Virtual currencies have been in the news a lot lately. You've probably heard of Bitcoin, which is in the middle of a bull run and is currently trading at €50,677.99? And of the upward trend in other cryptos? Would you like to find out more about this market, how it works and its potential? Good news, you've come to the right place!
In this article, you'll find the main information you need to know before investing in cryptocurrency. What is cryptocurrency? How does it work? How can I buy one? What investment strategy should you adopt? Which crypto-asset to choose? And much more!
What is cryptocurrency and how does it work?
Before explaining how to invest in cryptocurrency, let's take a quick look at what it is and how it works. So, what exactly is a crypto?
Cryptocurrencies are digital, cryptographic currencies that have no physical backing (they are purely virtual), are not legal tender, are not linked to the price of conventional currencies (euros, dollars) or gold and, lastly, are not regulated by any financial body.
Their value is simply determined by supply and demand. By extension, cryptos are also a peer-to-peer transaction network. In other words, each client is also a server and no central authority regulates the network. This may seem extremely abstract, so let's take a closer look at how they work.
Blockchain technology
Blockchain is the technology behind cryptocurrencies. It is a database that records all the transactions that take place on its network. All transactions since the genesis of the blockchain are recorded there. It is called a blockchain because the data is recorded in blocks, which are then sealed before moving on to the next block. Each block is connected to the previous block, forming a chain.
The blockchain is a decentralised database. In other words, it is based on a peer-to-peer network. Members of the blockchain can carry out transactions with each other without an intermediary. In real life, every transaction requires a third party: a bank, a lawyer, a government department. On blockchain, there is no need for an intermediary, simply because the chain is completely transparent. Every user has access to the register of all transactions that have previously taken place. It also knows exactly what each user owns. Nevertheless, users remain anonymous. When a member wants to carry out a transaction, the other members can check that he or she has the necessary funds, without discovering his or her identity.
The various users are represented by their computers and are called "nodes". When a transaction request is made, the network nodes confirm it if it complies with the codes. These transactions are recorded in blocks. Miners are responsible for validating and sealing the blocks when they contain a certain number of transactions. These miners are volunteers and are rewarded with tokens of the crypto associated with the blockchain.
How do you mine cryptos?
Several mining processes exist and are called "Proof of…".
The most famous of these, used by Bitcoin, is "Proof-of-Work". In order to validate a block, miners have to solve extremely complex calculations. When the result is found, the block is validated and all its transactions are recorded in the blockchain register. To carry out the proof of work, the miners need a great deal of computing power. To do this, they need a processor and a graphics card. The first miner to solve the calculation wins a reward in crypto.
However, these calculations require a lot of time and energy. To make this activity profitable, many companies have made it one of their main activities. It is therefore very difficult today for a private individual to solve the calculation first. If you still want to take the plunge, there are three options open to you:
Invest in a mining rig or "ASIC": these are electronic chips dedicated to solving algorithms.
Join a mining pool. This will enable you to pool your efforts with other members, but you will also have to share your profits.
Finally, you can try "cloud mining", which simply involves renting computing capacity from a company specialising in cryptocurrency mining.
Other mining methods also exist. For example, "Proof of Stake". Here, miners are selected, often at random. Nevertheless, their degree of "participation" in this cryptocurrency may favour their selection. In other words, the more coins they have of the said cryptocurrency and for a certain period of time, the more likely they are to be selected to validate the block and thus win the reward. Each blockchain has subtleties in its selection criteria. Some, for example, do not count coins that have been owned for less than 30 days when looking at the capital of different users, and so on.
This system encourages users to hold on to their cryptocurrencies so that they can be selected more regularly and maximise their profits. It also consumes much less energy than "Proof of Work". Many Bitcoin miners, for example, resell their rewards to pay off the energy costs incurred by mining.
The different uses of cryptos
So you're probably wondering what these virtual currencies are used for. Well, cryptocurrencies can actually be used in a number of areas! That's why many investors really do see them as viable currencies for the future.
Cryptos for payments for goods and services
Some crypto tokens are used as a means of payment for goods or services in everyday life. This is the case, for example, with Bitcoin, the most famous cryptocurrency. Although its use is still limited, more and more companies are accepting it as a means of payment. Tesla, for example, has been accepting purchases in Bitcoin since last month.
Some cryptos are also being developed around a specific project to meet a concrete need. For example, Theta wants to revolutionise the streaming sector by enabling users to share their bandwidth for better video quality. This crypto would also enable content creators to be better remunerated by cutting out the middleman.
Cryptos as financial assets
Many traders invest in cryptocurrencies. Their extremely volatile prices make short-term trading possible. Indeed, it is not uncommon to see the price of a cryptocurrency fluctuate by 5% in a single day. So it's an investment that's just as interesting as it is risky, and one in which you only need to invest a small portion of your capital.
The use of cryptos within the blockchain
Cryptocurrencies allow you to carry out transactions within their blockchain. You can, of course, carry out financial transactions with other members, but also other types of operation. Some cryptos allow, for example, the creation of "Smart Contracts", i.e. self-executing peer-to-peer contracts. They can also be used to develop decentralised applications (Dapps). The Ethereum and Neo blockchains, for example, enable this kind of operation.
Cryptos: anti-crisis stocks?
Cryptocurrencies are correlated by their own economic conditions, on which the global economy has very little impact. The prices of the various cryptocurrencies are dictated by that of Bitcoin, which simply depends on supply and demand. Although some new altcoins are managing to escape the giant's grip, Bitcoin is undeniably leading the way.
This independence from the monetary system and banking institutions allows them to escape traditional economic crises. It is for this reason that many financial specialists and individuals see crypto-currencies as an anti-crisis refuge. However, this needs to be qualified, as the price of cryptocurrencies is extremely volatile and they too can independently enter a crisis.
Bitcoin, king of the cryptos leading the revolution
If you're getting into cryptocurrency, you owe it to yourself to know about Bitcoin, the undisputed king of the cryptosphere, from which most altcoins have subsequently been inspired.
Bitcoin was the first crypto to appear on the market, in 2009, in response to the global economic crisis. Its creator goes by the pseudonym Satoshi Nakamoto. No one knows his true identity, or even whether he is a single person or a group.
Satoshi Nakamoto designed Bitcoin to offer a totally decentralised payment system, as opposed to the traditional monetary system. Today, this system is essentially based on debt. What's more, it gives power to governments and financial and banking institutions at the head of monetary funds. Thanks to its decentralised system, Bitcoin wanted to give ordinary citizens control over their capital.
The characteristics of the number 1 crypto
Bitcoin aims to offer a totally transparent and decentralised means of payment. When it comes to transparency, his goal has been achieved. Transactions are visible to everyone on its network. However, Bitcoin guarantees its users anonymity.
As far as decentralisation is concerned, it is increasingly criticised, even though its network is not in the hands of any financial institution. The mining of its blocks, which is done with proof of work, as we have seen, is increasingly complicated and therefore costly. As a result, large companies are getting involved in Bitcoin mining, which is hampering the total decentralisation that the network sought at its inception.
Nevertheless, Bitcoin has succeeded in establishing itself as a means of payment. Major companies, such as Tesla last month, now accept Bitcoin as a means of payment. Its use is growing all the time.
Bitcoin has also inspired hundreds of other cryptocurrencies. Although each has its own specific features, most of them share the ideal of decentralisation that Bitcoin has championed since its inception.
Investing in crypto
You can adopt two crypto investment strategies. The "hold" strategy, i.e. investing for the long term, or the "trade" strategy, i.e. investing for the short term.
Long-term investment
If you decide to invest in crypto for the long term, all you have to do is buy your cryptos and hold them for a certain length of time before reselling them at a profit. Most investors like to set themselves a minimum selling amount, so they hold on to their cryptos until their prices have reached that amount.
We'll come back to the crypto storage locations available to you in more detail later.
Crypto trading: the short-term strategy
You can also choose to buy to sell very quickly. This is trading. In crypto, it's just like the stock market! You'll need to keep a close eye on prices. Be aware that crypto prices are extremely volatile, so be quick! Buy your crypto as soon as its price hits a low and sell it when it seems to be peaking! A number of websites and applications offer real-time price charts, which you'll need for your trades.
Warnings and precautions
Cryptocurrency prices are extremely volatile. You really can lose everything in the space of a few minutes. So always make sure you only invest money you can afford to lose.
We advise you to get to know the market well before taking the plunge. Find out how cryptos and the market work. When you want to invest in a cryptocurrency, carefully study the project it supports (each crypto was created to meet a specific need and is part of a more general project). Follow financial and crypto news very closely in general, and more specifically news relating to the cryptos you own. The success of a new project or, on the contrary, a legal mishap, for example, could cause the price of your crypto to rise wildly or fall freely. So it's very important that you keep yourself informed and keep a cool head at all times.
The current price of cryptocurrencies
Since the end of 2020, an upward trend has been observed among most cryptos. This trend was started by Bitcoin, which has been enjoying an exceptional rise since October 2020. Selling for around €9,000 in October, its price soared to over €30,000 in early January. Since then, the price has risen in fits and starts. It hit a new all-time high on Friday 2 April 2021, with a price of 50,742 euros and a few cents, or around $60,338.
On the crypto market, Bitcoin is leading the way with a current price of €50,677.99. Its bull run has led to an upward trend in most other cryptocurrencies. Ethereum, number 2 on the crypto podium, is currently trading at €1,809.04, up from around €290 at the start of October 2020.
Don't panic at these prices, the rest of the podium is more affordable:
Binance Coin (BNB), No. 3: €484.22
XRP (XRP), No. 4: €1.16
Tether (USDT), no. 5: 0.8408 euros
Carnado (ADA), no. 6: 1.10 euros
Polkadot (DOT), no. 7: 34.24 euros
Uniswap (UNI), no. 8: 28.06 euros
Litecoin (LTC), no. 9: 212.56 euros
ChainLink (LINK), no. 10: €27.79
This ranking is the one proposed by Coinmarketcap, based on the market capitalisation of each crypto. All these cryptocurrencies have been impacted by the Bitcoin bull run with varying degrees of intensity, although some did not begin their upward trend until January 2021.
This podium confirms that when it comes to crypto, all prices exist. Rest assured, whatever your budget, you can afford to buy Bitcoin or Ethereum. In fact, it is perfectly possible to buy a fraction of a Bitcoin and not necessarily a whole Bitcoin, for example. If you want to invest €100 in Bitcoin, you will receive a fraction of a Bitcoin worth €100, at the market price.
How do you buy your cryptos?
You can buy cryptocurrencies in three different ways.
On specialist exchange platforms: This is the simplest solution. A huge number of platforms offer their users the chance to buy or sell cryptos on their network. These are, in effect, marketplaces where you create your account, which you can then fund with cryptocurrency or fiat currency (the euro, for example) to carry out your transactions. When you want to buy a crypto, all you have to do is issue a buy order at the market price or by indicating a limit price (your order will be issued when the crypto in question has reached the price you indicated). These platforms are easy to use, but they charge commissions of a few percent on your transactions. Nor do they all accept the same means of payment. We therefore advise you to compare their user policies. For greater security, it is best to carry out your transactions on market-leading platforms such as Coinbase, Kraken or eToro. You will find a guide to using the Kraken and eToro platforms on our site. They are generally regulated by official financial bodies and apply a strict security policy.
Peer-to-peer buying and selling: Cryptocurrencies are based on blockchain technology, one of the main advantages of which is that it allows all types of transaction to take place without intermediaries, from peer to peer. You can therefore buy your cryptos peer-to-peer by going directly to the seller.
Buying via a transaction facilitator. This facilitator can be seen as a broker who will advise and guide you through your transaction.
Where can you store your cryptos?
There are many ways of storing your cryptos. Many users simply leave them in their account on the trading platform. This solution is entirely possible, but it is very insecure. We advise you to store your cryptos in a "crypto wallet". Several types of wallet exist, with different levels of security.
Cold wallets: the most secure solution
Cold wallets allow you to store your cryptos away from the Internet. This prevents your precious cryptos from being hacked and stolen. This is the preferred solution if you have large sums of cryptocurrency. There are two types of cold wallet:
Hardware wallets. These take the form of a USB key. With them, you can carry out your transactions offline. They do not all have the same features and 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. Some sites allow you to download their generator for offline use. A private key and an address corresponding to your crypto capital will be written on this sheet of paper.
This is the most secure solution, but make sure you keep your cold wallet in a safe place to avoid any accidents, loss or theft. If you lose your wallet, you will lose all your cryptos along with it.
Hot wallets: keeping it simple
Hot wallets are so called because they are connected to the internet, which makes them fast and simple. There are several types of hot wallet:
Web wallets. This is the fastest solution. They are similar to exchange platforms. You need to create an account where your cryptos will be stored. Choose the market leaders if you want real security. However, you will never be safe from a hacking attempt.
Browser extensions. You can download a browser extension that communicates with the blockchain network. One example is the well-known MetaMask, which allows you to store your tokens, including bitcoins, with a few simple operations. However, not all of these extensions verify transactions. You will therefore be vulnerable to hackers and scams.
Desktop wallets: for more advanced users
These software wallets can be installed on a secure device (your server, desktop or smartphone, for example). They keep your keys private. They give you more autonomy than a web wallet, but also more responsibility.
Full nodes are a copy of the blockchain and therefore of the history of all the transactions in the blockchain, including your own. This gives you proof of your capital of tokens on the blockchain in question. This alternative is aimed at more experienced users.
Lightweight wallets, which do not download the entire blockchain.
We do not recommend these wallets for beginner investors. They are a more complex alternative to use.
Our opinion: which cryptocurrency should you invest in in 2021?
If you want to get started in crypto investing, we advise you to bet on the market leaders, i.e. the cryptocurrencies with the largest market capitalisations. Bitcoin and Ethereum are two obvious blue chips. It may also be worth investing in young crypto-currencies, but be careful about the project they are pursuing and remain cautious, as they can take off or fall overnight.
As a general rule, always remember to diversify your investment. We'll say it again, cryptocurrencies are extremely volatile. If you put all your capital into the same currency and it collapses, you will simply have lost everything.
Any crypto news to watch out for?
The cryptosphere is expecting a few twists and turns in 2021 that should impact prices. The biggest news announced remains the new version of Ethereum, Ethereum 2.0, which will be launched this year. With its 'proof-of-stake' and deflationary policy, Ethereum is set to overtake Bitcoin according to the crypto predictions of some analysts. So keep a close eye on ETH 2.0!
