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Your pocketbook may soon be going virtual.
That is, if the trend in cryptocurrency continues. This non-physical, digital form of money — issued not by governments but by private systems — keeps multiplying. Since 2009, when bitcoin — the first and best-known — debuted, thousands of cryptocurrencies have become available. Cryptocurrencies have been championed and developed by several corporations and financial institutions, including Air Asia, Mitsubishi UFJ Financial Group, and Facebook.
And the currencies have also attracted the attention of the financial world. The rapid ups and downs in the prices of bitcoin and the 12 other major types that can be traded are the stuff of daily headlines.
S&P Dow Jones Indices, which runs the S&P 500 Index, is going to start publishing the price moves of several cryptocurrencies in 2021, helping investors track the performance of different coins. This sort of index gives a major boost of transparency and legitimacy to “crypto” as an asset class.
For all its fame, though, “crypto” can still be confusing. Here’s a guide to the basics behind the electronic currency — how it works, and what to know before investing in it.
What is cryptocurrency?
Cryptocurrency is often referred to as “decentralized money,” meaning that it is stored, created, and processed outside of a central bank, or government.
Unlike traditional “hard” or paper money, cryptocurrency has no physical form. It’s really a set of data, secured by cryptography (the science of encoding and decoding information) — that’s why it’s called “cryptocurrency.”
When data is encoded, the information is converted from one form to another, less discernible form, and is then decoded — or reverted — back to its original form by the end-user. This complex process eliminates the possibilities of double spending and counterfeiting, thus reinforcing the security of using cryptocurrency to pay for things.
In a way, cryptocurrency works like a secure, cloud-based filing system, much like Dropbox or Google Drive.
By decentralizing, cryptocurrency avoids interactions with third-party servers and government agencies, which often engage in mass data collection and allow potential control of an individual’s access to funds. This lack of affiliation with a government or banking system allows transactions to be processed anonymously, which some users consider a notable benefit.
On the flipside, cryptocurrencies lack one of the main advantages of a physical or “hard” money system, since there is no government entity responsible for maintaining the central supply, or even a record of the money or its transactions.
How does cryptocurrency work?
Cryptocurrencies maintain their own record-keeping through the use of blockchain, an online ledger and transaction log.
Blockchains create digital records — of transactions, certificates, or contracts —that can only be added to, rather than changed or deleted. This independent transaction log, crypto-converts insist, is far more secure than paper records or institutional digital accounts, which could be hacked.
Essentially, the platform archives both the buyer’s and seller’s information and records it as a “hash,” or string of letters and numbers generated by a complex mathematical function. Each hash is directly linked to the hash before it, …read more
Source:: Business Insider