Digital Currency

Digital Currency, also called digital cash, digital money, or virtual currency is any form of currency or money-like asset that’s only available in purely digital or electronic form.

Digital currency isn’t a tangible asset like cash or gold.

But they have the same utility that “regular”, non-digital, physical currencies have.

Digital currency has value, it can be used for buying and selling goods and services, and it can be used as a unit of account, just like a physical currency.

It can represent dollars and euros, also known as fiat currencies.

But digital currency doesn’t exist in your bank account, because those dollars (or euros or pounds or Yen) can be withdrawn for physical paper cash.

Digital currency is in digital form only.

There are various types of digital currencies. These include:

Central Bank Digital Currencies (CBDCs) – digital currencies backed and regulated by a government, central authority, or central bank, like the Federal Reserve or Bank of England, that are considered legal tender in that country of issuance
Virtual currencies – digital currencies used by developers of virtual online communities, such as the popular massively multiplayer online role-playing game (MMORPG) World of Warcraft. Virtual currencies are used to buy in-game items and services
Cryptocurrencies – digital currencies like Bitcoin or Ethereum that use cryptography and mostly operate on a decentralized blockchain
Stablecoins – a variety of cryptocurrencies that are often backed 1:1 by a fiat currency like the U.S. dollar but not backed by a central bank or government

Digital currencies have many advantages that set them apart from physical currencies.

Accounting and record keeping are super easy. Everything happens in a digital environment already, with ledgers maintaining records history often in a public fashion
There is no central authority involved in regulating the digital currency or qualifying you as eligible, so literally, anybody, especially the unbanked, has access to using digital currencies
Transferring digital currency between two people doesn’t require a middleman, like a bank or credit card, so transaction times are fast
Physical storage is unnecessary, so pocket wallets, safes, and vaults at your local bank aren’t needed
Digital currencies don’t have a physical, tangible form, so manufacturing the actual currency isn’t necessary
Transaction costs to send digital currencies to another person or pay for online goods are low or non-existent. No middlemen, no bank fees, no wire fees, no credit card fees!

But digital currencies don’t come without some disadvantages. They include:

Being completely digital and online opens digital currencies to security threats and vulnerabilities from hackers, malware, viruses, and exploits, all issues that we must deal with working on computers and smartphones
Digital money in the form of cryptocurrencies, virtual currencies, and stablecoins are largely unregulated, exposing market participants and digital currency holders to scams, governmental regulatory changes, and unregulated business and service providers that can affect the value of your holdings
Volatile swings in price come with the territory, regardless of whether you trade Bitcoin or you trade the newest cryptocurrency that was just released today. Cryptocurrency trading is naturally very speculative in nature, as the market volatility leads to traders continuously buying and selling digital assets in hopes of generating trading profits.
Digital currencies come with the characteristic of being digital and online. An Internet connection and computer or smartphone device are critically necessary if you want to access your digital assets. Without a working device and working Internet connection, your digital assets can’t be “held” or accessed like tangible currencies.

Digital currencies provide many benefits that almost anyone would easily benefit from. But due to their digital and technical nature, they aren’t without some drawbacks that must be addressed to fully benefit from all the innovation they present.

Related Terms

Metaverse

The Metaverse should give you the opportunity to do virtually anything you can do in the “real” world, but online…virtually. Some common characteristics of the metaverse that are discussed today include the use of virtual reality (VR) interfaces (goggles, headsets, etc.), augmented personal avatars that represent you in the digital world, and ownership of digital goods.

Hardware Wallet

A type of cryptocurrency wallet that’s based on a physical device, such as a USB thumb drive with buttons and a screen, that stores your private keys to your cryptocurrency funds. A hardware wallet is considered a cold wallet in that it isn’t connected to the Internet, keeping your wallet (and wallet funds) away from hackers and theft.

Network Fee

A fee you pay to a blockchain network for transferring a digital asset on that network. The fees go to the miners or validators of that blockchain network who win the right or are chosen by the validation mechanism to ultimately confirm your transactions and add to the blockchain.

Cold Storage

Cold Storage is a short and long-term cryptocurrency storage solution that involves storing most or all of your cryptocurrency reserves offline. Forms of offline storage include a computer not connected to the Internet, hardware wallets like the Ledger Nano, a USB thumb drive that is kept in a safe or other secure location, on a piece of paper, or even on other physical items like an actual coin.

Desktop Wallet

A common type of crypto wallet used to securely store and manage your private keys on a computer hard drive. They’re considered more secure than web-based wallets, since you can only access them from wherever your computer is located, and again, you control your private keys.