What is cryptocurrency?

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A cryptocurrency is a value transfer vehicle, a currency based on a digital protocol, called a blockchain, and working on cryptographic principles that guarantee the security, validity and immutability of its transactions.

Everything has been affirmed about cryptocurrencies since the militant dream of the Cypherpunk movement: a sulphurous reputation as the dark web currency following the Silkroad platform episode, a tool of speculative madness during successive ecosystem bubbles, a way to uberize all economic sectors, a revolution in project financing with ICOs and even more recently an adoption by the corporate world with cryptocurrencies created by Facebook, Telegram, Samsung or JPMorgan among others.

In an ecosystem whose legal framework is still largely to be defined, the consensus is to recognise a cryptocurrency if it is, at least, listed on recognised sites such as Coinmarketcap.

Based on this condition, 2391 cryptocurrencies existed at the end of July 2019, based on principles, protocols, consensus methods, and philosophies that often have nothing in common. The term cryptocurrency often appears as a catch-all term. However, we can identify some key areas.

What is money?

To understand the concept of cryptocurrency, it is first necessary to agree on the concept of money, a concept defined differently according to periods and currents of economic thought.

Aristotle’s definition is often agreed upon, focusing on a number of properties: medium of exchange, unit of account and store of value.

Contrary to popular belief, a currency does not need to be guaranteed by a State to be used and have value: its concept exists before States and has survived historical examples of States failure.

This is why the official website of the European Central Bank, in its article “What is money?”, describes cryptocurrencies as a form of currency in its own right.

There are several forms of money

There is a consensus on the recognition of so-called alternative, complementary or local currencies by institutions. Legal tender currencies such as the Euro are therefore only one of the forms of currency, with the particularity of having the support of one or more States.

Without the direct support of a state and without massive adoption by the population, none of the 2391 cryptocurrencies identified today can yet meet the conditions set by Aristotle. Traders accepting Bitcoin remain anecdotal, prices are rarely displayed in satoshis in stores and many of them have not provided any guarantee of having any reserve capacity of any value.

But cryptocurrencies have been perfectly successful in another field of application: investment. By considering them through a reading grid reserved for financial assets, the term cryptoassets seems more consistent.

Cryptoassets or digital assets

Bitcoin, Ethereum, Litecoin, Dash or XRP are to be considered today in the category of cryptoassets.

The Autorité des Marchés Financiers (AMF) defines a financial asset as a “security or contract, generally negotiable on a financial market, in various forms: from the simplest (share, bond, etc.) to the most complex (option, warrant, etc.). The financial asset is likely to generate income. When it is sold, a gain or loss may be recognised.”

A cryptoasset is therefore an investment vehicle. Offsetting a risk-taking represented by the possibility of a loss in value, an investor can expect a return on investment (ROI) in the form of dividends, which in the ecosystem will take the form of capturing part of the inflation (Proof-Of-Stake) or a simple capital gain during a sale.

Cryptoassets must be presented as a high-risk, high-return investment. A market that ruins beginner investors and create wealth for more competent or simply lucky investors.

Any investor who has acquired and then retained Bitcoin for at least two years has realized a capital gain”

We also notice that while the success of Bitcoin or Ether can make people envious, hundreds of cryptoassets are no longer worth anything, as attested by the deadcoins.com site. Whether linked to scams, abandoned by speculators and developers or rejected by marketplaces, the cryptoassets cemetery welcomes new residents every day.

Investment in this ecosystem is particularly interesting, innovative and risky. It is better to be informed before making decisions, which is why Coinhouse offers personalised services to support investors in their crypto adventure!

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