Everyone has heard of Bitcoin. But it is only the best known of countless other cryptocurrencies. Here we present some of them. Currently, cryptocurrencies like Bitcoin are experiencing price jumps. They are highly speculative. Other crypto investments are also very risky.
The financial experts classify this new form of investment, explain the world of blockchains, tokens and coins, and show how cryptocurrencies and other crypto investments are used in practice – and what risks are involved. Tesla CEO Elon Musk has invested part of his company’s assets in Bitcoin and amplified a price fireworks. More than $50,000 cost one unit of the cryptocurrency in February 2021, more than ever before. Many became enthusiastic about the crypto world.
Blockchain to help make processes more efficient
The term “crypto” comes from the Greek and means hidden. This world extends far beyond the currency Bitcoin and also includes rights to assets, securities, products or services. They are stored in a blockchain, a chain of accounting transactions that are stored decentrally on a network of computers ( Glossary). There is usually no central control authority, but encrypted transmission protocols. Achim Himmelreich, Vice President of the Bundesverband Digitale Wirtschaft (BVDW) e. V., says: “Blockchain technology came into the world with Bitcoin, but it is now helping to make processes more efficient in many areas.” He cites notarized contracts or supply chains as examples.
- Speculation. Cryptocurrencies are high-risk, total loss is possible. This also applies to crypto investments in the form of rights to assets (security tokens). Data. Remember passwords. Keep your private key safe, loss is irretrievable. Never grant them to third parties.
- Selection. With security tokens, deal primarily with risks. Often they are rights to subordinated debt, in case of crisis you have a bad position. Sometimes the companies are very young and their business models are untested. Sometimes the information is scanty – there is no securities prospectus or anything like that.
Tokens and cryptocoins exist only virtually
Rights to assets stored in a blockchain, called “tokens,” are intended to make investments such as real estate or artwork more easily and cheaply accessible and tradable by private individuals. However, an analysis of the market shows that the potential benefits are hardly usable so far.
The crypto world has been a party topic before, when the bitcoin price rose from around $1,000 to $20,000 in 2017. This was the new gold, some promised. Others looked skeptically at the huge price fluctuations of the “coins” that exist only as a virtual string. “Bit” is the term for the smallest digital unit.
Ripple, Ethereum, Stellar
There are thousands of other blockchains and cryptocurrencies. One of the best exchange to buy them is Binance, there is also a discount on trading fees.
Ripple, for example, is primarily intended for cross-border use. Ethereum, the basis of the cryptocurrency Ether, is suitable for smart contracts and is therefore popular as a basis for rights to securities and assets (security tokens). This also applies to Stellar, via which transactions are supposed to be particularly fast.
The term currency is misleading. It is sometimes possible to pay with Bitcoin, but the cryptocurrency is not a legal tender. It is also only of limited use for everyday transactions, which is already due to the limited number of transactions. The booking systems of banks are much faster. In addition, there is the energy consumption. One Bitcoin transaction is estimated to consume as much electricity as a two-person household in Germany in just over two months.
First rules introduced
The comparison with gold is also lame, because there is no value behind cryptocurrencies. The price is based solely on the hope that they will still be in demand in the future.
Now there are first rules. Since 2020, a permit from the Federal Financial Supervisory Authority has been required for the safekeeping of crypto assets. A draft law plans to introduce electronic securities and crypto securities that exist only in digital form. This is considered a milestone because companies and investors will be able to do business directly with each other.
How cryptocurrencies are used practically
In order to buy, hold and sell cryptoassets including cryptocurrencies, special software is needed as a digital wallet or safe deposit box (“wallet”). It must match the blockchain technology on which the cryptoassets are based.
When a wallet owner acquires a crypto asset, a long string of numbers and letters is entered into the corresponding blockchain as proof of ownership, the public key, i.e. the public address of the wallet. When selling, the owner gives the order to transfer the crypto asset to the buyer ( This is how crypto assets change hands). She needs her private key, a password of numbers and letters, to do this.
The computers in the decentralized network that keep the “cash ledger” (distributed ledger) check to see if everything matches. If it does, they add a record to the blockchain. It is now apparent that the owner has changed and, for example, interest, dividends or distributions may now be accruing to him.
Don’t lose your private key
So whoever has the private key has access to the crypto assets. Fraudulent brokers, for example, pretended to help their customers set up the accounts, learned the private key in the process and cleaned out the accounts. Without the key, access is no longer possible. This is the case with a German programmer in California who forgot the password for a hard drive and can no longer access thousands of Bitcoin.
In addition, blockchain technology is still young and comparatively untested. Attackers can also paralyze exchanges with massive continuous requests. Moreover, no one can be sure whether a cryptocurrency will exist in perpetuity.
Token for artwork by Warhol
The coins of cryptocurrencies are usually created decentrally in complex computing processes. In the beginning, a simple PC was enough for Bitcoin. Powerful machines have long been necessary, and there are specialized companies.
With other crypto assets, it is not possible for third parties to create new tokens through computing processes. The Hamburg-based investment platform Finexity, for example, offered “digital shares” for 44,000 euros in the silkscreen “Vegetarian Vegetable Soup (1969)” by Andy Warhol at the end of 2020. The tokens do not grant co-ownership of the artwork, but rights to a subordinated debt security. The investors thereby lend money to a company. They do not have co-determination rights.
The concept of subordination is explained in the terms of the bond: the company is allowed to suspend interest and repayment if it would become insolvent. In the event of insolvency, subordinated creditors only get their turn after all senior ones have been satisfied. In most cases, there is nothing left for them.
Token-based subordinated debt is currently most common among security tokens that grant rights to assets or securities. Financial regulator Bafin classifies security tokens as a “security of their own kind” because the tokens make previously hard-to-trade assets tradable in a similar way to securities, at least in theory.
Anyone offering them to the public must publish at least a securities information sheet (WIB) summarizing key information. From a volume of 8 million euros, a securities sales prospectus with comprehensive descriptions of the business model, economic situation and, above all, the risks is mandatory. Like all token-based investments, however, they can only be held in suitable wallets and not in securities accounts.
Some of the companies are very young
Token holders bear high risks, because not only do they have an unfavorable, subordinate position, they also often lend their money to very young companies with novel business models, explains lawyer Peter Mattil from Munich. For example, the first two securities offering prospectuses for token-based debt securities that Bafin approved in 2019 came from Bitbond Finance GmbH of Berlin and Startmark GmbH of Düsseldorf, which were founded in 2018.
Bitbond was looking to raise up to €100 million for a novel intermediation platform for cryptocurrency loans. Interest and repayment will flow in the cryptocurrency Stellar Lumens. Meanwhile, the company is advising others on tokenization. Startmark sought 50 million euros for investments in other companies, including very young ones. That’s high-risk. Both raised only a fraction of the sum. Fixed costs, such as for the preparation of the prospectus, are still incurred and can have a significant impact.
In any case, the issuing costs are not necessarily favorable. In 2019, Hamburg-based real estate company Fundament RE reported issuing costs of up to 13 percent in its securities prospectus for subordinated token-based debt securities worth a quarter of a billion euros. In addition, the real estate projects were not fixed. That also convinced fewer private investors than expected.
Exporo offers real estate
Most of the offers so far come from subsidiaries of the crowdfunding platform operator Exporo. They have already issued 41 token-based subordinated notes based on the Ethereum blockchain since 2019. 20 are used to buy and rent one or more properties, for example a medical center in Hamburg. The interest rate is variable and depends on the leasing success. The bonds are secured, but subordinated to the lending banks.
In another 21, Exporo pools investor money for project developers who plan, build and sell real estate. Token holders get a fixed interest rate.
Token in trust shares
There are also offerings that grant co-determination rights. For example, RHAS 5 Schifffahrts GmbH & Co. KG from Haren (Ems) also wants to finance a ship for transporting goods via tokens. These grant rights to token-based trust shares in the limited partnership. The token holders are allowed to vote on shareholder resolutions via an online portal.
Such corporate investments are complex. Therefore, it is a pity that the company has exercised the right to provide only a three-page securities information sheet instead of a detailed securities prospectus, as is otherwise required for ship investments.
In contrast, the securities prospectus of the Leipzig-based real estate company Preos AG for the first token-based trust, which conveys substantial share rights, has a whopping 520 pages, including attachments. The tokens are exchangeable for shares in Preos AG. These are listed on the open market of the Munich Stock Exchange. It is therefore not apparent why someone should instead acquire share rights via a trustee, which are much less tradable.
No stock exchange yet
So far, buyers can only be found for Security Tokens via digital “bulletin boards”. The Stuttgart stock exchange, for example, has announced that it will offer trading in crypto assets via its app Bison and its platform BSDEX. So far, however, it lists only four cryptocurrencies. It offers to store private keys of customers who are afraid of scattering it. Speculating with cryptocurrencies is a very hot ride. With other crypto investments, there are hardly any advantages evident yet.