Virtual Currency

Article byWallstreetmojo Team
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.

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 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 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 currenciesDigital CurrenciesDigital 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 more in the world. Virtual currency list includes 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, Litecoin, Ethereum, Zcash, etc. Let’s look into its brief description.

Some commercial banksCommercial BanksA commercial bank refers to a financial institution that provides various financial solutions to the individual customers or small business clients. It facilitates bank deposits, locker service, loans, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of more 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 –