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What Is Digital Currency?

For many of us, currency has been acknowledged as a physical legal tender such as cash. But in early 2010, Bitcoin began the movement towards digital currency that is widely used today. 

But, this type of currency is used throughout daily transactions each day. So, what is digital currency and how did it become so popular?

Digital currency is a type of virtual currency that represents a medium of exchange which can be used as legal tender anywhere. You can use this currency to purchase goods and services within businesses or to individuals. 

How Does Digital Currency Work?

Understanding how digital currency works, begins with understanding the structure of how it works and thrives today.

Digital currency is part of a centralized structure which allows for  groups to maintain and regulate all transactions. Because of this, any issues can be brought to an authorities attention, while all information is stored confidentiality. Thus, making virtual currency a safe and reliable avenue for users.

Some digital currencies, like Bitcoin, run on Blockchain protocol. These currencies are exchanged between individuals and businesses on a blockchain network. Due to the abundant amount of blockchain networks, there are several varieties of digital currencies/cryptocurrencies. 

Within the Blockchain protocol, a blockchain network keeps transactions in groupings known as ‘blocks.’ Depending on the currency, some of these blockchain networks may be private or publicly held. When the blockchain network is publicly held, anyone can have access to edit the network.

Whether as in privately held blockchain networks are viewed as more secure since there is a certain group of overseers to modify. In privately held blockchain networks, when new ‘blocks’ are created, ‘miners’ will then verify these transactions. This verification is then recorded to a ledger where all transactions and data are stored.

What Is A Digital Currency?

Now that we’ve broken down the essential steps to understanding digital currency, let’s get into the most well known virtual currency on the market today.

Bitcoin, considered to be the original cryptocurrency, was created to combat the centralization of power though banks. Bitcoin issued a set number of units (21 million) making it impossible to endure inflation. Since cryptocurrencies combat against inflation, digital currency is what many are looking to use in the near future. 

Since there is no intermediary, users have the ultimate control over their money and all virtual transactions are completed immediately. This effectiveness is an attractive feature in the busy world of today. It will only be a matter of time until central banks directly issue digital currency to the public.

How Does Digital Currency Have Value?

As we begin to see a major development in digital currency over the next few years. The question turns to how do these currencies keep and gain value without running into failure.

Digital currency derives its power a few different ways. First being that, its value relies completely on supply and demand. This type of currency can relate to Bitcoin’s blockchain network. With this structure, the value of the currency is volatile, and there isn’t anything backing up the value of a bitcoin besides its market. 

The second type of power comes from a stablecoin. One of the first stablecoins on the market that’s widely used today is Tether. Tether is a stablecoin because of its 1:1 ratio with the U.S dollar. With its claims to hold the same value, users have the ability of converting it into other assets.  

Finally, commercial banks issue digital currency to their customers. It is also centralized but, all monetary value is the same as the dollar. Since there is no cryptocurrency within the network, the physical legal tender is just turned into virtual currency.

Where Can You Use Digital Currency?

In our world today, this type of currency has become a commonly used entity between individuals and businesses. For example, many of us use digital currency over carrying cash.

COVID-19 has led to many people finding that digital currency is safer to use to stop the spread of the virus. Unlike cryptocurrencies, Central Bank Digital Currencies, are a virtual form of the dollar. With the number of smartphone users surpassing 3 billion this year, many users are turning to virtual applications to complete transactions.

With increased competition, Banks are now issuing digital cards to users as an avenue to access money. Shopping at the grocery store, getting gas or even going to a flea market can be done without the use of a physical tender. Your virtual currencies are right on the smart device you carry with you each day. 

Is Digital Currency Safe?

Digital currency takes on multiple mediums of exchange. This leads to some being more secure than others. Although this currency’s market is centralized and decentralized, both are widely used in many economies around the world. 

The CBDC is the most secure form of digital currency. Central banks have the ability to track and store data on where transactions are to be made. As cash now takes on a digital form, users have the can access their money whenever, wherever. 

A common concern for consumers is the regulation of cryptocurrency. Without any intermediary, the cryptocurrency market leads to many worrying about scams and data breaches.

Major cryptocurrency, like bitcoin, will very rarely see data breaches. With a new market of digital currency, it may take a while for consumers to be trusting of newer cryptocurrencies in the market. 

Will Digital Currency Replace Money?

The use of virtual currency is at an all time high. As the world becomes more connected, people are looking for ways to increase convenience. But replacing money won’t be anywhere in the near future.

While this type of currency is extremely convenient, people haven’t widely accepted it and there is a lack in infrastructure Gita Gopinath, chief economist of the International Monetary Fund stated in 2019. 

What Is The Benefit Of Digital Currency?

With many countries trying to develop digital currency, it’s easy to wonder what the benefits are to this growing exchange. Virtual currency benefits its consumers for numerous reasons.

The main reason being there is no intermediary in the process of exchange so everything becomes instant. The days of waiting business days to securely send money or receive money is in the past. Without adding fees, banks haven’t been able to compete with digital currency’s speed. 

The benefits of digital currency also feed into the economy. Cryptocurrencies eliminate inflation as a problem. Like I said early, because there is a set number of bitcoins to be held, there can never be inflation with this tender. Many third world countries are susceptible to dealing with high inflation rates. 

The advancements in this type of currency have made international business more efficient. These currencies now allows businesses now have the ability to create more revenue from customers outside their borders.

How Many Types Of Digital Currency Are There?

  • Virtual currencies: does not have a legal tender and operates like real currency that is accepted as a medium of exchange in the country of issuance.
  • Central Banking Digital Currency: are backed by a government’s central bank, which means they hold the liability.
  • Cryptocurrencies: are digital coins that can be used by consumers to purchase goods and services. These currencies can be used as investments and live virtually within your wallet. 
  • E-Cash: are bank accounts used to send and receive money for goods and or services without physical currency. 

Will Digital Currency Replace Paper Money?

As this form of currency becoming more common among consumers Federal Governments will have to revise the security of virtual money. Data breaches might frequently happen in upcoming years as more organizations switch to internet exchanges.

It’s up to these growing virtual currency markets to make secure connections for users to trade and complete purchases. Cybercrime could become easier without proper security measures in place to monitor new cryptocurrency. 

With the world going virtual, consumers will need a digital currency to make purchases securely. The rise of digital currencies is happening because of this. With many users needing access to their money they can rely on knowing instant transfers are possible with digital currencies. If you are interested in beginning investing in cryptocurrencies, don’t hesitate to reach out to a financial advisor.