What is cryptocurrency?
Crypto Finder's™ guide to how cryptocurrency works and where to buy crypto in Canada.
Everyone’s talking about bitcoin, blockchains and decentralization—but what is cryptocurrency? At Finder, our team of crypto experts have put together loads of useful guides to help you make sense of the crypt craze. If you’re looking for a simple guide to cryptocurrency, you’re in the right place. Here’s how cryptocurrency works.
This is not an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade or use any services.
What is cryptocurrency?
Cryptocurrencies are digital assets that have value, just like a $10 bill is a physical item with 10 Canadian dollars of value assigned to it.
The difference is that crypto is electronic—it only lives on the internet. For a cryptocurrency to have value, its coin must be unique, verifiable and nonreplicable. The Bitcoin blockchain was the innovation that made this possible.
Crucial to crypto is the principle of decentralization. There’s no single authority or business like a bank or government that controls crypto, meaning you have much more control over your crypto than you have with your regular money (fiat currency).
This idea of sovereignty over your assets and removing reliance on any sort of intermediary is something you’ll hear about a lot. Decentralization also makes crypto a powerful medium of exchange because it minimizes the costs and processing times of transactions.
Thanks to these innovations, legacy companies like Visa, PayPal and several banks have also begun adopting cryptocurrency and blockchain technologies.
How does cryptocurrency work?
Cryptocurrency uses cryptographic technology to secure individual assets on a database called a “blockchain.” A blockchain records transactions on a network in a way that cannot be altered.
You can think of a blockchain as hundreds of connected computers sharing information with one another. This builds a ledger of data that can be used to validate the legitimacy and security of each crypto transaction.
Some blockchains use a variation of proof-of-work or proof-of-stake consensus algorithms to execute transactions. Proof of work is where the term “Bitcoin miners” comes from.
Miners operate powerful computers that solve complex mathematical problems, which helps secure the blockchain.
Proof of stake is a bit different. This algorithm uses staking—the process of locking up cryptocurrency on a specified blockchain wallet in exchange for a reward. Staking protocols use “nodes,” which are small copies of the blockchain being run on thousands of different computers.
Understanding how a crypto’s algorithm works in detail isn’t essential—or easy—but it can help explain movements in price.
How to buy cryptocurrency
- Compare crypto trading platforms in Canada.
The easiest way to purchase cryptocurrency is through an exchange or trading platform. Features to look out for are low fees, supported coins and deposit methods. You’ll have to provide some form of government ID to register an account. - Deposit funds.
To deposit Canadian dollars into your account, verify your identity (this process is called “Know Your Customer” or KYC). Most exchanges accept instant transfers from a bank account, while others also support credit card purchases. - Choose a cryptocurrency.
There are thousands of cryptos to choose from. Thoroughly research any you’re interested in, check what’s trending and keep on top of the latest crypto news before investing any money. - Build your crypto portfolio.
Most exchanges let you instantly buy crypto with the funds deposited in your account. Some platforms also have advanced market options and trading pairs, which may be useful for more experienced traders. - Store your crypto.
You can choose to leave your assets in your exchange wallet, but this comes with some risks. It’s generally recommended that you transfer your crypto to a non-custodial or hardware wallet for increased security.
Where to buy crypto in Canada
There are a number of feature-rich trading platforms for Canadian crypto investors to choose from. If you’re just starting out, look for exchanges registered with the Financial Transactions and Reports Analysis Centre (FINTRAC) and the Canadian Securities Administrators (CSA). Choose a platform that offers Canadian dollar deposits via your preferred payment method.
Select Go to Site when you’re ready to create an account on any of these platforms.
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How to make money with crypto
Like stock investments, you can make money with cryptocurrency by selling it for more than you bought it. But you can also earn crypto from holding onto it.
Some cryptos let you stake (or lock up) your coins for a specific period to help validate transactions on the network. In return, you earn extra crypto. Major cryptos like Ethereum, Solana and Cardano support staking, but some don’t, including bitcoin.
Alternatively, you can earn interest by lending crypto through centralized platforms that act as intermediaries for crypto loans or through decentralized platforms that let lenders and borrowers transact directly with each other.
When you buy crypto, where does your money go? It goes to whoever sold the digital asset, usually an exchange or broker service. But it could also go to a stranger, if you used a decentralized finance or peer-to-peer (P2P) platform.
What are the advantages and disadvantages of cryptocurrency?
The cryptocurrency industry is packed with potential, but there are some risks you should be aware of. Let’s take a closer look at the pros and cons of cryptocurrency.
Advantages of cryptocurrency
- Alternative to banks. The crypto ecosystem provides a way to spend, save, earn interest, borrow and lend without approval from a centralized authority like a bank. Unlike fiat currency, which can be lost when banks fail, crypto doesn’t rely on the performance of an overseeing financial institution.
- Secure blockchain technology. Crypto transaction records are verified and stored across a network of computers on a blockchain. This network is extremely difficult to hack, and you can transact pseudonymous—your personal information is not directly ties to your crypto movements.
- Fast, inexpensive money transfers. Crypto provides a speedy, low-cost way of sending and receiving currency, making it a promising alternative to traditional money transfer services.
Disadvantages of cryptocurrency
- Highly volatile. Changing public sentiment and demand for crypto can cause massive price changes, especially because crypto is unbacked by an inherently valuable asset like gold.
- Points of vulnerability. Blockchains are very secure, but exchanges, wallets and private keys are more vulnerable to hacks and fraud. It’s crucial to protect your wallet and key information, and only transact of platforms you trust.
- Requires lots of energy. Crypto mining (earning crypto by validating transactions on a blockchain) can require heavy computing power, which requires energy. Crypto technology is developing and may improve over time, but the industry draws criticism for its impact on global energy consumption.
Is cryptocurrency safe?
With crypto so frequently making the news, you might be wondering “Is crypto safe?” There are a number of risks associated with buying, storing and using digital currencies. Before jumping in, do plenty of research and make sure you understand how to keep your crypto safe. Some key risks to be aware of include:
- Poor regulation. Crypto in Canada is still largely unregulated, which means you may not be protected if your funds are lost or stolen. Look for platforms that are registered with FINTRAC and the CSA and that provide an insurance fund.
- Volatile prices. Crypto is much more unpredictable than traditional markets, and massive price fluctuations within a short window are not uncommon. Because of this, your investment can quickly lose its value.
- Vulnerable to hacking. Several million dollars have been lost to successful hacks of crypto exchanges, wallets and blockchains. It’s important to understand that, without appropriate security measures like using a hardware wallet, securing your private key and enabling 2-factor authentication, your funds could be stolen.
- Steep technical learning curve. Grasping the complex technical foundations of potential crypto investments can be confusing. You also need to fully understand concepts like gas fees and wallet addresses before interacting with a blockchain, or else you risk losing funds.
- Scams. As crypto has become popular, so too have crypto scams. Be extremely wary of deals that seem too good to be true, thoroughly research all platforms or projects before putting your money in and never disclose your private key.
Frequently asked questions
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
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