Digital Currency

Article byAndrea Calcagno
Reviewed byDheeraj Vaidya, CFA, FRM

What is Digital Currency?

Digital Currency is a currency found only in an electronic form as it is used for trading over the internet. They are famous for allowing transparent and secured digital payments. Although their popularity is constantly growing, their adoption as a reliable alternative to physical money is nowhere close. Some of the popular digital currencies are Ethereum, Bitcoin and Litecoin.

Key Takeaways

  • Digital currencies are a form of currency that exists only in a virtual format and is not tangible. Also known as electronic currency, they are of two types, centralized, and decentralized. They are famous for allowing transparent and secured digital payments.
  • Centralized electronic currencies are strictly regulated just like a traditional currency is backed by the government while decentralized is unregulated.
  • There are many different kinds of electronic currency, and most of them are tied to speculative exchanges where one can purchase, sell and exchange them.
  • At this time, crypto is the most profitable and volatile asset in the digital space. Some of the popular electronic currencies are Ethereum, Bitcoin and Litecoin.

How Does Digital Currency Work?

Also known as electronic currency, digital currencies are of various kinds, including virtual and cryptocurrenciesCryptocurrenciesCryptocurrency refers to a technology that acts as a medium for facilitating the conduct of different financial transactions which are safe and secure. It is one of the tradable digital forms of money, allowing the person to send or receive the money from the other party without any help of the third party more as one of their types. The biggest category of electronic currency includes virtual, crypto-assets and digital money. Based on their purpose and functionality, electronic currencies work in different ways.

  • From a legal standpoint, there are mainly two types of digital currency, centralized, and decentralized. The centralized one usually is strictly regulated with government backing. It is subjected to all movements the physical version of the currency has and works just like real money would.

With the growing popularity of digital currencies in countries like the U.S., India and Japan, nations have started working towards regulating these currencies. In 2015, New York made headlines for being the first state in the U.S. to regulate virtual currency companies. Many countries have plans to launch their own cryptocurrencies.

Digital currencies vs Virtual Currencies vs cryptocurrencies – Explained in Video


List of Digital Currencies


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The list of digital currencies in the market is vast. We will list out the most popular ones below as they have a higher trade volume or are backed by established institutions.

#1 – Bitcoin

BitcoinBitcoinBitcoin is a digital currency that came into existence in January 2009, speculated to be created by Satoshi Nakamato, whose true identity is yet to be authenticated. It provides lower transaction fees than the traditional online payment systems, is controlled by the decentralized authority, and is not like government-issued more is the most famous and most valued cryptocurrency currently in existence, and it was created in 2008 by a group of people going by the alias Satoshi Nakamoto.

It’s decentralized and uses peer-to-peer transactions to connect users worldwide without the need to pass through the bank system. It is the trendsetter for the crypto world, and its price fluctuates with the depreciation of fiat moneyFiat MoneyFiat money is a currency that is declared by the government to be legal tender and has no physical backing such as gold; rather, the value of fiat money is derived from the market's demand-supply relationship. India's and America's fiat currencies are the India Rupee and the US Dollar, more.

#2 – Ethereum

Ethereum is a smart contractSmart ContractSmart contracts are digital transaction protocols that verify, control, and self-execute an agreement, embedded in computerized codes on a blockchain, if parties meet predefined rules. Unlike traditional (physical) ones, these contracts occur among anonymous parties and are enforced automatically without the involvement of any third party. read more platform that allows to leverage of blockchain technology to create numerous different digital portfolios. It can create more cryptocurrencies to operate on the blockchain. It can also be sent, received, or held as digital money.

It’s the second-biggest cryptocurrency and is the most used one since its applications are many and it keeps adding new useful features.

#3 – Cardano

It’s the first proof-of-stake blockchain platform based upon peer to peer-reviewed research. It combines new forms of technology to guarantee it’s users the most secure decentralized applications. Like many cryptocurrencies, the principal use of Cardano is to shift back power from institutions and banks to the actual people making the transactions.

#4 – Renmimbi

One of the first fiat-based electronic currencies globally, this yuan alternative is the first step for China towards the digitalization of their cashflow. It’s centralized, meaning it has an institution behind it and is used as an alternative to real cash. It has currently entered the testing phase in Shanghai and is seeing positive feedback for its ease of use and security.

#5 – Polkadot

Polkadot allows for cross-blockchain transfers of assets of any kind facilitating a platform to connect with a wide web of networks. It’s one of the most recent cryptocurrencies, and it tries to solve a few common problems in the space, like the need for specialized exchanges to trade between users.

How Do I Buy a Digital Currency?

  • To buy, sell, or trade electronic currencies, you should rely on proven and tested exchanges. Cryptocurrency exchanges are online platforms that bridge the gap between the seller and the buyer. One can purchase, sell and exchange cryptocurrencies in return of other electronic currency in most platforms.
  • They are even available with the facility to convert the currencies into traditional money. For example, a Bitcoin Debit Card can be recharged using any digital payment methods, and it can be used to convert the electronic currency into cash or traditional money.
  • The process is fairly simple, sign up on an exchange of your choice and they will allow you to store the money in a digital wallet.
  • Usually, the ones endowed with strong security features and owning private keys are considered the best. A private key is a confidential number that allows real ownership of the purchased currencies; otherwise, they will not be under your name.
  • A standard trading platform like Robinhood seldom allows possessing your own keys. As such, you should do extensive research to find the appropriate digital asset suited to your need and locate its platform.
  • For beginners, Coinbase, Gemini, and Binance are all great trading platforms backed by some of the industry’s biggest names.

Digital Currency in China

  1. China has some history with the crypto market as several bans related to electronic currency restricted its movement in the nation to a minimum. In 2017, Initial Coin Offerings (ICO)Initial Coin Offerings (ICO)Initial Coin Offering (ICO) is a blockchain-driven fund-raising process. Through ICO, a company sells crypto coins or tokens to investors in exchange for legal money or other more faced a strict ban in China. Followed by that, exchanges offering the sale, purchase and exchange of cryptocurrencies were banned.
  2. Then came reports of China’s central bank testing out their own digital currency, Digital Yuan, which will have the central bank’s backing. It is currently under the trial phase, but it is close to being the world’s first sovereign digital currency.
  3. The digital renminbi (RMB) will be the electronic form to its traditional currency. Yuan is the basic unit of the renminbi which is why digital yuan is a move intended to replace cash like the coins and banknotes. The long term money deposited in bank accounts will retain their authenticity as money.
  4. The workings will be just like Alipay, and We Chat Pay, the other Chinese commercial digital payment platforms. The digital wallets will be downloaded to store the money that can be scanned to make a payment.
  5. China’s monetary revolution may affect how the world is shaped for years to come. For now, centralized electronic currencies are just a supplement to physical money.
  6. But the lower cost, ease of transaction, and added security provided by the capability of tracking all kinds of exchanges may give it a competition, years from today.

This has been a guide to what is Digital Currency. Here we discuss examples, working and how to buy digital currency along with importance. You may learn more about financing from the following articles –