Virtual Currency

Updated on March 11, 2024
Article byWallstreetmojo Team
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

Virtual Currency Definition

Virtual currency (VC) is a type of digital currency representing the value in a digital format, and it is active in the virtual community. In most countries, people can use VC as a medium of exchange, but it does not enjoy a legal tender status.

Advancement in cryptography and network technology triggered the development of VC. It is developed by private entities, unlike the real currency, which is issued and controlled by government entities. Convertible VC exists, convertible to real money, and non-convertible VC, which cannot be convertible to real cash or other VCs.

Key Takeaways

  • Virtual currency refers to a currency available in digital form only. Examples are Bitcoin and E-gold.
  • It can be convertible or non-convertible to real money. Also, it is categorized into centralized (example: XRP) and decentralized (Example: Bitcoin) VC.
  • There are different methods to earn VC. For example, purchasing VC using real currency, mining, and playing games.
  • Bitcoin, invented in 2008, is the most famous and largest in terms of market capitalization. It is open-source and uses blockchain technology. 

How Does Virtual Currency Work?

Virtual currency available only in digital form manifests a fresh concept of money. The use of VCs allows businesses to transfer funds without the assistance of banks or other similar intermediaries. Companies accepting VCs like Bitcoin are ever-increasing hence the global prominence. People can use it for various purposes like buying goods and investments. One of the examples is the “Amazon Coin” program launched by Amazon. It can be used by users of Amazon products like Kindle Fire to purchase apps, in-app items, and games from the Amazon Appstore.

To use a VC, first, the consumer must obtain it. There are various options available to earn virtual money. One of the methods is using real money or VCs to buy the other VCs. Another method is virtual currency mining. It involves solving complex mathematical equations to get VC as a reward for their service. Other examples include developers paying crypto dividends to the customers for holding their VCs and playing games to get VC, like players getting virtual currency in the NBA 2k21 game. Furthermore, cryptocurrency exchanges and wallets are important constituents helping customers manage currency trading.

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Types of Virtual Currency

Developers categorize VCs in different ways. For example, it can be classified as open and closed, convertible and non-convertible, and centralized and decentralized virtual currency. The following brief description explains centralized and decentralized categories.

Virtual Currency Types

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Centralized VCs are controlled at a central point, signifying the presence of a central repository like a central bank or the issuing company. It is imaginable as the digital form of fiat money controlled by a central agency. Examples include XRP created by Ripple Labs Inc. It is centralized because Ripple Labs develop and manage the Ripple payment protocol and exchange network.

Decentralized VCs are the common type of virtual currency compared to the category having a centralized system. They are not centralized means that no party can claim to be the currency’s distributor or controller. It implies that a central repository does not back such currencies. The features of heavy encryption and decentralization make data transfer safer and efficient.

Examples of Virtual Currency

There are more than thousands of examples of digital currencies in the world. Virtual currency list includes Bitcoin, Litecoin, Ethereum, Zcash, etc. Let’s look into its brief description.

  • Bitcoin: It is the most famous decentralized VC invented in 2008 by Satoshi Nakamoto. The peer-to-peer bitcoin network facilitates its circulation. The network node verifies the transactions, and it is recorded in the blockchain. Most of the bitcoin transaction happens in cryptocurrency exchange compared to those used for business transactions. It is also considered one of the first cryptocurrencies devised and largest in terms of market capitalization. During the start of 2017, the Bitcoin value was below $1000, and by February 2021, its value crossed $40000. As of 31st December, 2021, the value of one Bitcoin is equal to $47,220.41.
  • LiteCoin: It is an example of VC using a peer-to-peer cryptocurrency network developed two years after Bitcoin and is considered one of the most viable alternatives to bitcoin. Like Bitcoin, Litecoin is also global, decentralized, and open source. However, Litecoin uses different algorithms compared to bitcoin and has faster transaction times. 
  • Ethereum: It is one of the latest entrants into the VC market, making its debut in 2015. Ethereum uses blockchain technology, and it is the second-largest in terms of market capitalization. Ethereum makes it possible to track transactions and the owners of VCs. It pitches this as a safety feature to avoid scamming by buyers or sellers.   
  • Zcash: It was developed partly by MIT scientists. Their goal was to create a cryptocurrency that focused heavily on privacy. As a result, transactions done using Zcash can be done without disclosing the details of the buyers and sellers or even the amount of currency involved in the transaction.  

Some commercial banks worldwide are developing versions of cryptocurrency to provide their customers with a wider range of options when making online transactions. This decision is based on the idea that cryptocurrency will likely be the preeminent payment method in the future.

Frequently Asked Questions (FAQs)

What is an example of virtual currency?

Bitcoin is one of the examples of VC. It is the most popular and largest cryptocurrency based on market share. Its value tends to increase as the number of people accepting bitcoin as a form of payment rises.

Is virtual money legal?

It is not issued or controlled by central banks in most countries as a legal tender. According to IRS guidelines, dealings in virtual money are taxable under the law as any other taxable transactions. As a result, individuals who use virtual money may be required to record their transactions on their tax forms.

Is virtual currency a good investment?

The virtual currency meaning points to a VC market that is highly volatile, and investors can expect new lows or highs since the future is uncertain. However, the higher risk scenario also points to higher returns. For instance, the bitcoin price crossed $1000 in 2017 and reached a level greater than $40,000 in 2021.

This has been a guide to What are Virtual Currency & its Definition. Here we discuss how it works, along with examples and types. You may also have a look at the following articles to learn more –