Digital currency is a form of currency that only exists electronically. It is not a physical asset like coins or banknotes, but instead exists in the digital space and is often referred to as cybercash. Transactions between digital currency users are carried out over networks such as the internet, making it simpler and faster compared to traditional currency used for physical transactions.
Digital currency is an electronic version of physical money that allows for virtual payments and transfers. Digital currencies are based on a secure network connection and make use of encryption techniques to protect account information. They offer the same benefits as physical currency but often come with restrictions on their usage in certain online platforms such as gaming sites, gambling sites, or social media sites. It can also be used for instant transactions all over the world if both parties are connected to the same networks. We can withdraw the currency or check the bank balance of the amount we are holding in physical form but in digital currency, it never leaves the electronic networks and can only be exchanged through digital means.
Types Of Digital Currency
There are three types of digital currency, which are mentioned below:
1. Cryptocurrencies
It is a form of digital currency that uses cryptography for securing and verifying transactions in a network. Cryptography is also used to maintain and control the making of such currencies. A few examples of cryptocurrencies are ‘Bitcoin’ and ‘Ethereum’. It can be regulated only if the jurisdiction approves. They are also considered virtual currencies as they are unregulated and available in digital form only.
2. Virtual Currencies
They are unregulated digital currencies that are controlled by developers or founding organisations which consist of many stakeholders that are contributing to the process. Virtual currencies can be algorithmically controlled by a clarified network protocol also. Gaming network token is an example of virtual currency, whose economics is explained and controlled by the developers.
3. Central Bank Digital Currencies (CBDCs)
They are regulated digital currencies which are issued by the central bank of the country. A CBDC can be a supply or replacement in the alternative to traditional fiat currency. Unlike fiat money, which is available in both physical and digital forms, a CBDC is available in digital form only. A few nations like England, Sweden, and Uruguay are planning to replace their native fiat currencies with digital forms.
Advantages Of Digital Currency
Discover some of the primary benefits of digital currency that are mentioned below!
1. Faster Transactions
As digital currencies are particularly present within the same network and fulfil the transfers without any mediators, the amount of time required for transferring digital currencies is very fast. The transactions are completed without delay and low cost because the payments in digital currencies are made directly between dealing parties without any mediators. This is way better than other payment methods that involve banks or clearinghouses. These transactions also keep the mandatory record and make it transparent in dealings.
2. No Tangible Form Needed
There are many requirements for the tangible or physical form of currencies like the formation of creating facilities that are not required for digital currencies. They can’t get dirty or spoiled as compared to physical currency.
3. Low-Cost Transactions
Digital currencies make direct connections within the network. The costs of digital currency transactions between different networks are to a certain degree low as compared with physical currencies. As there are no mediators that look for economic rent from storing the transactions, digital currencies can make the final amount of transaction at a low cost.
4. Works 24/7
Every money transaction often takes much time on weekends excluding normal working hours as the banks are closed and can not confirm transactions. But in the case of digital currency, transactions work at the same speed at any time and any day.
5. Effectfull For Government Payments
In the current currency rule, the supply works from a sequence of mediators, banks, and financial organizations to distribute money into an economy. CBDCs can help avoid this mechanism and help the government to distribute the payments directly to the natives. They also make the process of distribution easy by preventing the need for creating and transporting.
If the cryptocurrency market overall or a digital asset is solving a problem, it’s going to drive some value. — Brad Garlinghouse
Disadvantages Of Digital Currency
Find out more about some of the main disadvantages of digital currency some of which are outlined below!
1. Storage And Processing Problems
As they don’t require any physical wallets, digital currencies have their requirements like storage and processing. Just like, an internet connection is important for smartphones and services related to their functioning. To store digital currencies, online wallets with sturdy security are also important.
2. Hacking Is Possible
The digital origin makes digital currencies exposed to hacking. Hackers can take digital currencies from digital wallets or can change the contract which makes digital currencies useless. Securing digital systems and currencies is ongoing, as a number of hacks in cryptocurrencies have taken place.
3. Deep Learning
We need to learn how to perform fundamental tasks for digital currencies, like opening digital wallets and storing digital assets properly with security. The system needs to get easier for digital currencies to embrace more broadly.
4. Unstable Value
The price of digital currencies for trading can be wildly unstable. For example, cryptocurrencies with decentralized nature have come out in an abundance of freely capitalized digital currencies whose values are open to immediate changes that are based on lenders’ unpredictable ideas. The rest of the digital currencies have tracked a related value path in their starting days.
Digital Currencies Future
The cryptocurrencies like bitcoin have erupted in value, but they are mainly used for speculation or for buying speculative resources. Even though there are few indications of dealer adoption in countries, the high instability and complexity of digital currencies make them unsuitable for daily transactions. Many companies have already tried to lower the instability by launching stablecoins, which have a fixed value just like physical currencies. This is done by depositing an equal amount of physical currencies that can be used to take tokens. CBDCs can also be a possible application, which can be provided by the country’s bank or monetary organization. They can be used and saved in digital wallets just like cryptocurrencies, but allow the central bank to provide and store tokens at will.
Invest In Cryptocurrency Wisely
1. Understand About The Investing
Firstly, we need to understand what we are investing in. In the case of investing in stocks, we need to read about the annual report and other things to get to know the companies thoroughly. As there are 1000+ cryptocurrencies, we need to plan to do the same. All cryptocurrencies have different functions and new ones are launched regularly. We need to understand investing for every trade. Unlike stock, where a company can grow profits and make returns for us that way, many crypto assets must depend on the market becoming more positive and hopeful for profit. Some of the recognized coins are Ethereum, Dogecoin, Cardano, and XRP. So, we need to understand the capability from top to bottom before investing.
2. Do Not Compare The Past With The Future
Many new investors make a mistake by comparing the past with the future. We agree that bitcoin was worth pennies, but now it is worth more than that. The main question here is whether the growth will continue in the future too, even if it’s not at the same rate. Investors think about the future, not about what an asset has done in the past. How to get future returns? Dealers investing in cryptocurrency in the present want to gain in the future.
3. Watch Unpredictability
The prices of cryptocurrencies are as unpredictable as an asset can get. They may fall quickly within a few seconds due to a small rumour that ends up proving groundless. This can be a great thing for experienced investors who can perform trades fastly or can have a hard grip on market basics like how it is trending and where it can go. Unpredictability is a game for expert traders, who are trying to beat other investors. New investors get easily crushed by the unpredictability because it makes them scared. In the meantime, other traders may come to buy at a cheap value. In other words, unpredictability can help expert traders buy low and sell high while new investors buy high and sell low.
4. Control Risk
Trading in any assets on a short-term basis, we need to control the risk, especially with unpredictable assets just as cryptocurrency. So beginners need to understand how important it is to control the risk and develop a process that helps in reducing losses. This process can be different for everyone:
- Risk controlling for a long-term investor could be not selling, nevertheless of price. It allows the investor to be in the same position.
- Risk controlling for a short-term investor could be making strict rules for selling, like in case of a fall in investment by 10 percent. In this, they can strictly follow the rule so that a small decline doesn’t turn into a huge loss later.
New traders should put a certain amount of trading money separately and use only a small part of it, at least in the beginning. This will help to trade later with the saved amount in case of any loss or any part of trading which didn’t turn out to be beneficial. Mainly, this shows that we can’t trade without money, so keeping some money separately means that we can always have a bankroll to fund the trading.
Conclusion
Digital money is changing the way people think about financial technology. It has the potential to create quicker, cheaper payment systems than ever before by eliminating the need for cash. But it also brings potential risks, like hacking and reduced privacy, that must be taken into consideration when evaluating its use. Despite these potential drawbacks, digital money looks set to play an important role in finance for years to come.
