Virtual Currency – How to Work, Types, Examples, Pros & Cons
What is virtual currency/ Virtual money/ Virtual cash?
Virtual currency is a type of the digital currency that are issued by the unregulated private parties such as group of developers. The virtual mpney is on the electronic form. It is stored and transacted through designated software, mobile, or computer applications.
Virtual currencies are only meant to be used online. Like paper money, they don’t have a physical appearance. They are so distinct from central bank digital currency (CBDC), often known as digital representations of central bank-issued money.
The best examples for the virtual money are the cryptocurrency and tokens are issued by the private organizations.
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what is virtual currency? definition by the European Central Bank (ECB)
The term virtual money came into existence in 2012, when the European Central Bank (ECB) defined it to classify types of “digital money in an unregulated environment, issued and controlled by its developers and used as a payment method among members of a specific virtual community.”
what is virtual currency? definition by the Internal Revenue Service (IRS)
The Internal Revenue Service (IRS) in the United States describes virtual currencies as “digital representations of value that function as a unit of account, a store of value, and a medium of exchange.”
Who issues virtual currency?
Virtual money is a type of the digital money that are issued by the unregulated private parties such as group of developers. The virtual money is on the electronic form.
How does virtual currency work and how does virtual currency make money?
Using virtual currencies business organizations and individuals can transfer funds without the intermediation of a bank or other agencies. Within the recent history, people considerably increased their attention toward the usage of virtual currencies. People use virtual currencies to buy goods and services. As examples, Amazon has introduced the “Amazon Coin”. Users of Amazon goods like the Kindle Fire can use it to buy apps, in-app purchases, and games from the Amazon Appstore.
People can use different techniques to buy the virtual currencies. They can purchase virtual currencies by spending virtual currencies. Another method is mining of virtual currencies. It involves solving complex mathematical equations to get virtual currencies as a reward for their service.
Virtual currency examples
Following virtual currency list shows the most popular virtual currencies.
Bitcoin (most popular virtual currency in the world)
Ethereum
USDT
Litecoin
Zcash
XRP
Types of virtual currencies
There are two main types of virtual currencies. They are centralized virtual currencies and decentralized virtual currencies.
Digital Currency, Virtual Currency, and Cryptocurrency
Digital currency is a broad concept. Virtual currency is a subgroup of the digital currency. Cryptocurrency is a subgroup of virtual currency.
Digital currency vs virtual currency
All the monetary assets in digital form are known as the digital currency or digital money. Digital money is a broad concept. Digital currency can be either regulated or unregulated. The central bank of a country issues regulated digital currencies that can be tied to domestic currencies. Thus, the regulated form of digital currency is governed by the monetary policy of a nation.
Virtual money also a type of digital money and it is unregulated. That means virtual money are issued by the unregulated private parties such as group of developers not the central bank of a country.
Virtual currency vs cryptocurrency
Cryptocurrency is a type of the virtual currencies. There are two main types of virtual currencies. They are centralized virtual currencies and decentralized virtual currencies. Among them, cryptocurrency is a type of decentralized virtual currencies.
Cryptography technology is used by cryptocurrencies to safeguard and authenticate financial transactions. Blockchain networks are essential to cryptocurrencies. Cryptocurrencies are therefore decentralized digital currency.
Advantages and disadvantages of virtual currency
Advantages of virtual money
Very fast: Using virtual currencies, you can do transactions instantly. As examples, Even a slow cryptocurrency transaction is confirmed within an hour. But some other digital currencies take one to five days to complete a transaction.
Cost is low: Using virtual currencies, people can complete their transactions without any processing fee or with least processing fee. Virtual currencies are cost effective than other digital currencies.
There is no cost of manufacturing or storing: Virtual currencies are produced electronically. There is no cost to produce and store them since they do not have a physical appearance.
Improve cash flow of businesses: Business organizations can sell their virtual currencies. This will helpful to increase the cashflow of business firms. For example, airlines sold frequent flyer miles to credit card companies in 2020 to bolster cash flow during a time when travel plummeted.
No requirement of intermediaries: People can complete their transactions without intermediaries using decentralized virtual currencies such as cryptocurrencies. So, there is no requirement for the intermediation of a third party.
Disadvantages of virtual money
Is virtual currency risky? Yes, virtual currency is risky. Because virtual money is inherent with some disadvantages. We can present disadvantages of virtual money as follows.
Low level of security: With the rise of popularity of virtual currencies, many security problems have been risen. As examples, if a hacker gets access to virtual currency, it can be tough to get back.
Unregulated and unprotected: As we have mentioned above, virtual money is issued by the unregulated private parties such as group of developers not the central bank of a country. This makes virtual currencies a breeding ground for scams.
High volatile: The value of a virtual money is extremely unstable when it is not under the control of a central bank. As a result, it is a less desirable tool or medium of exchange. For instance, the peak price of Bitcoin at the end of 2017 was around $20,000. Within a year, it reduced to about $3,000 per unit.
