With over 6000 virtual currencies in use across the globe, it has become exceedingly hard for central banks to ignore the overall impact of cryptocurrencies. As a result, central banks are putting forward their own digital money, known as central bank digital currencies (CBDC). The Reserve Bank of India is eyeing a test run for the Digital Rupee by the end of 2022. Central banks across the world are looking at gaining a first-mover advantage and proactively working towards developing their own digital currencies. But what is digital currency? How does it work? What is the process behind a currency becoming ‘digital’ in the current financial landscape? This article gives you all the answers.
What is a Digital Currency?
According to Allied Market Research, the digital currency market is proliferating at a CAGR of 12.8% from 2021 to 2030. At this rate, the overall size of the market is expected to reach a whopping $4.94 billion by 2030. With such a healthy scope, it is imperative for you to comprehend the intricacies of digital money to make the most of its limitless potential.
What is digital currency? Also regarded as cryptocurrency, it is defined as a digital payment system that is protected by cryptography and is leveraged as a medium of exchange in the digital ecosystem.
Stored in digital wallets, digital currency transactions exist as digital entries in the online database with specific information about every single activity. Virtual currency makes use of encryption to verify every transaction and is thus immune to counterfeiting and fraud.
Digital currency is curated with the help of an intricate process known as ‘mining’. Crypto mining requires computing prowess to solve a myriad of mathematical problems to ultimately generate what we know as coins.
The simplest answer to what is digital currency would be that it is an effective alternative to centralized money. What is centralized money? Well, it is the money that we use on a daily basis and is governed by a central authority such as the Reserve Bank of India. The technology backing digital currency makes it possible to send and receive money without the need for a third party.
Imagine a situation where you’re working or studying abroad and want to send money back to your family in India. In the current world, you’d be charged a heavy transaction fee for overseas transfers. With digital currency, you’d be able to send and receive money without incurring any extra cost. Moreover, merchants don’t need to worry about bounced cheques or invoice fraud as people can only spend the amount that they have.
Key Takeaways
- A digital currency relies on encryption and allows the seamless transfer of funds
- Virtual currencies are intangible and run on a distributed public ledger known as a blockchain
- Digital currencies can be bought, stored, and used to buy a plethora of tech and luxury products and services
- Crypto transactions are technically complex and necessitate two-factor authentication
Characteristics of Digital Currencies
Here are the some of the key characteristcs of digital currencies-
- As the name suggests, the digital currencies are not available in the physical form but over the computer networks.
- The digital currencies are accepted around the world and so the transactions have become faster with lower assessing fees.
- Digital currencies is contributing immensly in making cashless economy.
- With more people investing in cryptos and bitcoins, the digital currency is becoming highly stable.
- You can use digital currencies to pay for goods and services as well.
How Does Digital Currency Work?
All digital currencies are built over the blockchain technology. When the blockchain is implemented singularly on one currency, it creates a digital currency. Because of the blockchin technology, the digital currencies can be used as the money in the market for transaction. The framework includes-
- Unique digital currency
- Cannot be double-spend
- Limited supply
- Can be uniform and divisible
Miners are repsonsible for creating new currency and confirm the transaction in a block by solving the puzzle. The puzzle is a competiton between the miners to make hash which is a sequence of unique cryptographic information.
These currencies are then stored in two different types of wallets- hot wallet and cold wallet. Once it comes into the market, it can be used for transaction similar to the real physical money for services.
What Makes a Currency Digital?
Now that you know the answer to the question – what is virtual currency? Let’s dive into the journey of how a currency becomes digital. To start with, it is important to understand that there is nothing tangible about virtual currency. What this means is that all the digital currencies available in the world today are nothing more than programmed software.
Every minute aspect of a digital currency is governed by a computer code. This includes the total amount of currency that can be produced, the way that the data is stored, and the transactions are recorded, as well as the distribution of mining rewards.
Similar to the decentralized nature of any virtual currency, the software that is used to produce it is also decentralized. The public version of the decentralized software can be hosted on an array of computer systems without the need for a centralized server.
All transactions made through virtual currency are securely stored in an innovative database known as a blockchain. The technology acts as the ledger for coded accounts, much like a checkbook.
As soon as data is entered into the blockchain, it becomes impossible to make any changes, and any transition is visible publicly. While most digital currencies are mined with the help of special hardware and decentralized software.
Types of Digital Currency
While the market is saturated with cryptocurrencies, here is a quick look at some of the most popular ones:
Cryptocurrencies
Crypto is a digital currency. Maximum blockchains are based on blockchain technology, are decentralized. One can mine it or purchase it from cryptocurrency exchanges. The value of crypto is skyrocketing and maximum investors are noy investing in cryptocurrencies.
Virtual Currencies
Virtual currency is basically the digital representation of a value which is availble only in the electronic form. Some examples include tokens, cryptocurrencies and bitcoins.
Central Bank Digital Currencies
A central bank digital currency is the digital currency form of a country’s fiat money. It is issued by the central bank and is an alternative to cryptocurrencies.
Advantages of Digital Currencies
- Digital currency is just like money in digital form.
- Considering the digital currencies are based on blockchain technology, the transaction fees is lower.
- If you accept payment in bitcoins, there will be zero chargebacks.
- Since the digital currency is available in the limited quantity in market, it is safe from inflation.
- With the help of digital currency, you can easily do business transaction with the international customers.
Disadvantages of Digital Currencies
- One of the biggest disadvantage with digital currency is its scalabiility. The transaction speed is still slow in compariosn to payemtn gateaways such as VISA.
- Since digital currencies are not available in physical form, they can be hacked. The chances of fraud or a scam in digital currency is extrmely common and high.
- Some countries have still not made digital currencies legal.
How do I Buy a Digital Currency?
If you want to commence your journey as a crypto trader or simply a buyer, you will need to approach a broker or a cryptocurrency exchange. Brokers provide you with an online platform to buy or sell digital currencies. Cryptocurrency exchanges, on the other hand, are reliable for low-value transactions.
Before selecting a platform, it is imperative to know which cryptocurrencies are offered, the amount of money they charge, educational resources, and the transaction support.
Conclusion
Regardless of whether you know the answer to what is digital currency, its popularity is making it a part of the news everywhere. The transformation of the infamous Staples Center in Los Angeles to the Crypto.com arena is a testament to the fact that digital currency will play a significant role in the future.
With secure peer-to-peer transactions and minimal fees, digital currency can replace banks and pave the way toward a decentralized financial system. While investors face the challenges of entering a highly volatile market, ample market research can help diversify the portfolio and yield extraordinary returns.
FAQs
Anything that can’t be duplicated and is developed using blockchain technology, is a digital currency.
While all the transactions are time-stamped and recorded into blocks, it is difficult for hackers to tamper in the world of cryptocurrency. However, it is not completely immune to hacker attacks and is subject to minimum regulatory protection.
Digital money can be seamlessly used as real money in places that have started accepting it as a mode of payment.
There are primarily two approaches to cash-out cryptocurrency to your bank account. The first is with the help of a third-party exchange broker or a peer-to-peer transaction to sell your acquired digital currency.
Every transaction in the world of digital currencies involves a certain amount of risk. However, one can make an informed choice by doing extensive research on the exchange they plan to opt for. Moreover, investors should diversify their portfolios to increase the chances of a healthy return. Another productive tip is to think about where you will store your digital currency and prepare for any volatility.
You can invest in the digital currecy such as cryptocurrency, bitcoing, etherium and more. Before investing, check the market performance.
The newest digital currency is Tamadoge, Diamond Launch1DLC and Point Network2POINT.
Buy crypto when its lowest and then sell the currency once it reaches the peak in the market. Do a thorough research before you invest in the crypto as it is highly volatile.
Choose a right broker or an exchange. Create your official account, deposit some cash, place your order for cryptocurrency, use a safe storage method, and then safekeep your currency there.
