The means of exchange of products and services has undergone a drastic evolution, from the barter system to paper currency, and now to digital transactions. The surreal growth of the crypto world has increased people’s interest in crypto investments, making many learn more about the platform’s intruding opportunities.
Since cryptocurrency and virtual currency are interchangeably used, many believe they serve the same purpose, but the fact is they are poles apart in certain aspects. This article highlights the key features of virtual and cryptocurrencies and their differences in detail.
What is Virtual Currency?
Virtual currencies are digital currencies whose transactions are carried out using an unregulated system through designated mobile devices or computer applications. Private organizations issue virtual currencies and their transactions are monitored using a secure network system.
Many virtual currencies eliminate the need for third-party assistance and increase transaction speed. All virtual currencies are digital currencies, however, all digital currencies are not virtual currencies.
Virtual currencies can be either decentralized or centralized. A decentralized system doesn’t hold a central authority to regulate transactions. Virtual currencies include Litecoin, Bitcoin, and XRP. The value of digital currencies is driven by the sentiment of traders, thus they show high fluctuations within a short span of time.
Advantages of Using a Virtual Currency
- Fast and efficient
Virtual currency transactions are fast, one can make an international transaction within minutes due to their network-based nature.
- Decentralisation
Decentralization eliminates the need for third parties and authorizes transactions quickly.
- Transaction cost
Since there are no intermediaries in virtual currency transactions, the transaction costs are comparatively low.
- Automated transactions
Some virtual currencies use smart contracts, which automate the transactions when predefined conditions are met.
- Eliminate geographical boundaries
The blockchain technology used in virtual currency transactions eliminates geographical boundaries.
Types of Virtual Currencies
Virtual currencies are classified in terms of their operating system and legal status.
Based on the operating system
Virtual currencies are classified into open and closed virtual currencies based on their operating network.
Closed virtual currency
- Closed virtual currency works in a private and controlled system.
- It can’t be converted into another form of virtual currency or fiat currency.
- Airline miles is an example of closed virtual currency.
Open virtual currency
- Open virtual currency works in an open ecosystem.
- It can be converted into another currency within or outside the platform.
- Stablecoins and cryptocurrencies are examples of open virtual currency.
Based on legal status
Virtual currencies are classified into centralized and decentralized based on their legal status.
Centralized virtual currency
- A centralized virtual currency has a central authority to monitor and regulate the transactions.
- The central administrator issues the currency.
- XRP is an example of a centralized virtual currency.
Decentralized virtual currency
- A decentralized virtual currency does not have an intermediary for transactions.
- The transactions are authorized by a distributed system.
- It improves the speed and reduces the cost of transactions.
- Bitcoin, Litecoin, and Ethereum are examples of decentralized virtual currency.
Limitations of Virtual Currency
- Hacks and scams
Though virtual currencies follow higher security mechanisms, they are prone to hacks and scams.
- Lack of regulation
Due to the decentralized nature, the worldwide acceptance of virtual currencies is hindered.
- Decentralisation
The absence of a central authority for regulation increases the chances of theft and money laundering.
- High fluctuations
The highly fluctuating nature of virtual currencies makes them a less favorable investment for exchange.
What is Cryptocurrency?
Cryptocurrencies are digital currencies that use cryptographic techniques to secure transactions. It exists on a decentralized network and blockchain technology to store and monitor transactions. It eliminates the need for a third party to authorize transactions.
The security offered by cryptocurrency eliminates the chances of scams and fraud to a limited extent. Security features include public-private key pairs, elliptical curve encryption, and hashing functions. Bitcoin, Litecoin, and Monero are examples of cryptocurrency.
Advantages of Cryptocurrency
- Decentralisation
The decentralized nature of cryptocurrency eliminates the control of third parties. Most of the cryptocurrencies are controlled by the developers themselves, helping to keep the currency stable and secure.
- International transaction
One of the major advantages of cryptocurrencies is the ability to transfer internationally. The transactions take place fast and require a low transaction fee compared to other currencies.
- Security
Cryptocurrencies exist on blockchain which are difficult to decode. It prevents the chances of theft and hacking.
- Easy exchange
Cryptocurrency can be exchanged with currencies like the US dollar, European euro, Indian rupee, and Japanese yen. Crypto wallets allow an exchange of cryptocurrency with low transaction fees.
Types of Cryptocurrency
Cryptocurrencies are many, however, they are broadly classified into payment cryptocurrencies, utility tokens, stablecoins, and Central Bank Digital Currencies.
Payment cryptocurrency
- Payment cryptocurrencies are peer-to-peer electronic cash that acts as a medium of exchange or transactions.
- It has a unique blockchain that supports only the general-purpose currency.
- Since the number of digital coins created is limited, the value of digital currency is expected to rise.
Utility token
- Utility tokens are cryptographic tokens that run on an existing blockchain.
- These tokens are not capped, thus they are inflationary.
- The higher the number of tokens created the lower the value of the assets. Service tokens
- Service tokens, finance tokens, governance tokens, media and entertainment tokens, and nonfungible tokens are the different types of utility tokens.
Stablecoins
- Stablecoins are cryptocurrencies that can be exchanged for one or more fiat currencies.
- Generally, stablecoins are pegged with US dollars or Euros.
- Stablecoins are not subjected to government regulations.
- Tether’s USDT and Terra USD are examples of Stablecoins.
Central Bank Digital Currencies (CBDC)
- Central Bank Digital Currency is issued by central banks of different countries.
- It is issued in token form and pegged with the currency of the country in which it is issued.
- The central bank holds full control of CBDC.
Limitations of Cryptocurrency
- Promotes illegal activities
Since crypto transactions run on highly secure platforms, tracking the wallet address and keeping tabs on data is not possible. It promotes illegal activities like buying drugs and other products on the dark web.
- Data loss
The high-security platform creates impenetrable authentication protocols making it difficult for hackers to access the data. However once the user loses their private key to the crypto wallet, it can not be reassessed.
- No refund
When someone mistakenly sends funds to the wrong wallet address, it can’t be canceled or refunded.
- High energy consumption
Mining cryptocurrencies require a large amount of energy for computational activities and electricity input. The use of advanced computers resulted in large power consumption.
- Exchanges are vulnerable to hacks
Crypto exchanges store the wallet data for accessing the user ID, which is stolen by hackers and is utilized for accessing other’s accounts.
Final Thoughts
Virtual currencies are digital representations of value whose transactions are proceeded through online networks. Virtual currencies can be either centralized or decentralized. Cryptocurrencies are a type of virtual currency created with cryptographic algorithms to ensure security within the platform. It is decentralized and operates on the blockchain network. Cryptocurrency and virtual currency are two different classes of financial assets.