Digital currencies are currencies that can only be accessed by computer or mobile phone because they only exist electronically.
Conventional digital currencies do not require intermediaries and are often the cheapest way to trade currencies.
All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
Some advantages of digital currencies are that they enable seamless transfer of value and may reduce transaction costs.
And some disadvantages of digital currencies are that they can be too volatile to trade and there is a possibility that they can be hacked.
In this article we will check out together:
- Introduction to digital currency
- Features of digital currencies
- Different types of digital currencies
Introduction to digital currency
Digital currencies have no physical properties and are only available digitally.
Transactions related to digital currencies are carried out using a computer or electronic wallet connected to the Internet or designated networks.
In contrast, physical currencies such as banknotes and minted coins are tangible, meaning they have specific physical characteristics. Transactions related to such currencies are only possible when their holders have physical possession of these currencies.
Digital currencies have the same functionality as physical currencies. They can be used to buy goods and pay for services. Also, these currencies may find limited use among some online communities such as gaming sites, gambling portals or social networks.
Digital currencies also enable instant transactions that can be done seamlessly across the globe. For example, a person based in the United States can pay with digital currency to a counterpart based in Singapore, provided both are connected to the same network.
Features of digital currencies
As mentioned earlier, cryptocurrencies only exist digitally. They have no physical equivalent.
Digital currencies may be centralized or decentralized. While paper currencies that exist in physical form, have a centralized production and distribution system that is under the control of central banks and government agencies.
Prominent digital currencies such as Bitcoin and Ethereum are examples of decentralized digital currency systems.
Digital currencies can transfer value. The use of digital currencies requires a mental change compared to the current framework of currency performance, because in the current framework, physical currencies are linked to the purchase and sale of goods and services.
However, digital currencies extend this concept. For example, a game network token may increase a player’s life or grant them superpowers. This transaction is not a purchase or sale, but rather a transfer of value.
Different types of digital currencies
Digital currency is an umbrella term that may be used to describe various types of currencies in the electronic domain. In general, there are three different types of currency:
Cryptocurrencies
Cryptocurrencies are special digital currencies that use cryptography to secure and verify transactions on their network.
In this category of digital currencies, cryptography is also used to manage and control the creation of such currencies. Bitcoin and Ethereum are examples of digital currencies. Depending on the jurisdiction, cryptocurrencies may or may not be regulated.
Cryptocurrencies are considered virtual currencies because they are unregulated and only exist digitally.
Virtual currencies
Virtual currencies are unregulated digital currencies that are controlled by a developer or founding organization that consists of various interest groups. Virtual currencies can be controlled algorithmically with the help of a defined network protocol.
An example of virtual currency is game network tokens, whose economy is defined and controlled by developers.
Digital currencies of the central bank
Central Bank Digital Currencies (CBDC) are regulated digital currencies issued by a country’s central bank. Central bank digital currencies may complement or replace conventional paper currency.
Unlike paper currency that exists in both physical and digital forms, central bank digital currencies will exist only in digital form. The UK, Sweden and Uruguay are among the few countries that are considering plans to launch digital versions of their native paper currencies.