But the world of decentralized finance (DeFi), built on blockchain, can provide financial inclusion to these people.
- Mode of remittance: migrant workers rely on remittance services to send money to their families, often paying high fees. Many cryptocurrencies offer instant transactions across international borders at a fraction of the cost to overcome this barrier.
- Financial assistance: getting financial help in the form of a bank loan is impossible for the poorest parts of the world. Fortunately, for the benefit of those without KYC or credit scores, there are cryptocurrency companies that offer decentralized lending and credit services through the use of smart contracts and collateral.
Where to buy Digital Currencies? How investors buy bitcoin & co from reputable exchanges
The most important facts in a nutshell
- On the Internet, there are many different trading places where investors can buy Bitcoins
- The respective crypto exchanges and trading places for digital assets have advantages and disadvantages
- A list of brokers with crypto trading can be found here
Crypto enthusiasts also like to refer to Bitcoins as “digital gold”. And there are similarities between gold and Bitcoins that cannot be denied.
Unlike state currencies, both are finite – gold is a raw material that is limited in its occurrence, Bitcoins are limited in their quantity to 21 million pieces: In this way, the inventor of the Bitcoin, Satoshi Nakamoto, wanted to ensure their value stability. This, in turn, is particularly important in times of crisis.
At the beginning of the Corona crisis, however, Bitcoin seemed unable to live up to its reputation as a crisis-proof currency: The price plummeted massively, falling below US$5,000.
Bitcoin recovered relatively quickly, however, and the curve has been heading steadily upwards ever since. More than half a year later, Bitcoin found itself at over 15,000 US dollars and more and more investors are putting their money into the digital currency leader.
Three ways to invest in Crypto
In the meantime, it is no longer just daring private individuals who are buying Coins; institutional investors have also discovered digital currencies for themselves. Many of them put their money into the two best-known cryptocurrencies, Bitcoin and Ethereum. Together, their market capitalization represents around 60 percent of all digital currencies. So it’s no wonder that almost every trading center for cyber currencies has Bitcoin and Ethereum in its repertoire.
Even though they are actually available for purchase on every crypto platform, the differences between the trading venues are enormous. Some offer real Bitcoins, others ETPs of Bitcoin on a securities exchange, and still others rely on Bitcoin derivatives.
1. Real cryptocurrencies
Investors can purchase real Bitcoins on traditional exchanges and marketplaces. Exchanges sell the coins directly to the customer – the price is based on supply and demand. Marketplaces, on the other hand, are intermediaries; they only provide the platform for a transaction between buyer and seller. The price there also depends on the market, but the exact amount is set by the seller.
Anyone who buys real bitcoins is actually in possession of the digital coins. It is up to him whether he leaves them on the respective crypto platform or transfers the cryptocurrency to an external wallet, for example, to use it as a means of payment in an online store.
Tip: Depending on the crypto exchange, the current rates for a Bitcoin differ. Websites such as cryptowat.ch help to compare offers from different exchanges and find the best possible price at the moment.
High demand at online brokers
Investors can also buy real bitcoins from some online brokers. Young fintechs such as Vivid or Trade Republic have included some digital currencies in their product range – including Bitcoin.
However, there is a catch: although the cryptocurrencies can be traded easily and cheaply there, it is not possible to withdraw Bitcoin to an external wallet. The private key that grants exclusive access to the cryptocoins’ storage location remains in the hands of an outside custodian.
Bitcoin is therefore only suitable as a speculative asset with these brokers. For most investors, this is usually sufficient, as the possibilities to pay with Bitcoins are currently still limited. However, those who want to keep this option open will have to look for another provider.
By the way, investors do not have to buy a whole Bitcoin – with a value of more than 50,000 US dollars, that should also be difficult for many. Those who want to invest less money can merely purchase fractions.
2. Bitcoin ETPs
Another so-called neo-broker, namely Scalable Capital, offers to trade Bitcoin in the form of ETPs. These securities are similar to stocks or ETFs. They are distributed via an exchange and can even be saved. They are therefore suitable for investors who want to invest smaller amounts on a regular basis.
This form of investment also has an impact on the taxation of the profit: instead of settling the Bitcoins via income tax as usual, capital gains tax is due for them. This tax rate is usually lower and is automatically settled by the broker.
Those who invest in the securities also rarely have access to Coins. Only a few issuers pay out the crypto currencies.
3. Bitcoin derivatives
Bitcoin derivatives are available for purchase from a variety of providers. For example the online broker etoro offers bitcoin CFDs. But also banks, such as the S-Broker of the Sparkasse or comdirect, have warrants and futures on Bitcoin in their offer.
With derivatives, investors do not acquire the cryptocurrency itself, but merely place a bet on its performance – this is possible on both profits and losses.
Those who also use leverage have the opportunity to multiply their chance of winning, depending on the size of the leverage – but the leverage has the same effect on the loss.
Caution: Derivatives such as CFDs are suitable mainly for advanced traders. A large proportion of private CFD accounts slip into the red.
The right offer
So the particular crypto platform has a decisive influence on the way investors can trade bitcoin. But there are other differences: some providers carry more coins than others, charge different fees and are regulated differently. So it’s worth making a comparison.
Exchanges such as etoro, justtrade.com or the Stuttgart Digital Exchange (BSDEX) are considered reputable.
Crypto exchange / trading place cryptocurrencies headquarters website:
- etoro Cyprus etoro.com
- Justtrade Frankfurt am Main (Germany) justtrade.com
- Binance Malta binance.com
- Kraken USA (San Francisco) kraken.com
- Coinbase USA (San Francisco) coinbase.com
- Digital Exchange Stuttgart Stock Exchange (BSDEX) Germany (Stuttgart) bsdex.de
If it’s about the sheer number of coins, Binance is a good place to start – over 150 cryptocurrencies can be traded here. In addition to Bitcoin and Ethereum, the sought-after Dogecoin is also available there. The online broker etoro has also included the popular coin with the dog meme in its offer.
Exchanges such as Kraken or Coinbase also offer a wide range of cryptocurrencies, but charge higher fees than Binance. With German providers, it is mostly the other way around. Here, there are only a handful of digital coins, but BSDEX, Bitcoin.de or Trade Republic are cheap. On the latter, investors can trade stocks and ETFs in addition to four cryptocurrencies. The same applies to the online brokers Justtrade and Scalable Capital.
Many crypto platforms offer an app for buying and selling bitcoin in addition to their online version. This has the advantage that active investors can react flexibly to price fluctuations. Good apps for Bitcoin trading are available from Bison, Coinbase or Trade Republic. Here, users will find a simple structure and an intuitive interface.
Deposit
After the user has successfully registered and verified if necessary, he can transfer funds to his exchange account. Traders should make sure that crypto exchanges cooperate with reputable partner banks: Preferably, these also provide deposit insurance.
Payment options are often limited – a standard bank transfer is almost always possible, but usually takes a few days. Money via credit card, instant transfer or PayPal is available more quickly, but the fees are usually higher. A provider that allows a particularly large number of payment options is, for example, etoro.
Note: Incidentally, etoro is also one of the few crypto platforms in Germany where investors can use PayPal to fund their settlement account. In contrast, it is already possible in the US to buy digital currencies such as Bitcoin directly via Paypal. It is not yet known when this function will also be introduced in Germany.
Tip: It often makes sense to be active on several exchanges in order to benefit from individual advantages or favorable rates.
Investment options
Once the money is in the account, you are ready to go. Traders can either acquire the actual coin or speculate on its performance – for example, through CFD trading or certificates.
Note: Those who trade derivatives such as CFDs often use leverage to increase the theoretical investment volume. This allows users to make high profits very quickly, but at the same time they can also lose a lot of money within a very short time. Therefore, newcomers are strongly advised not to trade with levers.
However, in order to make long-term and also practical use of bitcoin, it is advisable to actually buy bitcoins. Don’t worry: investors can also buy digital currencies on a pro-rata basis and don’t always have to purchase an entire coin.
The actual purchase is then rather unspectacular: the buyer decides on the amount of money he wants to invest and waits for the price that suits him. After the purchase is completed, the coins are in his possession.
On marketplaces like bitcoin.de, the sum and number of coins is fixed. After the trader has selected the purchase option, the site blocks the offer for other interested parties and the buyer only has to transfer the money to get the coins credited to his wallet.
Depending on the exchange or marketplace, there are different fees. Most of the time, it is a small percentage of the amount traded.
Transfer to a wallet
To ensure that your digital currencies are safely stored, it is advisable to create or purchase an external wallet. Wallets are available digitally, for example as an app, or as a hardware wallet (cold wallet).
Tip: The online wallets of the providers are usually not recommended because your own coins or digital currencies can be stolen in the event of a possible hacker attack.
The personal wallet contains a receiving address. By means of this and a private key, the transfer is secured and it is impossible that the amount goes to a wrong account.
The transfer from wallet to wallet takes a few minutes. In the case of a purchase transaction via a marketplace, the buyer and seller have to pay a small fee for the transfer.
Sell Bitcoins and pay taxes
Those who want to sell their Bitcoins can also do so on a crypto exchange or marketplace like BSDEX. Selling is just as easy as buying.
But beware: traders must pay tax on profits from the sale of Bitcoins above a certain amount. Digital currencies are subject to the same tax requirements as other foreign currencies. Such private sales transactions fall under the Income Tax Act.
An exemption limit exists up to 600 euros of profit – except for coins that have already been in the trader’s possession for more than twelve months – cryptocurrencies are tax-free from such a holding period.
Calculate capital gain
To calculate the capital gain, the FiFo method is used in most cases: Here, you sell the Bitcoins first, which you also bought first. The difference in value then forms the profit or loss.
It is advisable to document all transactions of your digital currencies in detail in order to be able to provide the tax office with information in case of doubt. In the tax return, such income falls under the item Other Income (SO) – even if the amount is less than 600 euros: This is because the tax office determines the tax exemption.
Frequently asked questions about buying Bitcoins
What is a bitcoin?
Bitcoins and other digital currencies are digital means of payment – but shopping with them has been limited so far: for example, at Rakuten, Subway or Microsoft.
The technology behind this is the so-called blockchain. It protects the new transfer system from manipulation. Thanks to its decentralized mode of operation, it is also beyond the control of governments or banks – the legitimization of a transaction with Bitcoins and digital currencies is carried out by the users of the network.
How does the blockchain work?
The blockchain is also known as distributed ledger technology: this refers to a public and decentralized account book. A single block of such a chain consists of data, the hash – that is, the unique fingerprint of the block – and the hash of the previous block.
The data on the block depends on the blockchain: in the case of a Bitcoin blockchain, the data contains information on the sender, recipient and the number of coins. If a third party now changes the content of the block, its hash also changes and the chain of blocks collapses.
What is a peer-to-peer network?
The blockchain uses a peer-to-peer network that anyone can join. Individual members’ computers then check each block in the chain to make sure the hash is correct. In this way, the system ensures that tampering never goes undetected.
How does the proof-of-work mechanism work?
In theory, particularly powerful computers are capable of tampering with blocks and recalculating all subsequent blocks to disguise the forgery. The proof-of-work mechanism prevents this: it ensures that the construction of a new block takes at least a few minutes. In this time, a fraud would have been discovered long ago.
What determines the value of a Bitcoin?
Bitcoin is the oldest and best-known cryptocurrency – its market capitalization is over 800 billion US dollars. By comparison, the market capitalization of Ethereum – the second largest digital currency – is just under $400 billion.
The price of cryptocurrencies like bitcoin is regulated by the principle of supply and demand. Drivers that fuel demand are many: Blockchain technology is seen by many as forward-looking and more and more companies are investing in technical solutions: These include the major banks BNP and HSBC, among others.
Bitcoin is also becoming increasingly popular as a means of payment. Stores and service providers are increasingly offering their customers to pay with Bitcoin. Paypal, for example: The financial service provider allows its U.S. customers to buy Bitcoin and pay with it.
However, one of the main reasons for the ever-strong increases in value are investors hoping to make a return on their investment.
Can I buy Bitcoin anonymously without registering?
With the vast majority of crypto platforms, registration is required. If investors ever come across a trading site for digital currencies where this is not the case, it could be a scam site – so it is definitely advisable to only buy Bitcoin on reputable crypto exchanges.
If you still want to trade Bitcoin anonymously, you can do so privately. This means that buyers and sellers get together outside of a platform and negotiate their bitcoin deal. However, such sales transactions must also be listed in the tax return.
Are there banks for buying bitcoin?
Classic branch banks such as the Sparkasse or direct banks such as Comdirect, do not yet offer proper trading with digital currencies. Here, investors can only purchase Bitcoin derivatives such as futures and warrants. Vivid provides a special offer: there, investors can open a bank account and trade and store cryptocurrencies. With it, cryptocurrencies such as Bitcoin, Ethereum or Rippleare tradable.
Is it possible to buy bitcoin through Trade Republic?
Trade Republic provides its customers with a beginner-friendly access to cryptocurrencies. The clear structure and easy handling ensure that investors can buy Bitcoin within a few clicks. A wallet is not necessary for this; instead, a special depository takes care of the protection of the purchased Bitcoins.
Disclaimer: This is no investment advice and just a general information about different cryptocurrency investment options in Germany. We’re not professional investment advisors. If you need assistance please get in touch with an official advisor.
Furthermore this is no official tax advice and just a general information about the taxation of income from cryptocurrencies. We’re not professional tax advisors. If you need assistance please get in touch with an official tax advisor.
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