The terms virtual currency, cryptocurrency and digital currency, are often used as alternatives or synonyms. People misunderstand and mistakenly use these three terminologies interchangeably. But, factually, these three currencies are different to each other. Digital currency is a bigger domain while virtual currency and cryptocurrency are its sub domains. All virtual currencies and cryptocurrencies can be called digital currencies, but, all digital currencies cannot be considered as virtual or cryptocurrencies.
When we talk about cryptocurrencies and virtual currencies, we conclude that they fall in the category of digital currencies but differ to each other.
Digital currency – By definition:
By definition, digital currency is a type of currency which is stored and transferred electronically. Any currency which exists in the form of 0s and 1s can be labelled as digital currency. Fiat currencies, when stored in bank accounts, also represented in digital 0s and 1s but it cannot be called digital currency because somehow it exists somewhere physically. But you can call it electronic money.
Digital currencies have been in existence since 1996. In 1996, E-gold was launched. It was the first digital currency which was backed by gold. In 2006, first digital exchange was found named Liberty Reserve. This exchange was providing services of exchanging dollars and Euros with Liberty reserves at 1% fee. Both of these digital currency ventures were centralized and reputed to be used for money laundering. Hence, US government shut down both.
Initially, digital currencies have given a very bad image to the society.
Virtual Currencies – By usage and applicability:
Virtual currencies are fun. They are mainly used by online entertainment industry. It was introduced by gaming sector. “Virtual” word signifies that it has no existence in reality. It just belong to a virtual world where you earn this and buy some virtual items. You cannot use this currency to buy real life items. Virtual currencies work in virtual economies where demand and supply is completely in control of game owners. Virtual currencies are absolutely centralized. There are a predetermined list of items and actions which a players can buy and perform by this virtual currency. The virtual currencies can be purchased against some fiat currencies like dollar. All the paid amount is moved to a bank account associated with this virtual currency, owned by the developer.
Cryptocurrencies: By usage and applicability:
Cryptocurrency is another category of digital currency which is real in nature. Unlike virtual currencies, these currencies are highly tradeable in real life economy. You can purchase physical items by trading this currency. Bitcoin is the most popular cryptocurrency launched in 2008. These currencies are capable of replacing cash so you cannot call them an alternative to virtual currency.
Decentralization is another major dissimilarity which differentiates cryptocurrency from rest of the digital currencies. They are mined by solving some mathematical algorithms.
Decades ago, there were some fine lines between different currencies. But, with the passage of time, these lines are getting blur. The concept of hard and plastic money has been depleted by electronic cash. Digital currencies have further revolutionized the economy.