Cryptocurrency
Cryptocurrency is digital currency that exists electronically. In this guide, discover how it works and how it can revolutionize (or not) the world of finance.
Right now, cryptocurrencies are all over the news. If you are just discovering what cryptocurrency is, do not 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 in, but are extremely volatile, so you’ll need a bit of courage.
The difference with more traditional currencies like the euro or the dollar? Trust. “Crypto” comes from cryptographic techniques that guarantee 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 cryptocurrency: it is a decentralized financial system that does not depend on any large bank or institution to operate, much cheaper and faster, fair and transparent. But this system has some shortcomings, making users doubt the veracity of this promise. Let’s take a closer look.
How do crypto currencies work?
Many are based on blockchain, a technology that allows a decentralized network to review and approve transactions. The blockchain is similar to a digital register: all the actors in a network receive a copy of this register and can reject any attempt to modify it.
The blockchain actually acts as a database, allowing large volumes of information to be stored that cannot be modified. However, by relying on a peer-to-peer network to verify any new transactions added to the blockchain, the approach to trust of cryptocurrencies differs from that of traditional currencies.
The latter are in fact regulated by a bank or a central authority. The opposite, crypto currencies such as Bitcoin or Ethereum are not managed by any central institution. Similarly, no approved third parties (e.g. banks) oversee cryptocurrency transfers. It is this aspect of cryptocurrency that attracts users, but can also complicate payments.
Pay with cryptocurrency
Yes, you are not dreaming: you can pay with crypto currencies, which nevertheless remain a form of currency. Many websites and online stores accept Bitcoins as a form of payment. There are even payment types, such as credit cards that can convert the digital currency in your wallet to traditional currency. With cryptocurrencies, you can buy everything from NFTs to plots of land in a video game too.
To make a virtual purchase with cryptocurrency, you need a cryptocurrency wallet to keep your cryptocurrency safe. Each wallet contains public and private keys that you can use to spend and receive currency. The public key is a code known to everyone within a system. The private key is only known to the user and allows him to validate his transactions.
How many crypto currencies 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 a crypto currency 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 crypto currencies in 2013). The most popular cryptocurrencies are Bitcoin, Ethereum and Litecoin.
How is the value of each cryptocurrency determined?
Compared to other financial markets, the cryptocurrency market is relatively unstable, if not very unstable. The value of a cryptocurrency can skyrocket in just a few days or hours, and crash just as easily.
Many of these cryptocurrencies, such as Bitcoin, have no intrinsic value, since their value actually depends on supply and demand. So, if many want to buy a cryptocurrency but the availability is limited, then its value will increase. To prevent supply from exceeding demand, many cryptocurrencies, like Bitcoin, have a limited number of tokens. At least for the moment.
Why such a success for crypto currencies?
Everyone is attracted to cryptocurrencies for different reasons, but they also have their share of skeptics. Here are some reasons to better understand the rise in popularity of these currencies:
No fees
The relative absence of fees is partly the key to the success of cryptocurrencies. Compared to traditional bank fees, cryptocurrency fees are lower since there is no central authority to manage transactions.
Efficiency
The availability and speed of transactions contribute to this attraction. Transactions can be completed in just minutes, 24 hours a day, 7 days a week, 365 days a year. There are no openness or third-party processing restrictions. They are therefore easy to use and very accessible.
Security
Blockchain technology is the system that issues many cryptocurrencies and complicates the modification of transactional data entered into the system. It is this security feature that has led to an increase in demand.
Without human intervention, the risk of error decreases, because the computer network approves the information transmitted in the database.
Lack of government involvement
The lack of regulation by governments is also a positive point in the eyes of some users. Different cryptocurrencies can then be considered to be more stable and less risky if a particular region of the world experiences upheaval.
Speculative profitability
Last but not least, cryptocurrency can generate profits. The cryptocurrency market is very active and, since banks are investing in projects to adopt blockchain technology, it is easy to say that the presence of cryptocurrencies in the financial landscape will continue to grow.
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Important information: All investments involve some degree of risk. As a general rule, you should only sell and buy or trade financial products that you are familiar with and understand the risks associated with. You should carefully consider your investment experience, financial situation, investment objectives, level of risk tolerance and consult your independent financial advisor regarding the appropriateness of your situation before making any investment.
Sources: PinterPandai, Kaspersky, Investopedia, NerdWallet
Photo credit: TheDigitalArtist / Pixabay
