Cryptocurrency Is An Electronic
Cryptocurrency Is An Electronic
Cryptocurrency Is An Electronic
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?
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.
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.
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, so unauthorized changes to the ledger will become
apparent immediately after a hash is altered.
Once a certain number of hashes is reached, the group is converted into a "block" and linked to
the other blocks on the server - hence the name "blockchain." The blockchain is updated every
ten minutes and stored on a multitude of servers worldwide.
Cryptocurrencies operate in a closed system, meaning that there is a fixed amount of them and
new units can only be created following a strict set of guidelines. Some currencies, such as
bitcoin, have a software-enforced cap on how many units can be created. This limited supply
makes each unit more valuable-especially as the currency gains popularity among day traders.
Several varieties of cryptocurrencies exist. The most popular and widely traded include:
In its early days, crypto seemed a tad shady, associated with criminals and money launderers. A
black market operation, the Silk Road, used bitcoin as its currency of choice until the FBI shut it
down in 2013.
Since then, cryptocurrency has slowly gained prominence in the public eye - and respectability.
Today, it can be used for a variety of transactions, including investing in startups, negotiating
import-export contracts, and even paying utility bills.
In 2020, Paypal announced that it would allow users to hold multiple types of cryptocurrencies
on their accounts, and is even looking to allow crypto to be used as a payment option on their
many partner websites like eBay.
But while its uses are growing, cryptocurrencies mainly seem to flourish as an investment
asset, trading in specialized currency markets.
Common investing apps like Robinhood, Coinbase, and Kraken all offer the ability to purchase
crypto with ease. There are also entire online trading platforms and exchanges (like Gemini,
BlockFi, eToro, and Bitcoin IRA) dedicated exclusively to crypto products.
Innovations are already being established to manage the market fluctuation of the system and
control its valuation. For example, the crypto coin Tether quite literally "tethers" itself to local
currencies, thus sidestepping the characteristic volatility of other unsecured tokens.
Cryptocurrency is an emerging asset that is sure to continue evolving in the coming years.
Whether the future will be one where all tokens are backed by local currency or whether they'll
remain intangible, crypto can certainly form a portion of a prudent investor's portfolio.
Its decentralized nature has protected cryptocurrency from the influence of third-party servers
and government agencies, which has created an anonymous processing system that appeals to
many users. Its blockchain technology maintains a complex and highly-secure transaction log.
However, the system is not risk-free by any means. The current lack of government and
international regulations may hinder the product's desirability for some. For others, the volatility
of different coin prices may seem just too dangerous - especially for an asset that has no intrinsic,
fundamental value.
Much like the asset's price, public perception of cryptocurrency has fluctuated dramatically over
time. But it's safe to say that this new type of currency is not yet spent.
Potential for high returns High volatility and potential for large losses