What is digital currency and virtual currency?

The buzz around Bitcoins has brought some new terms and concepts into the public eye. One of these is the concept of the digital currency and virtual currency. Both are two separate concepts that overlap to a large degree and therefore the terms are used interchangeably. However, it is important to understand what each is and where they differ in order to ensure that you know your internet money terminology.


Paper and Electronic Money

The money in your wallet is referred to as paper money, banknotes or simply as cash. The money available in your bank account and credit cards is electronic money. Paper money (banknotes and coins) can be converted into electronic money when you deposit it into your bank account. Electronic money can be converted into paper money when you withdraw it at an ATM.

The bottom line is that money is just an easy way to trade, but in the banknote sense it is nothing more than paper. The difference from normal paper is that bank notes are a tender or promissory backed by a country’s Reserve bank. In some economics where the currency is pegged against a precious metal like gold, a certain denomination banknote is a promissory for a specified amount of gold held by the Reserve bank.

If the US dollar was still based on gold, then a $10 bank note means that you have $10 worth of gold which is held by the Reserve Bank on your behald.

Real Money vs Digital Money

A digital currency is not the same as paper money or electronic money. It is therefore said to be an alternative currency. It exists in cyberspace and is used to trade online but it can buy real goods and services. Some digital currencies are pegged against real currencies or even precious metals and other commodities.

However, the value of many digital currencies is also largely dependent on the online demand for it – as with any currency or commodity. If there was an unlimited supply of the currency, it would be essentially worthless just as if there was no demand for it. The basic principle of supply and demand.

What makes a digital currency different from a real currency is that it is not subject to the same regulation by a central authority and its value doe not fluctuate as drastically according to the political, social and economic forces. It is also not open to manipulation by authorities and traders – at least not in the ideal setting.

However, this is not an entirely accurate. A digital currency is only worth what it can be converted into or purchase. For example, it would be great to own 10 million Bitcoins but if all it ever did was to buy and sell digital services and products and could never be converted into cold hard cash at some point then it is essentially be useless apart from a small group of IT fundis.

Cryptocurrency and Virtual Currency

So the moment a digital currency becomes real goods, services or money, it is also affected to some degree by the state of national and international markets. A cryptocurrency, which is what Bitcoin is, is a digital currency that utilizes cryptography to produce and manage the system. It prevents counterfeit currency from entering the system in much the same way as paper money could be forged.

A virtual currency is a separate concept. It is a type of currency that is used in the virtual world for virtual goods. It usually cannot be translated into real world goods or services and cannot be converted into real currency. However, if there is a big demand for a limited supply of virtual currency then the economic forces would give real currency value to a virtual currency.

Although some of these currency-related concepts have been oversimplified in this article, it essentially gives you an idea of the differences between real currency and digital currency. It also explains where the term cryptocurrency and the concept of a virtual currency fit in. With Bitcoins shaking up the digital currency system these day, you can rest assured of using the right jargon in the correct context.

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