Cryptocurrency and digital currency are one and the same, right? Think again. Various factors differentiate these two forms of currency, and each has its own advantages and disadvantages.
So, what are cryptocurrency and digital currency, and how do they differ?
What is cryptocurrency?
Cryptocurrency is certainly a type of virtual currency, but its characteristics distinguish it from classic digital currency.
Cryptocurrencies are by no means new, but in terms of money, they are still finding their feet. The first cryptocurrency was launched in 2009 and is called Bitcoin. Even if you’re not into crypto, you’ve probably heard of Bitcoin, as it’s been the subject of various news stories and debates for a few years now. Bitcoin was developed and launched by a group or individual who uses the pseudonym “Satoshi Nakamoto”. Nowadays, no one really knows the true identity of the creator of Bitcoin(s).
All existing cryptocurrencies exist today on a blockchain, which is an immutable register of chronological data. Every transaction made using a cryptocurrency is recorded on its native blockchain. Each blockchain has a long line of blocks in which a finite number of transactions are stored. The number of transactions stored in the block depends on the block size.
Cryptocurrencies are generally decentralized, although they can have centralized characteristics. Decentralization refers to a system that distributes data and network power across multiple connection nodes. This structure ensures that no single entity ever has majority control of the network, which bodes well for security and transparency. Centralized networks, on the other hand, have a small group of decision-makers who exercise most, if not all, the control, which many see as problematic.
Cryptocurrencies can be traded on various platforms, including exchanges. Cryptocurrency exchanges can be centralized or decentralized. Some of the biggest exchanges, such as Binance, Kraken, and Coinbase, are centralized. But there are also popular decentralized options, like Uniswap and Slingshot. You can also buy or sell cryptocurrencies using wallet apps, like Exodus and Mycelium.
A key point of contention around cryptocurrency is its lack of regulation. Many crypto enthusiasts believe that cryptocurrency should not be regulated or touched by large financial institutions. However, this lack of regulation exposes cryptocurrencies to many risks, including volatile price fluctuations, scams and fraud. If you follow the crypto market, you will know how much an asset’s price can fall or rise. This can sometimes be a good thing but often results in huge financial losses on the part of investors.
The value of cryptocurrencies may vary depending on how they are collateralized. Many major cryptocurrencies, including Bitcoin, Ethereum, Dogecoin, Litecoin, and BNB rely on a supply/demand balance to maintain value. Let’s say, for example, demand for Bitcoin fell to zero. This would cause prices to drop drastically, as there is no longer a market for the trade.
However, a category of cryptocurrencies called stablecoins can combat this. Stablecoins are often backed by collateral, such as physical reserves, bonds and stocks.
Cryptocurrency can also be quite restrictive in terms of accessibility and utility. While you can spend your cryptocurrency in some stores your choice will likely be limited. Additionally, most providers that accept cryptocurrencies only accept the most popular assets, such as Bitcoin, Ethereum, and Dogecoin. Cryptocurrency is also illegal in some countrieswhich makes it inaccessible to many.
What is digital currency?
Rather, digital currency is a general term that can be used for various assets. While cryptocurrency can certainly be called digital money, not all digital currencies are cryptocurrencies.
In short, digital currency is any fungible asset that exists solely online. Many types of traditional currencies exist as digital currencies, including the British pound, US dollar, Japanese yen, Indian rupee and Canadian dollar. Of course, these currencies are not exclusively digital, but in the technological age, vast proportions of the economy’s wealth exist online.
Take for example your bank account. When you use this account’s payment card to pay $20 for a product, no physical money is exchanged. The $20 will likely remain virtual for a long time until it is cashed out. Although there are paper dollars that represent digital dollars, this physical currency is not backed by any valuable asset (like gold or silver), so the physical and virtual versions only have a subjective value.
With digital currency now so common, it can be used in almost any area. So whether you’re paying for a product online or in-store, signing up for a service, donating to charity, or making a bank transfer, you can do it using a fully virtual tender . Actually, Rory Callaghan reports that 92-93% of the world’s currency is already in digital form, showing how crucial digital money has become in our modern world.
Cryptocurrency and digital currency: main differences and similarities
The biggest difference between digital currency and cryptocurrency is that the latter still exists on a blockchain, while the former does not. A digital cryptocurrency does not necessarily need a blockchain to function, although the technology is well suited to virtual assets and their exchange.
When it comes to inherent value, digital currency and cryptocurrency are mostly in the same boat. Typical cryptocurrencies have no collateral, as is the case with digital and traditional currencies. However, cryptocurrency stablecoins are backed by valuable real-world assets, such as gold, silver or oil. This confirms the value of the crypto and gives it inherent, objective value.
In terms of accessibility and utility, digital currency in the form of legal tender is by far the winner. You can use digital dollars, British pounds, rupees and other forms of currency in multiple ways. In contrast, the use of cryptocurrencies is currently limited outside of trading, staking and investing. For example, in most countries you can’t walk into a bar and pay for your drink with cryptocurrencies, but you will likely be able to pull out your card or smartphone to pay via digital tender.
So while digital currency can be used to describe cryptocurrency, there are technical and practical differences between these terms that should be kept in mind.
Digital currency plays a huge role in our lives
Whether on the blockchain, in our smartphones or on our payment cards, digital currency has become an inherently crucial part of our global economy throughout the 21st century. While opinions may vary on cryptocurrency and its future, there is no doubt that digital currency, in general, is here to stay.