It is not always easy to tell the difference between digital currency vs cryptocurrency. You may notice that some online publications often use these terms interchangeably and are only adding to everyone’s confusion.
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Well, you’ll be able to tell the exact difference between a digital currency and cryptocurrency at the end of this article. You’ll also learn about virtual currencies and the technical differences that exist between all these forms of internet currencies.
What is digital currency?
Digital currency is a term for money that exists in only a digital form. There are no physical papers, but you can transfer and exchange them for other forms of currencies.
For instance, you can use digital currency to shop online and pay bills just as you would use the money on your mobile banking application. Unlike the money in your bank, though, digital currency has no physical papers or coins.
Yes. You can’t touch or feel it.
What is cryptocurrency?
Cryptocurrency, as the name, implies is a form of digital currency backed by cryptography. It exists only on the internet and is not controlled or issued by any central party such as your local bank.
The issuance, distribution, and other monetary policies are hard-coded into a decentralized computer network that all participants can easily verify. Transactions are almost impossible to reverse and stored on the database forever.
But what about virtual currency?
Virtual currency is yet another form of digital currency that is available in games and other applications. Users of these apps often have to pay real money to acquire these in-app currencies and, in most cases, must use them within the application.
Although some countries such as the United States apply the term “virtual currency” to cryptocurrencies, it is worth noting that the term was first popularized by software and mobile app developers.
Many countries are also working towards the development of a digital version of their national currency. These currencies are termed central bank digital currencies (CBDC) since each country’s central bank will issue them, and it will co-exist with physical notes.
What is the difference between digital currency and cryptocurrency?
Although both digital currencies and cryptocurrencies only exist on the internet, there are notable differences.
- Digital currency is usually issued by a centralized entity such as a bank or e-commerce store. Cryptocurrency, on the other hand, has no centralized issuer and relies on community involvement to survive.
- Digital currencies live on a centralized internet database, while cryptocurrencies are developed on top of a blockchain.
- Anyone can verify the circulating supply and the complete transaction history for a particular cryptocurrency, but one cannot say the same about digital currencies, which are usually kept secret.
- The price of cryptocurrencies is highly volatile and thus makes holding them a form of speculative investment. Digital currencies, however, primarily serve as a means of payment.
- Digital currencies are often restricted to users in a particular jurisdiction. Cryptocurrencies are available globally.
- Users have to provide personal information to use digital currencies. However, they can transact with cryptocurrencies pseudonymously. In other words, their transaction records are visible to other peers, but not their real-life information.
- While digital currency users may request refunds or cancellation of payments, cryptocurrency transactions are mostly irreversible.
- Although digital and virtual currencies exist since the early days of the internet, it was only in 2009 that the first cryptocurrency, Bitcoin came onto the scene.
- Most Governments provide clear regulations for the use of digital currencies (e.g., Directive 2009/110/EC in the EU.) But regulators are still in the process of enacting laws to govern the use of cryptocurrencies. (You can read about bitcoin regulation in the UK)
Digital Currencies: Paycoin, Facebook Libra (yet to launch), Digital Yuan (China), Money stored on credit/debit cards, Tether (USDt).
Cryptocurrencies: Bitcoin (BTC), Ether (ETH), Litecoin (LTC), and Monero (XMR).
Virtual Currencies: In-app currencies and points distributed in your favorite games.
Digital currency vs Cryptocurrency: Final Thoughts
The dynamic nature of internet currencies is one of the primary reasons it is often difficult to tell the difference between digital currency vs cryptocurrency, virtual cash, online currency, etc.
However, understanding the technical difference is vital if you plan to or are already using any of these forms of money. Especially for those who want to invest in cryptocurrency, it is necessary to note that it significantly differs from your typical digital currency.
Cryptocurrencies are primarily investment assets, while payment-friendly cryptocurrencies primarily exist as stablecoins. Their value is pegged to a fiat currency such as GBP, USD, or EUR to prevent price fluctuations as in Bitcoin or other cryptocurrencies.
In this article, we explained the difference between cryptocurrencies, digital currencies, and virtual currencies. Although all of these are electronic money and cannot be held physically, people use them for internet-based transactions.
Each has distinct features that many people choose to view as advantages and disadvantages. In the end, they all have a role in the current payment landscape, and this will likely not change anytime soon.