How do cryptocurrencies work?
Unless you live in a cave, you've probably heard of cryptocurrencies, especially Bitcoin, which paved the way for this new digital currency. But deep down, you don't really know how it works. That's good news: Birdee comes to your rescue and explains how this virtual currency that everyone is talking about works.
First of all, what is a cryptocurrency? 🪙
Also known as "crypto assets" or simply "cryptos", cryptocurrencies refer to digital currencies. They use cryptographic techniques to secure and verify transactions, but also to control the creation of new units of currency.
Unlike traditional currencies, cryptocurrencies are not issued or controlled by governments or central banks. This makes them decentralised and, for the time being, unregulated. Everything happens on a network of computers: the blockchain. This means that "anyone" can create a crypto-currency.
How do crypto-currencies work?
Crypto-currencies are managed by computers spread around the world and created by "miners" based on an algorithm. They are connected to each other on a network called the blockchain. This is a tamper-proof digital ledger that records, authenticates and verifies transactions.
Every time someone makes a transaction with a cryptocurrency, that transaction is recorded and encrypted on the blockchain. This makes it possible to verify and secure the transaction. In this way, cryptocurrencies provide proof of ownership.
Cryptocurrencies thus offer several advantages such as its decentralisation, security and transparency.
What are cryptocurrencies used for?
Thanks to the unbreakable nature of the blockchain, crypto-currencies are used to secure transactions, purchase goods and services online, or in the real world. On some online sites, you can choose crypto to make the payment for your purchase.
Crypto-currencies can also be exchanged for physical money. Crypto-currencies are therefore considered to be investment products. They are therefore not exempt from speculation and trading.
Not all crypto-currencies have the same financial value. Their price also varies and is extremely volatile. One example is the crypto super star. While in 2021 the value of Bitcoin rose sharply, its price fell sharply in 2022. It is therefore an investment that presents risks, and requires a certain level of knowledge, or guidance from a knowledgeable specialist. And that's without counting the various online scams that have cost some investors a lot of money...
What crypto-currencies exist in 2023?
The first crypto-currency, Bitcoin, was launched in 2009. Since then, thousands of other crypto-currencies have emerged. In 2023, these include:
- Ether by Ethereum
- Binance Coin
- ALGO or Algorand...
In 2021, there were nearly 5,023 crypto-currencies in the world (source: economie.gouv.fr).
How to buy crypto-currencies?
Crypto-currencies can be bought, sold and traded on dedicated exchange and trading platforms. Beware: not all platforms and crypto-currencies work the same way! Study the platform carefully and get informed.
💡 To avoid scams, the AMF (Autorité des marchés financiers) website offers many guides and a blacklist of unauthorised companies and sites.
Responsible investing: when crypto goes green
Blockchain, with its mining process, is an energy-intensive technology. Bitcoin has a bad reputation in this respect. But rest assured: not all cryptos are equal when it comes to their ecological footprint. Some are indeed less energy intensive than others.
Cryptocurrencies based on the "proof of stake" mechanism, however, are less energy-intensive than the "proof of work" mining mechanism. Another factor in the ecological equation is the power consumption of computers. Depending on the crypto, the power or number of computers will also change. Faced with the environmental challenges, the rise of crypto-currencies leads to review and improve the processes of processing and securing transactions of the blockchain.
Do you want to invest your money in responsible projects? With Birdee, adopt the responsible investment reflex! We compose our portfolios with responsible securities to give meaning to your financial investments.