Virtual currency, also known as cryptocurrency, is a type of digital currency that is only available online- it does not have intrinsic value, unlike traditional currencies, and doesn’t come in physical forms such as cash, check, or coin. Instead, it’s worth is dictated by its traders, and can experience extreme price fluctuations. Virtual currency has been experiencing a rise in recent times- but what exactly is it?
The Two Main Types of Virtual Currency (Centralized & Decentralized)
A centralized virtual currency is administered by a primary source, and the distributor of the currency is often the issuer or producer of the currency. It’s very similar to a bank in a traditional currency system. One example of a centralized virtual currency is XRP.
Meanwhile, decentralized virtual currency does not have an administrator from a third party- it has a system to distribute and handle transactions of the currency. The majority of decentralized virtual currencies rely on blockchain networks, which links a list of records, known as blocks, using cryptography. When a user requests a transaction, the request is broadcasted in the network to various computers. Once the transaction is verified, the network then adds the transaction information to the blockchain, cementing the transfer for good. Some examples of decentralized virtual currency are Bitcoin, Ethereum, and Dogecoin.
Upsides to Virtual Currency
1. Fast, convenient transactions
A major pro to using virtual currencies is the ability to easily make transactions and trades, since the currency is kept on a network. It’s especially suited for international transactions, with the networks providing fast, easy payment.
2. Protection from fraud
In most instances with online payment, people use their credit cards to purchase goods. However, paying with a credit card runs the risk of information theft, and your personal information and accounts can be stolen. With digital currencies, you can send currency without giving out your information.
3. Increased acceptance of virtual currencies
More and more people have been looking into and investing in virtual currencies- they’re making headlines! There has been a large increase in the number of Bitcoin users, and a 2020 article states that Bitcoin has seen $4 billion worth of Bitcoin activity. Virtual currencies are piquing people’s interest, and it’s becoming more normalized.
Downsides to Virtual Currency
1. Virtual currencies can be unpredictable and volatile.
A virtual currency’s value is determined by its traders, unlike other traditional currencies which have hard assets (e.g., gold or silver) or fiat currencies whose values are controlled by the government. The means that the value of a currency can fluctuate greatly- Bitcoin, for example, has peaked to $20,000 a unit in 2017, but later dropped to $3,000 per unit. It does have the potential for high return and profit, but is very unpredictable and can drop within a heartbeat.
2. Security can be easily compromised
Cryptocurrencies do not have official oversight or regulation, and can be vulnerable to illegal activity. A 2019 study found that 25% of Bitcoin users are involved in illegal activities, and 46% of users are associated with illegal activity. And although your information is safe with virtual currencies, the currency itself is vulnerable to being hacked.
3. The future of virtual currency is unknown
Although cryptocurrency is increasingly accepted, it’s future is still up in the air. People and governments alike have various attitudes towards it- some want to welcome virtual currency, and others want to ban it for good. Many new currencies are being formed as well, and people may be unsure of how to pay with and invest in such an unpredictable venture. Cryptocurrency is prone to change, and we don’t know it’s future quite yet.
All in all, virtual currencies are a new, modern form of payment. They have various advantages and disadvantages, such as convenient transactions and online security issues. With a changing future and increased publicity, cryptocurrencies are something to keep an eye on.