Digital currency is a type of currency available only in digital form, not in physical (such as banknotes and coins). It exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership. Like traditional money, these currencies may be used to buy physical goods and services, but may also be restricted to certain communities such as for use inside an online game or social network.
Digital Currency Vs. Virtual Currency
Digital currency is an asset represented in digital form and having some monetary characteristics. It can be denominated to a sovereign currency and issued by the issuer responsible to redeem digital money for cash. In that case, digital currency represents electronic money (e-money). Digital currency denominated in its own units of value or with decentralized or automatic issuance will be considered as a virtual currency.
Virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money. It was defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.
Risks and Benefits of Digital Currency
Digital currencies are based on blockchain technology. One of the greatest benefits is that cryptocurrency cannot be counterfeited and transactions cannot be reversed arbitrarily by the sender. Further, cryptocurrency transactions provides anonymity. One other benefit is how cryptocurrency is not bound by exchange rates, interest rates or transaction charges. In addition, digital currency transactions take place at the same speed, regardless of where the sender and receiver are located.
Despite the popularity and positive price performance, digital currency is not without risk. Cryptocurrencies represent a new frontier. Therefore, retail investors should expect volatility and significant price swings as markets develop. While cryptocurrencies have experienced explosive growth, they currently remain a relatively small part of the global financial ecosystem. Regulators and policymakers will continue to monitor cryptocurrencies to determine any potential impact to financial stability or broader systemic risk.
The benefits of digital currency in today’s economy could appear to be earth-shattering, breaking down geographical barriers, and saving the consumer quite a bit of cash on the back end of a purchase. But it doesn’t come without risk. Being familiar with key concepts before becoming an investor is of great importance.
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