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What is a Digital Currency?

2017-03-30T17:15:34+00:00

The term 'Digital Currency' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

A digital currency refers to an asset which possesses numerous interesting and groundbreaking characteristics. On the one hand, they are much like traditional forms of money that people spend and keep, such as cash and coins. On the other hand, such currencies are not physical. This means that they do not have literal physical representations or the associated physical limitations. This currency is kept in a digital wallet, which can have physical characteristics if it is a cold storage type of digital wallet.

Digital currency in particular and electronic money in general is gradually becoming more significant as the world continuously evolves into a society that is more and more cashless. The amount of money supply which is expressed in digital format is constantly growing. Thanks to the rising popularity of such crypto-currencies as especially Bitcoin, there now exists the distinct possibility of migrating entirely away from traditional paper bills and coins at some point in the future.

Such digital currency only can exist and function when secure transactions are guaranteed online. This makes these currencies both an occupant and hostage of digital environments. They are generally represented and depicted in the form of information. Bitcoin has become so popular that numerous companies currently accept this form of digital currency. PayPal even allows for the utilization of Bitcoin now.

It is interesting to note that Bitcoin is not the only digital currency option available to individuals and businesses for transactions. A range of such currencies exist which can be used to pay for transactions. The next five most important after Bitcoin are Litecoin, Darkcoin, Peercoin, Dogecoin, and Primecoin. They have many advantages over traditional money.

The first of these is the instant transfer ability. Individuals are no longer required to wait on a central clearinghouse somewhere to handle the transaction. The days of from one to five business days waits for transfers are long gone thanks to these digital currencies. Crypto-currencies are so popular precisely because the effect of such a transfer is instantaneous.

The majority of these digital currencies also come with no fees. Whatever something costs in Bitcoin or another such digital currency, people simply pay with it at transaction cost and no hidden fees are applied. This is a stark difference from many credit card or even PayPal transactions.

Individuals and businesses especially love the fact that these digital currencies come completely without borders. This means that a seller or buyer does not have to be concerned with exchange rates or foreign transaction fees (which are often exorbitant). Cross border transactions are simple and effective to put through, though people must still watch the exchange rate at which they are offered in the local currency into which they are paying.

For the majority of applications and scenarios, these crypto-currencies also prove to be extremely secure. It is the digital wallet where the danger lies. The money is not being stored in a bank vault or even on a bank computer. The wallet must be backed up on a daily basis to prevent it from being lost. In order to ensure that it is secure, the only way to guarantee this is by utilizing cold storage.

Cold storage takes the digital wallet completely offline and off network. It means that the “pin code” like authorization element will be stored on a small device that resembles a USB miniature drive device. The nature of these devices is that they do not accept software. This means that Trojan Horses and viruses which steal information can not be imprinted on them. They also are never online long enough to be hacked, as users only connect them to a computer long enough to digitally sign the transaction.

These digital currencies have convincingly changed the rules of the financial transaction game. Their limits are two fold. The first is that a business must be willing to accept Bitcoin or rival currencies in order for a consumer to pay with it. The second is that digital currency regulation is inevitable. Central banks are jealous animals. They are already suspicious of their monopolized currency-printing functions being assumed in a non-regulated and more difficult to track environment by a non-centralized form of money.

The term 'Digital Currency' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.