Digital Currency - What Is It and How Is It Used?

August 17th, 2021

Digital currency has been in popular use for over a decade by now, so it’s safe to assume that it’s here to stay, regardless of any claims its detractors may have made in the past. However, not all critiques were unfounded and digital currency does have its faults and drawbacks.

So, how does digital currency work? What are its types? Is it safe to use? What are the drawbacks of using digital currency? These are all questions you should know the answers to before you decide to invest in digital currency. And this is what will be covered in this article.

What is Digital Currency and What Are Its Types?

A digital currency is a currency that is only and exclusively available in digital format. So, while you can use it online, you can’t go to an ATM and convert your digital currency to physical bills and coins. However, when people talk about digital currency, they are mostly referring to cryptocurrencies – Bitcoin, Ethereum, and the like.

With good reason. Crypto is the type of digital currency that has made the biggest impact on the way money transfer works and this is what we’ll focus on, but you should still be aware of the other types, so we’ll explain the common classification of digital currencies into virtual, crypto, and central bank-issued digital currency.

Virtual Currencies

Virtual currencies are a type of digital currency that sees common use, but the term is not well defined and wide-ranging. For one, cryptocurrencies that are used for real-life transactions are sometimes classified simply as virtual currencies, but for practical purposes, they should always be separated.

Virtual money that can be used to trade for goods or services within a mass multiplayer online game is considered a virtual currency. Digital tokens or coupons a company makes and lets you use are virtual currencies – the Amazon coin is one example. Anything and everything can be considered a virtual currency, which is why the term is not very practical to use.

Cryptocurrencies

In simple terms, cryptocurrencies are organized sets of data that work as a medium of exchange (i.e. money). The data is recorded and stored in digital form, and the creation and transfer of the units of the cryptocurrency is organized within a system by cryptography. As a rule, cryptocurrencies are decentralized. This is the type of digital currency that most speculators and traders focus on.

CBDC – Central Bank Digital Currency

This has, as of yet, not been implemented for the most part, but many central banks of different countries have discussed issuing their own form of digital currency. Unlike virtual or cryptocurrency, a CBDC would be legal tender. CBDCs would be fiat currencies, with all the drawbacks and positives of a fiat currency.

The Chinese digital yuan is the first example of a major economy issuing a centralized digital currency and it is being tested currently in 2021. The digital yuan is both legal tender and has the same value as the equivalent yuan bills and coins. As the use of CBDCs is still in its infancy, it’s hard to gauge how they will operate.

Digital Currency

How Many Cryptocurrencies Exist?

Because the use and creation of cryptocurrencies is not regulated, there are thousands of cryptocurrencies in use, and new ones come about each day. The most popular cryptocurrency is Bitcoin, with Ethereum coming in at second. Tether, Binance Coin, and Cardano are some other popular cryptocurrencies.

What Is the Appeal of Cryptocurrencies?

Many people believe that cryptocurrencies are the future of monetary transactions, so they are rushing to get into the game early. Additionally, as many cryptocurrencies are volatile, they see potential for profit in that volatility.

Other people simply like that it takes central banks out of the equation. Whether they don’t trust central banks, dislike the system where inflation is a means of regulating the money supply, find the concept of fiat currency risky, or for any other reasons, they like that cryptocurrencies have no relation to central banks, so they decide to invest.

The use of cryptocurrencies is also hard to track, so some people like the supposed anonymity. Finally, the transfer of crypto is instantaneous, so that practical aspect appeals to people. While these are far from the only reasons people use cryptocurrencies, you can see what the general appeal is.

Is the Use of Cryptocurrencies Practical?

This question doesn’t have a single answer, as it heavily depends on what you would use them for. As of yet, if you want to go to a store to buy some groceries or pay for a drink at a pub, crypto is not the most practical way of paying. For that matter, most often you can’t pay in crypto.

If you want to pay for some online services, you could probably find someone who accepts cryptocurrency as a payment method. In essence, it depends on how accepted they are. And for the most part, they are not, except in online spaces. However, this doesn’t mean they won’t become more popular and thus practical as time goes on.

Are Cryptocurrencies Legal to Use?

Finally, besides the practicality, you should know whether you can get into legal trouble if you use crypto. In the U.S., using cryptocurrencies is legal. But, once again, there is no one answer, as each country has different laws that regulate the use of cryptocurrencies. For instance, China effectively bans the use of digital currencies (including crypto), except for its digital yuan.

Still Not Sure About Digital Currencies?

Until you make up your mind about using digital currencies, you can exchange legal tender online at US First Exchange. We carry many types of exotic currencies besides the major ones and can safely deliver clean, crisp bills right to your doorstep. We provide many of the conveniences of using digital currencies, without any of the drawbacks.

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