What is cryptocurrency and how does it work?

Cryptocurrency: meaning and definition
Cryptocurrency, sometimes called cryptocurrency or crypto, refers to a digital or virtual currency that uses cryptographic techniques to secure transactions. It exists only in electronic form, independent of any central authority, and operates on decentralized networks, such as blockchain technology.

A cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It is a P2P (peer-to-peer) sharing system allowing anyone to send and receive payments anywhere. It is not physical money transported or exchanged in the real world: cryptocurrency payments are purely virtual entries made into an online database and corresponding to certain particular transactions. When you transfer funds in cryptocurrencies, the transactions are recorded on a public ledger. Cryptocurrencies are stored in digital wallets.

These cryptocurrencies were so named because they use encryption to verify transactions. That is, they incorporate complex coding to store and transfer cryptocurrency data from wallets to public ledgers. Encryption aims to provide security.

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the most well-known today. Much of the interest in cryptocurrencies lies in the pursuit of profits, with speculators sometimes driving prices skyrocketing.

How do cryptocurrencies work?
Cryptocurrencies operate on a distributed public ledger called blockchain, a ledger of all transactions maintained and held by the holders of a currency.

Cryptocurrency units are created through a process called “mining,” which involves using the power of computers to solve complicated mathematical problems that generate coins. Users can also purchase the coins from brokers and then store and spend them using crypto wallets.

If you own cryptocurrencies, you don't own anything tangible. What you have is a key that allows you to move a record or unit of measurement from one person to another without going through a trusted third party.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still booming financially, and new uses are expected in the future. Transactions including bonds, stocks and other financial assets could eventually be exchanged using this technology.

Type of cryptocurrency
There are thousands of cryptocurrencies. Examples of known cryptocurrencies:

Bitcoin:

Founded in 2009, Bitcoin was the first cryptocurrency and remains the most traded. The currency was developed by Satoshi Nakamoto, believed to be the pseudonym of a person or group of people whose precise identity remains unknown.

Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is most similar to Bitcoin, but has evolved more quickly to develop innovations including faster payments as well as processes allowing for a greater number of transactions.

Ripple:

Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different types of transactions, not just cryptocurrencies. The company behind it has worked with various banks and financial institutions.

Tether (USDT):

Launched in 2014, Tether is a stablecoin designed to maintain a 1:1 parity with the US dollar, providing stability in the volatile cryptocurrency market. It is widely used as a trading pair on exchange platforms.

Binance Coin (BNB):
Binance Coin was created in 2017 as a native token of the Binance cryptocurrency exchange. It offers low trading fees and can be used for various purposes within the Binance ecosystem.

Solana (SOL):

Developed in 2017, Solana is a high-performance blockchain platform that uses Proof of History (PoH) and Proof of Stake (PoS) consensus mechanisms to achieve high transaction speeds and low fees.

US Dollar Coin (USDC):

US Dollar Coin, launched in 2018, is a US dollar-backed stablecoin issued by Circle. It is fully backed by US dollar reserves held in regulated financial institutions.

Dogecoin (DOGE):

Created in 2013 as a meme-inspired cryptocurrency, Dogecoin gained popularity thanks to its low price and endorsements from prominent figures. It is often used to reward content creators and for charitable donations.

Cardano (ADA):

Launched in 2017, Cardano is a third-generation blockchain platform that aims to address scalability, interoperability, and sustainability issues. It uses a proof-of-stake consensus mechanism called Ouroboros.

Cryptocurrencies other than Bitcoin are commonly called “altcoins” to distinguish them from the original currency.

How to buy cryptocurrencies?
You may be wondering how to buy cryptocurrencies safely. The procedure generally takes place in three stages. Here they are :

Step 1: Choosing a Platform

The first step is to decide which platform to use. In general, you have the choice between a traditional broker and a specialized cryptocurrency exchange platform:

Traditional brokers. These are online brokers that offer ways to buy and sell cryptocurrencies, as well as other financial assets such as stocks, bonds and ETFs. These platforms tend to offer lower trading costs, but fewer cryptocurrency-related features.
Cryptocurrency exchange platforms. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, different wallet storages, different interest-earning account options, and more. Many exchanges charge fees based on assets.
When comparing different platforms, consider the cryptocurrencies offered, the fees they charge, their security features, storage and withdrawal options, and educational resources.

Step 2: Funding your account
Once you have chosen your platform, the next step is to fund your account so you can start trading currencies. Most cryptocurrency exchanges allow users to purchase cryptocurrencies using fiat (i.e. government-issued) currencies, such as the US Dollar, British Pound Sterling or Euro using their debit or credit cards (although this varies by platform).

Credit card purchases of cryptocurrencies are considered risky, and some exchanges do not support them. Some credit card companies also do not allow cryptocurrency transactions. Indeed, cryptocurrencies are very volatile and it is not advisable to risk going into debt (nor potentially paying high credit card transaction fees) for certain assets.

Some platforms also accept ACH transfers as well as bank transfers. Accepted payment methods and deposit or withdrawal times differ depending on the platform. Likewise, the time required to validate deposits varies depending on the payment method.

Fees are an important factor to consider. These include possible deposit and withdrawal transaction fees as well as transaction fees. Fees vary depending on payment method and platform, which is something to check up front.

Step 3: Placing an order
You can place an order through your broker or exchange's web or mobile platform. If you are considering purchasing cryptocurrencies, you can do so by selecting "buy", choosing the order type, entering the amount of cryptocurrencies you wish to purchase and confirming the order. The same process applies to “sell” orders.

There are also other ways to invest in cryptocurrencies. These include payment services, such as PayPal, Cash App and Venmo, which allow users to buy, sell or hold cryptocurrencies. The following investment instruments are also available:

Bitcoin Funds: You can buy shares of Bitcoin trusts with a regular brokerage account. These instruments allow retail investors to gain exposure to cryptocurrencies through the stock market.
Bitcoin Mutual Funds: There are Bitcoin ETFs and Bitcoin mutual funds for you to choose from.

What can you buy with cryptocurrencies?
When it was launched, Bitcoin was intended to be an everyday means of transaction, allowing one to purchase everything from a cup of coffee to a computer and even high-value goods like real estate. This has not yet materialized, and although the number of institutions accepting cryptocurrencies is increasing, large transactions involving them are rare. Despite this, it is possible to purchase a wide variety of products on e-commerce websites using cryptocurrencies. Here are some examples :

Technology and e-commerce sites:

Several companies that sell technology products accept cryptocurrencies on their websites, such as newegg.com, AT&T and Microsoft. Overstock, an online trading platform, was among the first sites to accept Bitcoin. Shopify, Rakuten and Home Depot also accept it.

Luxury products :

Some luxury brands accept cryptocurrencies as a method of payment. For example, online luxury retailer Bitdials allows you to use Bitcoin to purchase Rolex, Patek Philippe, and other high-end watches.

Cars:

Some car dealerships – ranging from mass-market brands to high-end luxury dealerships – already accept cryptocurrencies as a form of payment.

Insurance :

In April 2021, Swiss insurer AXA announced that it had started accepting Bitcoin as a payment method for all of its insurance lines except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance strategies in the United States, also accepts Bitcoin for premium payments.

If you want to spend cryptocurrency at a retailer that doesn't accept it directly, you can use a cryptocurrency debit card, such as BitPay in the United States.

Cryptocurrency frauds and scams
Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include the following:

Fake Websites: Fake sites that feature fake testimonials and crypto jargon promising massive, guaranteed returns, provided you continue to invest.

Virtual Ponzi Schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with new investors' money. One scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.

“Celebrity” endorsement: Scammers pose online as billionaires or famous people who promise to multiply your investment in a virtual currency, but actually steal what you send them. They may also use messaging apps or chat rooms to start rumors that a famous businessman supports a particular cryptocurrency. Once they have encouraged investors to buy and driven up the price, the scammers sell their shares and the currency loses its value.

Romance scams: The FBI is warning of a trend in online dating scams, where fraudsters persuade people they meet on dating apps or social media to invest or trade virtual currencies. The FBI's Internet Crime Complaint Center received more than 1,800 reports of cryptocurrency romance scams in the first seven months of 2021, with losses reaching $133 million.

Cybercriminals can also pose as legitimate virtual currency traders or set up fake exchanges to trick people into giving them money. Another cryptocurrency scam involves fraudulent sales presentations for individual cryptocurrency retirement accounts. Then there is outright cryptocurrency hacking, where criminals break into digital wallets where users store their virtual currency to steal it.

Are cryptocurrencies legal?
Cryptocurrencies are generally based on blockchain technology. Blockchain describes how transactions are recorded in “blocks” and time-stamped. This is a fairly complex technical process, but ultimately it provides a digital record of cryptocurrency transactions that hackers find difficult to tamper with.

Additionally, transactions require a two-factor authentication process. For example, you may be asked to enter a username and password to start a transaction. Next, an authentication code sent via SMS to your cell phone may need to be entered.

Although security measures are in place, cryptocurrencies are not immune to hacking. Several large-scale hacks have cost young cryptocurrency companies dearly. Hackers raided Coincheck for $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.

Unlike state-backed currency, the value of virtual currencies is entirely determined by supply and demand. This can create wild swings that produce big gains for investors or big losses. Additionally, cryptocurrency investments are subject to far less regulatory protection than traditional financial products, such as stocks, bonds, and mutual funds.

Quatre conseils pour investir dans des cryptomonnaies en toute sécurité
Selon les rapports des consommateurs, tous les investissements comportent des risques, mais certains experts considèrent que les cryptomonnaies sont l'un des choix d'investissement les plus risqués. Si vous envisagez d'investir dans des cryptomonnaies, ces conseils peuvent vous aider à faire des choix éclairés.

Informez-vous sur les plateformes d'échange :

Avant d'investir, informez-vous sur les plateformes d'échange de cryptomonnaies. On estime qu'il y a plus de 500 plateformes d'échange parmi lesquelles il est possible de faire son choix. Faites des recherches, lisez les commentaires et discutez avec des investisseurs plus expérimentés avant de vous lancer.

Découvrez comment stocker vos monnaies numériques :

Si vous achetez une cryptomonnaie, vous devez la stocker. Vous pouvez la conserver sur une plateforme d'échange ou dans un portefeuille numérique. Bien qu'il existe de nombreuses sortes de portefeuilles, chacun présente ses avantages, ses exigences techniques et sa sécurité. Comme avec les plateformes d'échange, vous devez réfléchir à vos choix de stockage avant d'investir.

Diversifiez vos placements :

La diversification est essentielle dans toute bonne stratégie d'investissement, et c'est d'autant plus vrai lorsque vous investissez dans des cryptomonnaies. N'investissez pas tout votre argent en Bitcoin, par exemple, simplement parce que c'est le nom que vous connaissez. Il y a des milliers de possibilités, et il est préférable de répartir votre investissement dans plusieurs monnaies.

Préparez-vous à faire face à la volatilité des monnaies :

Le marché des cryptomonnaies est très volatil, alors préparez-vous à des fluctuations. Vous observerez des variations spectaculaires des cours. Si votre portefeuille d'investissements n'est pas en mesure de les gérer ou si votre tempérament s'accommode mal de ces soubresauts, les cryptomonnaies ne sont peut-être pas un choix judicieux pour vous.

Les cryptomonnaies font fureur en ce moment, mais n'oubliez pas qu'elles n'en sont encore qu'à leurs débuts et sont considérées comme hautement spéculatives. Investir dans quelque chose de nouveau n'est pas simple, alors préparez-vous correctement. Si vous envisagez de vous lancer, faites des recherches et investissez prudemment pour commencer.

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