Cryptocurrency, digital currency and virtual currency
Physical currency, paper money and coins, is gradually disappearing in today’s technology-driven world. Transactions are becoming more and more digitized, and demand for other forms of currency is growing. These currencies include cryptocurrencies, digital currencies and virtual currencies. Many people tend to confuse or put these terms on the same level, but they significantly differ.
Digital currency or digital cash is a general term used to describe all electronic money. Subcategories of digital currency include cryptocurrencies and virtual currencies. Digital currency works exactly like fiat currency. Its main feature is weightlessness.
The process of creating a digital currency is straightforward. Fiat currency is converted to digital form and stored in an electronic wallet. The weightlessness allows to trade digital money online, i.e. make instant transactions by accessing an electronic wallet. You can then use this digital currency to pay for services, purchase goods, or send them to other people. Examples of digital currencies are PayPal, Wepay, Webmoney, Qiwi, etc.
As mentioned above, virtual currency is a subcategory of digital currency. It differs from cryptocurrencies and is clearly defined by European Central Bank:
“Virtual currency, or virtual money, is a digital currency that is largely unregulated and issued and usually controlled by its developers and used and accepted electronically among the members of a specific virtual community.”
Cryptocurrency is a type of digital currency or electronic money. This compound consists of two words – crypto and currency. Term currency usually stands for money used to buy food, pay for electricity or go to the cinema. It is issued by the central banks of the individual states.
The word crypto is derived from the word cryptography = encryption. Cryptocurrencies use a so-called asymmetric cryptography, which differs from symmetric cryptography in that different keys are used for encryption and decryption. Technically, these are units and zeros that flow across the Internet and are stored in the form of data on the hard drives of servers worldwide.
The heart of cryptocurrencies is an open, decentralized database – blockchain. Blockchain is the central ledger of cryptocurrencies storing all transactions. Blockchain eliminates the need for third parties, creating a so-called peer-to-peer system (P2P). Thus, the network is not managed centrally but consists of many computers (so-called nodes) that communicate with each other and verify transactions.
The popularity of cryptocurrencies has been steadily growing since their inception in 2009. The individual cryptocurrencies, led by the largest, according to market capitalization – Bitcoin (BTC), are reaching new and new highs and thus attracting the attention of an increasing number of institutional investors.
Although cryptocurrencies are still “in their infancy” because the market is very young, a real crypto revolution can be expected in the future. It is up to you whether you stay away or become part of this emerging market.