Welcome to Hard Fork Basics, a collection of tips, tricks, guides, and advice to keep you up to date in the cryptocurrency and blockchain world.
Rife with complex terminology, the world of cryptocurrency can be daunting at the best of times, but things got even more confusing last week when JPMorgan announced the launch of its own coin, which many argued was a digital currency – possibly a stablecoin – but most definitely not a cryptocurrency.
With this in mind, Hard Fork put together a primer on the differences between cryptocurrencies, digital, and virtual currencies – three terms that are often used indiscriminately but don’t actually mean the same thing.
Defining digital currencies
Digital currency is the blanket term used to describe all electronic money, that includes both virtual currency and cryptocurrency. It can be regulated or unregulated.
It’s only available in digital or electronic form and unlike a dollar bill or a coin, it’s intangible. Digital currencies, which can only be owned and spent using electronic wallets or designated connected networks, are also commonly called digital money, or cyber cash.
The lack of intermediaries means transactions are typically instantaneous and incur no or little fees.
If what critics say is true, JPMorgan’s coin, for example, would classify as a digital currency because it doesn’t operate on a blockchain, it’s used online, and its intended use is to transfer funds between the financial giant and its clients.
What about virtual currencies?
Virtual currencies are a type of digital currency, typically controlled by its creators and used and accepted among the members of a specific virtual community
Here is where it gets a little confusing: all virtual currencies are digital (they exist online only), but not all digital currencies are virtual, because they exist outside a specific virtual environment.
Essentially, virtual currency is a representation of monetary value issued, managed, and controlled by private issuers for the transaction of peer-to-peer payments. They are sometimes represented in terms of tokens and may be unregulated without a legal tender such as coins or banknotes.
Unlike fiat currency, virtual currency is not issued by a bank. This lack of regulation means virtual currencies are susceptible to price swings.
Cryptocurrencies such as Bitcoin and Ethereum are considered to be virtual currencies.
So, what is a cryptocurrency?
The ‘crypto’ in ‘cryptocurrency‘ refers to the fact that many encryption algorithms and cryptographic techniques are used to ensure security across the network. This level of security also makes cryptocurrencies hard to counterfeit.
Many cryptocurrencies operate as blockchain-based decentralized systems without the need for a trusted third-party such as a central bank, or credit card company. In this instance, peer-to-peer transfers are facilitated through the use of private and public keys.
Bitcoin is undoubtedly the most well-known – and most widely used – blockchain-based cryptocurrency. It’s also the most valuable, currently sitting at $3,821 per coin.
Although Bitcoin is the most popular, it’s not the only cryptocurrency. There are many alternatives, or altcoins, such as Litecoin and Monero. Some of these mimic Bitcoin, while others are forks, or simply new cryptocurrencies that have split, or derived, from an existing one.
Due to their virtual nature, cryptocurrencies do not have a central repository, meaning they can be wiped out by a computer crash if there’s no backup copy of the holdings or if the user misplaces their private key.
Unlike cash, which is entirely anonymous, transactions carried out with cryptocurrencies can, in the case of Bitcoin, be traced on the blockchain without initially knowing participants’ identities.
It’s worth noting, however, that some cryptocurrencies are less private than others. For example, Dash, ZCash, and Monero are far more difficult to trace than Bitcoin.
On another note, cryptocurrencies tend to be characterized by price volatility because their value is based solely on supply and demand.
Summarizing the findings
To summarize, digital currency is the blanket term used to refer to money that exists solely in the digital space. Virtual currencies and cryptocurrencies are digital currencies because they exist online.
Virtual currencies are a form of digital currency available in the virtual world (think of exclusive online communities created by developers).
Cryptocurrencies are digital currencies because they exist online, but they are also virtual currencies created with cryptographic algorithms.
So, while we may often see the terms digital, virtual, and cryptocurrency cobbled together, it’s important to understand the nuances between the three. Use them wisely!