If you haven’t yet heard of digital currencies, get ready because they’re taking the market by storm. Bitcoin alone has had a banner year, with prices skyrocketing from $6,800 to over $63,000 per coin in just twelve months.
As an investment, it’s a volatile risk. As a form of payment, it’s intriguing and growing in acceptance.
But Bitcoin is just one piece of a new–and rising–online construct: digital currency.
How does digital currency work?
So, what is digital currency?
Digital currency is a type of currency available in digital, rather than physical, form. It goes by several names, including digital money, electronic currency, and electronic money.
You cannot physically hold digital currency in your hand. You can only use it online. Typically, you “store” digital money in an electronic wallet and then trade your currency for goods and services online.
But not every store or government recognizes digital currency as legitimate money, which leaves users with a lot of questions.
Is digital currency real money?
Digital currency can be used like real money, except it only exists in electronic form. For example, the term “digital currency” may refer to one of several things:
- Money issued by a central bank or governing body and held electronically.
- Virtual currencies: a type of unregulated digital currency that operates within set parameters and may sometimes be redeemed for cash.
- Cryptocurrencies: a type of virtual currency that uses blockchains, or blocks of data chained together, on decentralized networks to track transactions.
What is central bank digital currency?
Central bank digital currency, or CBDC, is a regulated form of digital currency issued by a central bank. For instance, China recently announced a digital version of its paper currency, the yuan.
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What is digital currency mining?
Digital currency mining, or “crypto mining,” is how transactions between cryptocurrency users are added to the blockchain “public ledger.” The mining process also helps “mint” new coins into the existing supply. Note that not all digital currencies are mineable.)
Is digital currency the same as cryptocurrency?
Digital currencies can be considered a superset of both cryptocurrencies and virtual currencies. Think of it this way: all bank-issued coins are money, but not all money is a bank-issued coin.
In the same way, all cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
Is digital currency safe?
Most digital currencies are unregulated, which means that the rules are determined by the issuing company.
Additionally, digital currencies aren’t backed or regulated by a governing body. This means that you’re on your own if you lose your investment or the value suddenly goes down. Many digital currencies are also subject to illegal scams.
As such, until a government-backed digital currency comes along, electronic currencies aren’t a safe investment.
Examples of digital currencies
The future of digital currency is uncertain as governments struggle to tackle the topic beyond traditional online banking. A lack of regulation has led to thousands of examples of digital currencies in recent years, with the most notable examples of digital currencies including:
- Bitcoin
- Ethereum
- Binance Coin
- Litecoin
- Ripple
Best features of digital currency
Now that you know how digital currency works, it’s time to explore what electronic currencies bring to the table.
Low-cost transactions
Digital transactions are unique in that they take place directly between the buyer and seller. As such, there is no need for a bank, credit card company, or government to sit in the middle and take a fee. In essence, digital currencies get rid of the middle man.
Instant transactions
One of the best features of digital currencies is that transactions take place almost instantly. All you need is a network and a vendor willing to accept the currency!
No need for a currency exchange
You do have to exchange money to invest in digital currency initially. But once you own the currency, you can use it to buy and sell goods and services across international borders, language barriers, and even oceans, all without visiting a currency exchange.
Advantages & disadvantages of digital currency
Like all financial tools, digital currencies come with a unique set of advantages and disadvantages.
Advantages of digital currency
Digital currency is the logical “next step” in the financial world, merging technology with money. As such, it combines some of the best features of both money and the online world:
- Instant, low-cost transactions
- Electronic transactions that automatically generate payment records
- Increased transparency
- The ability to “mine” your own money
Disadvantages of digital currency
But digital currency also comes with some severe drawbacks:
- You must have a network connection to buy or sell with digital currencies.
- Transactions are not always traceable, depending on the currency.
- The value of many cryptocurrencies fluctuates wildly.
- Some currencies have been “hacked.”
And ultimately, the future of digital currency is uncertain. That’s a disadvantage in and of itself.
Digital currency vs cryptocurrency
You read earlier that cryptocurrencies are a type of digital currency. But there’s more to the story.
For one, the government has limited regulatory guidance on cryptocurrencies whereas some digital currencies fall subject to regulations. Plus, many cryptocurrencies operate on decentralized, unregulated networks.
Additionally, digital currencies come about in multiple ways. They can be in the form of rewards systems, coupon systems, or online money, to name a few.
In contrast, a cryptocurrency by definition has to use cryptography to secure and verify any resulting transactions.
Digital currencies and the future
Digital currencies are varied and mostly unregulated. Like most aspects in life, they also come with unforeseen advantages and disadvantages. But whether you love them, hate them, or are plainly confused by them, digital currencies are here to stay.
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