Everything you need to know about cryptocurrency: If everyone can name a few known crypto-currencies, fewer are those who are familiar with the crypto ecosystem and its concrete differences from so-called "fiat" currencies (the euro or the dollar, for example).
Traditional money benefits from extensive logistics aimed at making it “credible” in the eyes of users, in particular through the support of commercial and central banks.
This is not the case with crypto, which is nevertheless rapidly becoming more democratic and is increasingly accepted as a means of everyday payment.
What is cryptocurrency?
In contrast to "classic" currencies, cryptocurrency can be defined as a digital currency that is exchanged peer-to-peer, i.e. in a decentralized way, without an intermediary, thanks to an encrypted procedure on a blockchain.
digital currencies
Virtual currency, crypto-currency, electronic money, crypto-asset… There is no shortage of terms to talk about crypto-currencies. They are often referred to as digital currencies in the sense that they have no physical medium. Here, neither banknotes nor coins: everyone holds their assets in wallets of which they alone have the private key, which is encrypted. These wallets can be hosted on Android or iOS apps, on websites, or external drives, much like network-disconnected USB drives (also known as “cold wallets”).
Alternative currencies
Crypto-currencies are alternative currencies in the sense that they are not legal tender: their value is not indexed to the price of precious metal or to that of a state currency, except stablecoins which, as their name suggests, exhibit price stability. Also, crypto is not regulated by any financial institution.
And yet, we often put forward the first rank of the advantages of crypto-currencies the security and transparency of their transactions! These two assets are indeed intrinsically linked to crypto, which allows secure, verified, and recorded operations on the blockchain.
Decentralized currencies
Cryptocurrencies operate without intermediaries, i.e. without the intervention of banks or governments. Individuals can transfer values between themselves independently. This is called a peer-to-peer system.
Cryptocurrencies
Operations carried out in crypto-currencies are stored on its blockchain, which is neither more nor less than a digital database. The blockchain is a technology that makes it possible to carry out transactions (such as payments) and to transmit information such as contracts or sales, in a secure way and without an intermediary.
This information is stored in chronological order in blocks. When an operation is saved, the previous one becomes unalterable, and so on. Thus, all the operations recorded on the blockchain, as they are passed, are kept, consultable by all the participants of the network, and unfalsifiable.
Pricing Cryptocurrencies
When you are neither an economist nor a trader, you do not necessarily know how the price of a currency is determined. For state currencies, there are three management methods. But what about cryptocurrencies?
Traditional monetary policies
The first is quite simply that of supply and demand, which is followed by the European Union and the United States in particular. It is a market policy in which States intervene only slightly. The value of the currency here is a function of supply and demand: the more a currency is bought, the more its value index increases, and vice versa.
However, during crises, central banks intervene massively in monetary creation (the subprime crisis of 2008 or Covid-19, for example). At the same time, some African countries fixed the rate of their currency on the Franc, which has now become the Euro.
Finally, other countries like China, have chosen a monetary policy of state control. The latter is therefore involved in decisions that affect the value of the currency. For example, to promote exports, China has opted for a low value of the Yuan.
And for crypto-currencies, how does it work?
Since cryptocurrencies are not subject to state control, they escape these monetary policies. Their value is determined exclusively by supply and demand: buyers and sellers offer a price based on their analysis of the market.
The price of crypto-currencies is therefore influenced by the analyzes that buyers and sellers make of the market. For this, they will rely on different tools and analyzes that will influence their decision.
In addition, the economic and political context is a factor that weighs more and more on the prices of cryptocurrencies.
The traditional finance sector is taking a close interest in this and, during periods of turbulence in the stock markets, we can witness an increase in the prices of cryptocurrencies, as investors fall back on crypto-assets. But this effect should not be misleading: crypto-currencies have not become safe havens in the event of a storm in traditional markets.
Origins and functioning of cryptocurrency
Origins of cryptocurrency
The first crypto-currency was born at the end of the 1980s. It was in the company DigiCash Inc, founded by the American mathematician David Chaum, which is the origin of the 1 e crypto, the cash, described by its inventor as " a digital form of cash on the Internet, where paper cash cannot exist. […] Like cash, it offers consumers a real opportunity to hide what they are buying ”. The company went bankrupt in 1998, taking the cash with it.
David Chaum explains the reasons for this failure as the difficulty " to get enough merchants to accept it so that enough consumers use it or vice versa ". Despite several other attempts by other developers in the 1990s, it was not until 2009 and the creation of Bitcoin that the crypto "adventure" really began.
At that time, the world was still in the grip of the subprime crisis, these mortgages were granted at the beginning of the 2000s to households with poor credit whose heavy indebtedness caused a chain reaction that spread to the whole international banking sector.
It is in this context of plummeting stock market indices and breach of trust between individuals and banking institutions that Bitcoin was born in 2009. Created by an anonymous entity with the pseudonym of Satoshi Nakamoto, Bitcoin appears as a solution to this mistrust growing.
Like all other cryptocurrencies that were created subsequently, Bitcoin was launched with the idea of doing without banks and therefore securing its funds by reclaiming them. Where fiat money needs a trusted intermediary (usually a bank), cryptocurrency only works thanks to technology that ensures the security of operations, while guaranteeing their transparency and tamper-proofing: each operation remains registered on the blockchain, which can be viewed by anyone.
The identity of the parties does not appear: only their public keys are visible, which explains why we sometimes speak of “pseudonymous” crypto-currencies (the public key allowing a person to be identified), and not anonymous.
How cryptocurrency works
The value in Bitcoin that you have is materialized by a private key which takes the form of a kind of password composed of many numbers and letters. This key is unique, which means that no one will be able to use your assets, but also that in the event of a loss it cannot be recovered. Therefore, it must remain confidential. To each private key is attached a public key which can be shared with other people to receive crypto-currencies.
A cryptocurrency, cryptocurrencies
Bitcoin is the "number 1 cryptocurrency" in terms of popularity and capitalization, but today there are more than 3,500 cryptocurrencies. The site coinmarketcap.com draws up a complete list of them, which it would be impossible for us to detail in this article. On the other hand, we can classify them according to different criteria, since all cryptocurrencies do not necessarily have the same objective.
So-called “infrastructure” crypto-currencies
The purpose of these cryptos extends well beyond the means of payment: their purpose is to become alternatives to the financial system in place. Not accessible to the general public, they are intended more for professional use. We can cite in this category Ethereum and Cardano, which allow the creation of smart contracts aimed at programming the execution of an action according to the fulfillment of previously defined conditions.
Tether, a stablecoin whose value, backed by the dollar, always remains close to $1, is also part of it since it allows you to partially protect yourself from the volatility of other cryptocurrencies. We should also mention Ardor, which gives companies the possibility of creating their blockchain, but also Ripple and Stellar which make it possible to execute,
Crypto-currencies as a means of payment
These currencies aim to offer a real alternative to fiat currencies. They allow you to make certain purchases, depending on the currency and the service. In this category, let's mention Bitcoin, with which one can buy goods or be paid (in Japan, for example, which recognizes it as a currency since April 2017). There are also Litecoin, Dash, and Digibyte which offer international payment solutions.
“Anonymous” cryptocurrencies
Transactions made in these currencies are anonymous, that is to say, the identity of the parties and sometimes even the amount of the transactions are completely hidden. Examples include Monero and ZCash, whose transactions are untraceable thanks to different encryption techniques.
“Social” cryptocurrencies
They were designed to exchange small amounts through social networks, for example, to “remunerate” the author of online content (photo, blog article) by sending him a tip. Dogecoin and BAT offer this possibility.
It goes without saying that given the number of crypto-currencies existing on the market today, this list is far from complete!
In addition, other classifications of these cryptocurrencies are possible such as ranking according to market capitalization (i.e. their weight in the market) or the technology used.
Cryptocurrency facing difficulties
Despite growing enthusiasm, crypto-currencies face many difficulties and are the target of more or less legitimate criticism and accusations.
The lack of regulation of cryptocurrencies
Many states want to regulate cryptocurrencies and the subject can sometimes be quite hot in politics. Following the tragedy in Conflans-Sainte-Honorine, Bruno Le Maire declared that “ crypto-currencies pose a real problem of financing terrorism ”.
If this argument is valid, the financing of terrorism did not wait for the deployment of crypto-currencies to be effective, and many other channels using traditional currencies are also at work when it comes to injecting funds into terrorist networks.
Similarly, the argument that cryptocurrencies are the perfect breeding ground for money laundering can be qualified, since the latter still largely results from drug and arms trafficking, tax evasion, and extortion practices.
The question of security of funds
Exchanges, where many investors' crypto funds are held, are not immune to hacks. It has happened before, and thousands of bitcoins could have been stolen this way. This is the reason why you will often hear the adage " Not your keys, not your coins ": as long as your crypto-currencies remain on the exchange platforms you do not own them, and in the event of hacking lost funds will be permanently lost.
However, there are solutions such as the transfer of its assets to a hardware wallet: disconnected from the Internet, it in principle offers a high level of security.
Limited common use
Another obstacle encountered by crypto users is related to the fact that it is difficult to use them in everyday life: you don't (yet?) buy your wand in bitcoins. However, the number of merchants who accept payments in cryptocurrencies is constantly increasing:
let us quote Expedia which accepts the reservation of tickets in BTC, Paypal which now supports payments in four cryptocurrencies in the United States, or even some Swiss cantons that accept bitcoin and ether tax payments.
Despite this, the fact that cryptocurrencies are not massively accepted is undoubtedly a hindrance to their adoption by the general public. But even if their use were to develop on a large scale, we will have to ask the question of their scalability, in other words, their ability to cope with a growing number of transactions while retaining their functionality.
Bitcoin, for example, can see its network completely saturated when the number of transactions to be processed simultaneously is too large.
This inability to process a large number of operations leads to significant delays but also an increase in mining costs. Here again, a few solutions exist, such as the possibility of transferring bitcoins instantly even though the transaction has not yet been recorded in the blockchain.
The creation of crypto-
This question is related to that the regulation of cryptocurrencies. Indeed, anyone can now create crypto, thanks to open-source encryption software for example. You just need to find the name and your currency and the software will do the rest. Of course, that's for the technical part! As for launching your cryptocurrency in the crypto sphere, you will need to deploy communication and marketing resources to publicize your project.
You can also build on existing blockchains designed to host cryptocurrencies, like Ethereum, Bitshares, Tron, and many more. Again, nothing could be simpler since it is neither more nor less than filling out a form. Of course, this is all very synthesized, but it measures the ease with which it is possible to create a cryptocurrency, and it partly explains why there are so many in circulation today.
But why create a cryptocurrency? The main reason is financial. For companies, this involves raising the funds necessary for the creation or the development of a project. Once the cryptocurrency has been created, a fundraiser called ICO (Initial Coin Offering) is organized to sell tokens of the currency and thus finance the company's project. In 2018, this phenomenon of ICOs experienced rapid growth, with billions of dollars raised for the benefit of start-ups of all stripes. It didn't take long for the scams to multiply around this colossal financial windfall: a certain number of companies simply disappeared after having collected the sums, such as Modern Tech, which raised 660 million dollars before vanishing. In the same way,
Whatever one thinks, the crypto ecosystem today weighs heavily in terms of financial investments, more and more institutions have decided to acquire reserves (of bitcoins in particular), and some authorities such as States and central banks are taking a close interest in it. Cryptocurrencies are not about to disappear, and we have every interest in understanding them well to appreciate their development.
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