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In the rapidly changing circumstances of digital finance, for example, it is not uncommon to hear both the words ‘cryptocurrency’ and ‘digital currency’ being used and viewed as synonymous. These groups are, however, different and have different uses.
This article is going to clear all your doubts toward the differences between cryptocurrency and digital currency and justify the claim.
This is a new form of money that is secure due to the use of encryption techniques. It uses a peer-to-peer network referred to as a blockchain. All transactions taking place are logged in a database that is spread across several computers. Because of this decentralization, no country or financial body dominates crypto assets.
Bitcoin which was created in 2009 was the first cryptocurrency and remains the most popular. Since then numerous other cryptos like Ethereum, Dogecoin and more recent ones like Toncoin have emerged. Each with its own features and purposes.
Decentralized: It is not controlled by any authority.
Blockchain-based: Transactions that are made are recorded on a distributed computerized ledger.
Mining: The new units are created through the mining process.
Speculative: Often used as an investment vehicle.
Volatile: The prices normally fluctuate dramatically.
Digital currency is a term that relates to any form of currency that exists in digital form only. All cryptocurrencies are digital currencies but not all digital currencies are cryptocurrencies.
Digital currencies can be used to purchase online but are not accepted as legal tender. However, Digital currencies do not necessarily use blockchain technology.
Examples of digital currencies include Facebook's Libra (now Diem) and China's digital yuan (DCEP).
1. Digital: They do not exist in physical form like cash or coins.
2. Can be centralized or decentralized: They may or may not be controlled by an authority.
3. Various production methods: Units can be generated in any way that its issuing authority chooses.
4. Less volatile: Prices are less volatile because they are more stable than cryptocurrencies.
5. Payments: They are often designed for everyday transactions rather than investment.
The main differences between cryptocurrency and digital currency lies in their technology and purpose:
1. Technology: Digital currencies can use different technologies but cryptocurrencies are based only on blockchain technology.
2. Production: Cryptocurrency units are "mined" while digital currencies units are normally generated by the issuing authority.
3. Regulation: Digital currencies are often subject to more government regulation than cryptocurrencies.
4. Volatility: Cryptos are more volatile than digital currencies making them attractive for speculative investment but challenging for everyday use.
5. Trading: Cryptos are often traded on decentralized exchanges while digital currencies use centralized platforms.
6. Security: Blockchain-based cryptocurrencies offer tight security and transparency compared to some digital currencies.
Many investors are drawn to cryptocurrencies because of their high return potential. The blockchain technology cryptocurrencies like Bitcoin and Ethereum are seen as innovative and secure.
However, high volatility of cryptocurrencies also means that they are somehow risky. Their value can change dramatically in short periods leading to large gains or even losses.
As much as digital currencies are generally more stable, they may not offer the same gains and growth potential like the cryptos do. They're designed more often for practical use in online transactions rather than in investments.
