Cryptocurrencies have been in the news a lot lately. For the most part, their prices have been rising phenomenally for months now, and Bitcoin, the first and best-known cryptocurrency, is currently trading at €53,945.77 (its new record). Enough to make the crypto-sceptics of the early days swoon. Admittedly, this uptrend will certainly come to an end in a few months' time, but analysts' predictions are rather favourable for 2021.
Has this upheaval caught your attention, and do you also want to take advantage of these extremely popular assets? Nevertheless, are you struggling to understand what's really behind "cryptocurrencies" and the many terms that usually accompany the debate about them? Then you've come to the right place! Before embarking on this financial investment, it's important to understand the mechanisms and subtleties of these virtual currencies.
So welcome to our beginner's guide to cryptocurrencies!
Cryptocurrencies: definition and benefits
Why were cryptocurrencies invented?
Quite simply, cryptocurrencies are virtual currencies based on the principle of decentralisation. The first to appear was Bitcoin, in 2009, in response to the 2008 financial crisis. Its creator, Satoshi Nakamoto (this is a pseudonym; no one knows his real identity), saw Bitcoin as a way of giving economic power back to the people and opposing the traditional financial and monetary system, which was based on debt and at the mercy of the major banking institutions and governments. Satoshi Nakamoto wanted to create a currency controlled by no institution and based solely on a peer-to-peer network.
This ideal of decentralisation caught on and, more than ten years later, there are over 3,000 cryptocurrencies. However, their use is no longer strictly financial. Quite simply, any transaction requiring a trusted third party can constitute a potential niche for a cryptocurrency. Many areas have therefore been invested in, and projects are multiplying. Cryptocurrencies now make it possible to carry out all kinds of transactions in many areas more quickly, more cheaply and more securely. We explain!
Freedom from trusted third parties
In everyday life, all our financial or administrative transactions are carried out via a trusted third party: banks, financial institutions, lawyers, governments, etc. All these authorities therefore have an impact on our transactions and impose their rules. Thanks to their "blockchain" technology, cryptocurrencies make it possible to do without these trusted third parties altogether.
What is the point of doing without trusted third parties? Well, from a practical point of view, blockchain users above all save time and money. Trusted third parties generally charge a commission for their services (transaction fees for banks, lawyers' fees, etc.). By dispensing with an intermediary, you also save the intermediary's commission. It also saves time, because by bypassing an intermediary, you also bypass a stage in the transaction. What's more, where it would take a human intermediary several hours, or even several days, to check that all the clauses of a contract have been respected, the blockchain does this instantaneously thanks to the data on its network. If this is not the case, the transaction is simply not confirmed and is therefore cancelled. Cryptocurrencies, thanks to their blockchain technology, make it possible to optimise our transactions.
Finally, decentralisation means that no one organisation or authority responsible for ensuring that transactions run smoothly can take advantage of its position to grant itself privileges.
Cryptocurrencies, a much more secure system
Cryptocurrencies are also much more secure than our traditional transaction systems for two reasons. Firstly, because their blockchains are based on a cryptographic process that prevents the data stored on the chain from being altered. There is no fraud here, and it is impossible to lie about funds or transactions. Secondly, because the decentralisation mechanism means that all users of the blockchain have the full history of the chain since its creation. So there is no loss of data.
How do cryptocurrencies work in practice?
Cryptocurrencies are based on blockchain technology. The blockchain is simply a decentralised database that records all the transactions that take place on its network. All transactions carried out on the network since the blockchain was created are entered and recorded. This data is recorded in blocks, which are then sealed. When a block is sealed, we simply move on to the next block. All the blocks are connected to the previous block, which is why they are referred to as a "chain".
This decentralised database is based on a peer-to-peer network, meaning that all its users are both clients and servers. There is no central entity in charge of overseeing operations on the blockchain. Users are represented by their computers and are called "nodes". The nodes can carry out transactions between themselves without an intermediary. All the nodes have a replica of the blockchain, i.e. a copy of the register of all the transactions that have previously taken place. So everyone can see what all the other users have, although they remain anonymous. When a member wants to carry out a transaction, the other nodes can check that he or she has the necessary funds, without discovering his or her identity. They can then check that the transaction complies with the codes and, if it does, confirm it.
All transactions are carried out in cryptocurrency. In the case of financial transactions, the recipient can then convert the amount of the transaction into fiat currency (euro, dollar, etc.). The nodes that have confirmed the transaction and entered it into the register are called miners. They are volunteers and are rewarded with cryptocurrency for their efforts. They are also the ones who "mine" the new blocks on the chain.
Cryptocurrencies are therefore used to power all the transactions taking place on their network. They can also be exchanged for fiat currencies, which can make them a good financial investment if you opt for a trading strategy and play on their prices.
However, cryptocurrencies can also be used for administrative transactions thanks to "smart contract" technology, or self-executing contracts. The principle is the same as for a monetary transaction, but these contracts are based on the exchange of data of a completely different nature. To give you a concrete example, the IOTA blockchain network could be used for COVID-19 vaccination certificates in Germany. Patient data would be stored on the blockchain, and all you had to do was scan a QR code to access it and check the vaccination status of each individual.
The vocabulary you need to know before getting involved in cryptocurrencies
Now that you understand the concept and usefulness of cryptocurrencies, here are a few vocabulary points to know if you want to get into this field.
Altcoin: Stands for "alternative coin". Altcoins are all cryptocurrencies other than Bitcoin.
Block: Blocks are the entities that contain the list of transactions carried out on the blockchain network.
Blockchain: The blockchain is a huge register in which all the transactions that have taken place on its network are recorded. This chain of blocks enables data to be stored in a decentralised manner. Each block is linked to the previous block, forming a chain. When the blockchain is public, all its users have access to its entire history. This ensures a high level of security, as it is impossible to falsify data since all users have the transaction history.
Bull run: Period of prolonged rise in the price of a cryptocurrency.
Private key: Encrypted sequence of digits that gives you access to your cryptographic funds. A public key and address are generated from this private key. This key is the only way of accessing your funds, so it provides you with a high level of security. However, if you lose it, all your funds are lost too. It will be absolutely impossible to recover them.
DApp: dApps are decentralised applications based on smart contracts. These applications are open source. They operate completely autonomously on the blockchain that hosts them.
DeFi: DeFi stands for "decentralised finance". This type of financing is made possible by blockchains. All financial operations and transactions are carried out without recourse to a third party. This saves time and money and eliminates the need for a human intermediary.
Fork: A fork is an update to the blockchain. There are two types of fork:
Soft forks, which are gentle forks. In other words, a simple backward-compatible update to the blockchain. Soft forks generally involve adding new rules to the blockchain.
Hard forks involve changing the consensus rules of the blockchain. They are not backwards compatible. Sometimes, hard forks are used in the event of disagreement within the team to cause the blockchain to split into two separate chains.
Token: Tokens are the digital assets linked to a cryptocurrency. They can be fungible, i.e. interchangeable, or non-fungible.
Minage: Minage consists of verifying and confirming new transactions on the blockchain and creating new blocks.
Miner: Miners are those involved in mining. Miners are often volunteers. In exchange for their participation on the network, they are rewarded with cryptocurrency.
NFT: NFTs are special non-fungible tokens. They are therefore unique and not interchangeable.
Nodes: Nodes are the computers connected to the blockchain network. They therefore correspond to the users of the network.
Wallet: This is where you store your precious cryptocurrencies. There are several wallets: online, USB key, paper format, etc.
Scalability: Scalability is the ability of the blockchain to adapt to a growing number of transactions. This is the biggest shortcoming of the first blockchains: they are generally unable to cope with too many requests and their network can become completely saturated.
Smart contract: This means "intelligent contract". These contracts are created within the blockchain, peer-to-peer, bypassing the human intermediary. They are then executed autonomously, without human intervention. The smart contract can use the data on the blockchain to check that all the conditions for executing the contract have been met.
Stablecoin: Stablecoins are cryptocurrencies whose prices are indexed to the price of a fiat currency. For example, the USD Coin is indexed to the dollar, meaning that one USD Coin will always be equal to one dollar.
Staking: You can think of staking as a kind of savings. You lock in your crypto-assets and receive rewards (interest) in exchange. Your cryptocurrencies will be used to assist blockchain operations for the duration of your staking.
One cryptocurrency, one project
Before you start buying cryptocurrencies, you should know that behind each crypto lies a concrete project. Not all cryptocurrencies have the same objective, so they won't all have the same use. When you want to invest in a cryptocurrency, it is therefore very important to have a clear understanding of the project of its creators. Here are a few concrete examples.
Bitcoin: It was designed and created to be a currency of exchange. You can therefore buy goods and services in Bitcoin on a daily basis. Bitcoin is not the only cryptocurrency used for this purpose, but it is the most widespread. It is therefore increasingly accepted in the outside world. For example, it has been possible to buy a Tesla car in Bitcoin since last month.
IOTA: As we have seen, IOTA could be used as part of the German vaccination passport. But its network addresses a much broader concern: the Internet of Things. These days, there are more and more connected objects. IOTA aims to facilitate the exchange of data and values between the various connected objects, free of charge. The old blockchains are not suited to the Internet of Things. Their networks are saturated too quickly and transactions, which are paid for (in cryptocurrency) within the blockchain, see their costs increase when the network is saturated. These blockchains are therefore not suited to the micro-transactions of the Internet of Things. IOTA is, because it is scalable and free!
Tezos: This cryptocurrency is one of the most revolutionary because it has been designed to avoid hard forks, thanks to an "internal adaptability mechanism". Hard forks can be delayed, but they are inevitable on traditional blockchains. What's more, Tezos' internal adaptability mechanism is based on voting, making it a fully decentralised blockchain. It is largely this feature that has led experts to say that Tezos will soon replace Ethereum, despite the fact that it has been second on the market since its creation.
Every cryptocurrency has its own project! So it's up to you to find out which cryptocurrencies you want to support!
What can you do with cryptocurrencies?
You can invest in cryptocurrencies for two main reasons: to make purchases and other transactions in cryptocurrency, or to make it a financial investment like any other.
Using your cryptocurrencies
Some crypto enthusiasts, who truly believe in the future of the crypto-economy, buy cryptocurrencies to actually use them. As we have seen, some crypto-currencies allow the purchase of goods and services. Bitcoin remains the most democratised currency, but other cryptocurrencies, such as XRP, are beginning to be accepted for online purchases.
Some cryptocurrencies also provide access to services or benefits in the field to which they are linked. For example, many football clubs offer their fans their own cryptocurrencies. Holders of their tokens are granted VIP benefits and can participate in the decision-making process of their favourite club by voting via the socios application.
There are many different uses for cryptocurrencies, so make sure you find out how the cryptocurrencies you decide to invest in will be used. You could be in for some pleasant surprises!
Cryptocurrency staking
Staking involves blocking your crypto-currencies on the blockchain for an extended period in order to gain a reward. You can think of it as saving money to earn interest. While you are staking, your cryptocurrencies will be used to assist the operations of the blockchain. The more cryptos there are on the blockchain, the more secure it is and the less energy it consumes.
Exchange platforms now allow you to store your cryptocurrencies easily.
Trading cryptocurrencies
Cryptocurrency trading is extremely popular due to the current prices of crypto-assets. The principle is simple: buy cryptos to resell them at better prices. Cryptocurrency prices are extremely volatile, varying by as much as 5% in a single day, so you'll need to keep a close eye on them. To help you out, you should know that there are apps with live cryptocurrency prices.
Another possible buy/sell strategy is the 'hold' strategy. Same concept as trading, buy to sell at a better price, but this time looking at things over the long term! So you can hold your cryptocurrencies for a long time before reselling. You can take advantage of this to store them in the meantime and monetise your capital.
Where can you buy and store your cryptocurrencies?
We've convinced you and you want to get started buying cryptocurrencies? Here are the purchase and storage solutions available to you.
Buying cryptocurrencies on exchange platforms
There are several options available to you for investing in cryptocurrency. Nevertheless, the most developed and easy-to-use solution for beginners remains cryptocurrency exchange platforms. A huge number of platforms offer the buying and selling of cryptocurrencies on their network. You can buy cryptos at the market price or set a limit price, and your purchase will take place when the price of your cryptocurrency reaches the set price.
To use these platforms, all you need to do is create an account. To trade securely, we advise you to use the market-leading platforms, such as eToro or Kraken. These platforms are regulated by official stock exchange bodies and allow you to make secure payments.
Commission charges vary from platform to platform. You can view details of their fee policies on their websites.
Storing cryptocurrencies
As with buying cryptocurrencies, there are also several storage solutions available to you. Many beginners make the mistake of leaving their funds in their account on the buying platform. Instead, store your cryptocurrencies in wallets. There are various types of wallet, but here we will only recommend the easiest to use.
Web wallets
This is the simplest solution. These wallets are similar to exchange platforms. You need to create an account. These wallets will verify your identity. You can then store your cryptos. They have the advantage of being very practical, as you can connect to them from your computer or mobile phone.
As usual, choose the market leaders if you want real security. However, you should be aware that since these wallets are connected to the Internet, you will never be safe from a hacking attempt. To strengthen security, most web wallets offer two-factor identification: your private key and a secret code sent by text message to your telephone number.
Cold wallets, the most secure solution for your cryptocurrencies
Cold wallets are the only wallets that allow you to store your cryptocurrencies away from the Internet and hackers. So this is the solution to go for if you have large sums of cryptocurrency! There are two types:
Hardware wallets. These look like USB sticks. You can carry out your transactions offline with a hardware wallet. They are not necessarily compatible with all cryptocurrencies, so be sure to check compatibility with your cryptos when you buy your wallet.
Paper wallets. These are simply a sheet of paper generated by a paper wallet generator on which is written an address and a QR code to access your funds. Some sites allow you to download their generator for offline use.
These solutions are more complex to use than web wallets, but they are still the most secure. They are therefore preferable if you have a large amount of crypto capital. But beware of accidents, loss or theft. If there is the slightest problem with your wallet, you will lose all your crypto funds.
Our advice for crypto beginners
No. 1: Find out about the cryptocurrencies you want to buy. Why did they come into being? What project are they pursuing? Which team is behind them? What is the crypto-community's opinion of them?
2: Diversify your crypto funds! You should never bet everything on the same horse, especially in cryptocurrency. If the price of your only investment collapses, you will quite simply have lost all your capital.
No. 3: Only invest money you can afford to lose. Once again, because of the extreme volatility of prices, you are not immune to losing all your crypto capital. So don't put yourself at financial risk. Only invest sums you can afford to lose.
4: Keep your private keys in a safe place. If you lose your private keys, you simply lose your cryptocurrencies. There's no "forgot password" button or after-sales service to help you here. The private key is the only protection for your crypto capital, so don't give it out under any circumstances and don't forget it! And don't leave it lying around on your computer – if a hacker comes across it, he could gain access to your funds.
5: Keep your cool. Cryptocurrency prices sometimes plummet or soar in the space of a few hours. Stay in control of your mind and don't jump into hasty trades on the spur of the moment. That's the best way to lose money.
You're ready to invest. So get your cryptocurrencies!
