What are cryptocurrencies? How to invest in cryptocurrency?

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Cryptocurrency is a digital currency that exists electronically. In this guide, discover how it works and how it could revolutionize (or not) the world of finance.

Right now, cryptocurrencies are making headlines. If you are new to cryptocurrency, don't panic, follow the guide! Cryptocurrency is a type of digital currency with which you can buy goods or services. They can be traded or invested, but are highly volatile, so you have to be brave.

How is it different from more traditional currencies like the euro or the dollar? Trust. "Crypto" comes from a cryptographic technique that ensures the security of cryptocurrency transactions. These techniques replace the work of banks and third parties in transaction management.

This is one of the main attractions of cryptocurrencies: it is a decentralized financial system that does not depend on any large bank or institution to operate, is much cheaper and faster, fair and transparent. But this system has certain flaws, causing users to doubt the veracity of this promise. Let's take a closer look.

How do cryptocurrencies work?

Many rely on blockchain, a technology that allows a decentralized network to review and approve transactions. Blockchain is similar to digital registers: all actors in the network receive a copy of this register and can resist any modification attempts.

The blockchain actually acts as a database, allowing a large amount of information to be stored that cannot be changed. However, by relying on a peer-to-peer network to verify every new transaction added to the blockchain, the approach to trusting cryptocurrencies is different from traditional currencies.

The latter is actually regulated by a bank or a central authority. In contrast, cryptocurrencies like Bitcoin or Ethereum are not managed by any central institution. Likewise, there are no authorized third parties (banks, for example) to oversee cryptocurrency transfers. It is this aspect of cryptocurrency that attracts users, but can also complicate payments.

Payment using cryptocurrency

Well, you're not dreaming: you can pay with cryptocurrencies, which though are all forms of currency. Many websites and online shops accept Bitcoin as a payment method. With cryptocurrency, you can buy everything from NFTs to plots of land in video games.

To make virtual purchases with cryptocurrencies, you need a cryptocurrency wallet, to keep your cryptocurrencies safe. Each wallet contains a public and private key that you can use to spend and receive change. A public key is a code that everyone in a system knows. The private key is known only to the user and allows him to validate his transactions.

How many types of cryptocurrencies are there?

According to statista.com, there are nearly 6,000 different cryptocurrencies in active circulation. However, only 20 of these cryptocurrencies are used by 90% of the market.

Setting up cryptocurrencies is relatively easy, which is why a strong increase in their use has been observed in recent years (for example, there were less than 70 cryptocurrencies in 2013). The most popular cryptocurrencies are Bitcoin, Ethereum, and Litecoin.

How is the price of each cryptocurrency determined?

Compared to other financial markets, the cryptocurrency market is relatively unstable, if not very volatile. Cryptocurrencies can skyrocket in value in just a few days or hours, and collapse easily.

Many of these cryptocurrencies, such as Bitcoin, have no intrinsic value, as their actual value depends on supply and demand. So, if many want to buy cryptocurrency but its availability is limited, then its value will increase. To prevent supply from exceeding demand, many cryptocurrencies, such as Bitcoin, have a limited number of tokens. At least for now.

What is cryptocurrency mining?

Cryptocurrency mining is the process by which a new unit of currency is placed on the market, in exchange users have to confirm transactions and add them to the blockchain.

This system encourages users to keep the network updated and secure, in exchange for cryptocurrencies like Bitcoin. Anyone with a computer and an Internet connection can mine, but it's not always profitable. Depending on the currency being mined, the capabilities of your computer, and the electricity used, you may or may not mine profitably.

In the case of Bitcoin, mining is a real lottery. Any company or person who wants to mine cryptocurrency must take part in the race to complete a special code as quickly as possible, which will confirm transactions and update the blockchain with a lot of details. The winner will then get Bitcoin.

How to invest in cryptocurrency?

Today, you can buy and sell cryptocurrencies on exchange sites like Binance, Coinbase Exchange, or Huobi Global. Many of these platforms charge fees (which can reduce your profits!) for transactions.

You can buy some cryptocurrencies with euros and others with only cryptocurrencies. Bitcoin, for example, offers you these two options. To start trading cryptocurrencies, create an account on an exchange. You can then buy the cryptocurrency for real money.

Some platforms provide "storage" wallets, which do not allow you to obtain private keys, to store your purchases and currency exchanges. Note: in most cases, the platform holds the private key of the wallet. So make sure you do a secure exchange if you plan to store your cryptocurrency in such a wallet.

Is investing in cryptocurrencies risky?

Yes. Very risky.

If you invest in one cryptocurrency, the risk is concentrated there. To reduce it, you can buy a portfolio of different cryptocurrencies through exchange-traded funds (ETFs). You can then invest in a different currency, although the process is not always "safe". The entire cryptocurrency ecosystem is unstable and not a safe bet in the long term. So think carefully before investing all your savings.

Why are cryptocurrencies so successful?

Everyone is attracted to cryptocurrencies for different reasons, but this also has its share of skepticism. Here are some reasons to better understand the currency's rising popularity:

No charge

Part of the key to the success of cryptocurrencies is the relative lack of fees. Compared to traditional bank fees, cryptocurrency fees are lower because there is no central authority to manage transactions.

Efficiency

Availability and speed of transactions contribute to this attraction. Transactions can be completed in just a few minutes, 24 hours a day, 7 days a week, 365 days a year. There are no restrictions on the opening or processing of third parties. Hence they are easy to use and very accessible.

Security

Blockchain technology is a system that issues a lot of cryptocurrencies and makes it difficult to change the transactional data that is entered into the system. It is actually this security feature that is causing the increase in demand.

Without human intervention, the risk of error is reduced because the computer network trusts the information passed to the database.

Lack of government involvement

The lack of regulation by the government is also a positive point in the eyes of some users. Different cryptocurrencies can then be considered more stable and less risky if certain regions of the world experience turbulence.

Speculative profitability

Last but not least, cryptocurrencies can make a profit. The cryptocurrency market is very active and, as banks invest in projects to adopt blockchain technology, it can easily be said that the presence of cryptocurrencies in the financial landscape will continue to grow stronger.