The trend is shifting towards digital currencies, and people prefer to make transactions through these digital currencies. Digital Currency is a form that is managed, stored, and exchanged on a digital computerized system.
Cryptocurrencies are considered the best digital currency form, with revenues increasing to $3.33 billion in 2023. As of now, it is expected that the revenues will rise to $6 billion by 2027.
What is Digital Currency?
Digital Currency is a type of Currency, which doesn’t have a physical form, and any central authority does not regulate it. So, financial institutions can only perform some transactions of buying goods or services.
Digital currencies don’t have a physical attribute; they are available in a physical form. All the transactions are processed through computers or electronic wallets to the Internet. Therefore, it can also be said as digital money. However, it is not central bank money, and central authorities have no control.
In addition, physical currencies like banknotes and coins are tangible. Therefore, they have physical attributes, and their transactions can get possible only if the possession of these currencies is transferred.
Well, Digital currencies are similar to physical currencies. Users can make transactions and pay for goods and services without any hassles. These digital currencies can also be used to send payments across borders seamlessly.
Key Takeaways
- Digital currencies can be easily transferred from mobile phones or desktops in just a few seconds.
- It is the cheapest method to trade currencies without the need for intermediates.
- Transactions can be completed seamlessly with digital currencies while making transaction costs more affordable.
- All cryptocurrencies are digital currencies, but all digital currencies are not cryptocurrencies.
Characteristics of Digital Currencies
- Digital currencies also exist in a digital form; there is no physical equivalent to these currencies.
- Digital Currencies can be both centralized and decentralized. Fiat currency is regulated and governed by central authorities. While cryptocurrencies such as Bitcoin and Ethereum are examples of a Decentralized system.
- Digital currencies are considered legal tender and a safe store of value for government agencies.
- It is a fungible currency type that doesn’t require a bank account to store the currencies.
Types of Digital Currencies
There are different types of Digital currencies in the electronic ecosystem. Below, we have broadly defined the types of digital currencies.
Cryptocurrencies
Cryptocurrencies are currencies that use cryptography to secure and verify all transactions. Cryptography is also used to manage and control newly created currencies. Here, Bitcoin and Ethereum are the most used cryptocurrencies with a huge market capitalization. However, it is still being determined whether crypto will be regulated.
Virtual Currencies
Virtual currencies are digital assets that can come into use as a medium of exchange. These currencies are created and stored electronically, and there is no control of a central bank or government authority.
Virtual currencies provide a better alternative to the traditional financial system, allowing users to make payments transparent and cost-effectively. They enable users to make transactions quickly, securely, and with cheaper fees.
As such, virtual currencies are getting very popular in recent years as a way for people to store their wealth or make payments without using traditional banking systems.
Central Bank Digital currencies
Central Bank Digital currencies are the regular digital currencies regulated by a country’s government or central bank. These currencies became the perfect replacement for fiat currencies.
The Fiat currencies exist in a physical form only, while these currencies are in a digital form. Countries like England and Sweden plan to introduce a central bank digital currency CDBS. They have seen potential benefits to launching a digital currency. It may be regulated or unregulated but will be available only in digital form.
The Bank of England has yet to plan to introduce UK CBDC. So, we must wait for the UK digital currency to launch until all the regulations have been made.
Advantages of Digital currencies
Some of the main advantages of Digital currencies are-
Quick Transactions
Digital currencies place transactions on the same network, and no intermediator is involved in placing the transactions. So, the amount of time required to place transactions is swift.
All the payments are made quickly with a low cost and instantaneous transactions. These payment options are better than the traditional form of payment. Infect, you will get a complete transaction record to maintain transparency.
No Inflation
Digital currencies don’t have to face inflation issues because the central banks don’t have any control over them. Instead, unlike some countries, the central bank inflates its Currency to keep itself above the water.
We have seen such things in the United States, where the inflation rate is higher than the consumer price index indicates. However, these things couldn’t run with digital currencies because they are available in limited quantities.
Easier for the international customer to do business with
Once you receive payments from around the world, you can scale your business quickly. So yes, digital currencies allow us to do business with international customers.
It gives you more profit-generating opportunities by serving the whole globe. In addition, you can easily target international customers because you have the choice to receive payments through digital currencies. Today, countries are exploring themselves and making the most benefits out of it.
Disadvantages of Digital currencies
Here are some of the disadvantages of digital currencies-
Infrastructure issues
These digital currencies have their storage infrastructure, and there is no need for physical wallets. However, it creates an issue because you will need an active internet connection to transfer the amount.
Moreover, some online wallets are also necessary to decode these currencies. For that, we need to opt for the robust security option, which is daunting.
Hacking Potential
Keeping our digital currencies in online wallets is always a considerable risk. The hackers can steal hard-earned funds from your account by breaking the protocol.
We have seen many crypto scams in the past few years. Unfortunately, the secured wallets are still in progress, and we need to wait for some more time to expect a secured wallet to store digital currencies.
Volatile Value
Digital currencies have a volatile value because they are used for trading and may have wild swings, reducing the Currency’s value.
Digital currencies have the chance of sudden price changes, as it highly depends on what investors plan to do. So, it will be a risky approach to deal in digital currencies all the time.
So these are the pros and cons of digital currencies. Infect, the bank of England has given several research papers on this topic and also briefed about the benefits on the economy for issued digital currencies. Even China has released their digital Yuan for their citizens also. It is a digital form of the Yuan and is available only to Chinese people.
Conclusion
Digital currencies are the digital form of currencies which has no physical equivalent. It is mainly used to process all electronic transactions. Although, they can be exchanged for regular currencies without any hassles.
Currently, the most popular digital currencies are Bitcoin and Ethereum. In addition, many governments are planning to launch their centralized digital Currency.
FAQs
Q. Can we invest in Central Bank Digital Currency?
Ans. Yes, Central Bank Digital currency can be invested in the forex markets. However, it is a speculative investment, and the best option would be to store these currencies in your account.
Q. Can I buy digital Yuan?
Ans. Digital Yuan is available only for people living in China. Still, there are other channels through which people can buy and trade Digital Yuan.
Q. What is the difference between digital Currency and cryptocurrency?
Ans. Digital Currency is Currency that is available only in digital form, while cryptocurrencies are decentralized digital Currency.
Q. What’s the most significant disadvantage of Digital Currency?
Ans. Digital currencies are still open to hacks, and your financial information can be leaked anytime. In addition, hackers can track and trace the data anytime, and you will be penalized for that.
