Digital Currency Types, Characteristics, Pros & Cons, Future Uses (2024)

What Is a Digital Currency?

Digital currency is a form of currency that is available only in digital or electronic form. It is also called digital money, electronic money, electronic currency, or cybercash.

Key Takeaways

  • Digital currencies are currencies that are only accessible with computers or mobile phones because they only exist in electronic form.
  • Typical digital currencies do not require intermediaries and are often the cheapest method for trading currencies.
  • All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
  • Some of the advantages of digital currencies are that they enable seamless transfer of value and can make transaction costs cheaper.
  • Some of the disadvantages of digital currencies are that they can volatile to trade and are susceptible to hacks.

Understanding Digital Currency

Digital currencies do not have physical attributes and are available only in digital form. Transactions involving digital currencies are made using computers or electronic wallets connected to the internet or designated networks. In contrast, physical currencies, such as banknotes and minted coins, are tangible, meaning they have definite physical attributes and characteristics. Transactions involving such currencies are made possible only when their holders have physical possession of these currencies.

Digital currencies have utility similar to physical currencies. They can be used to purchase goods and pay for services. They can also find restricted use among certain online communities, such as gaming sites, gambling portals, or social networks.

Digital currencies also enable instant transactions that can be seamlessly executed across borders. For instance, it is possible for a person located in the United States to make payments in digital currency to a counterparty residing in Singapore, provided they are both connected to the same network.

Characteristics of Digital Currencies

  • As mentioned earlier, digital currencies only exist in digital form. They do not have a physical equivalent.
  • Digital currencies can be centralized or decentralized. Fiat currency, which exists in physical form, is a centralized system of production and distribution by a central bank and government agencies. Prominent cryptocurrencies, such as Bitcoin and Ethereum, are examples of decentralized digital currency systems.
  • Digital currencies can transfer value. Using digital currencies requires a mental shift in the existing framework for currencies, where they are associated with sale and purchase transactions for goods and services. Digital currencies, however, extend the concept. For example, a gaming network token can extend the life of a player or provide them with extra superpowers. This is not a purchase or sale transaction but, instead, represents a transfer of value.

Types of Digital Currencies

Digital currency is an overarching term that can be used to describe different types of currencies that exist in the electronic realm. Broadly, there are three different types of currencies:


Cryptocurrencies are digital currencies that use cryptography to secure and verify transactions in a network. Cryptography is also used to manage and control the creation of such currencies. Bitcoin and Ethereum are examples of cryptocurrencies. Depending on the jurisdiction, cryptocurrencies may or may not be regulated.

Cryptocurrencies are considered virtual currencies because they are unregulated and exist only in digital form.

Virtual Currencies

Virtual currencies are unregulated digital currencies controlled by developers or a founding organization consisting of various stakeholders involved in the process. Virtual currencies can also be algorithmically controlled by a defined network protocol. An example of a virtual currency is a gaming network token whose economics is defined and controlled by developers.

Central Bank Digital Currencies

Central bank digital currencies (CBDCs) are regulated digital currencies issued by the central bank of a country. A CBDC can be a supplement or a replacement to traditional fiat currency. Unlike fiat currency, which exists in both physical and digital form, a CBDC exists purely in digital form. England, Sweden, and Uruguay are a few of the nations that are considering plans to launch a digital version of their native fiat currencies.

Digital CurrenciesVirtual CurrenciesCryptocurrencies
Regulated or unregulated currency that is available only in digital or electronic form.An unregulated digital currency that is controlled by its developer(s), its founding organization, or its defined network protocol.A virtual currencythat uses cryptography to secure and verify transactions as well as to manage and control the creation of new currency units.

Advantages of Digital Currencies

The advantages of digital currencies are as follows:

Fast Transfer and Transaction Times

Because digital currencies generally exist within the same network and accomplish transfers without intermediaries, the amount of time required for transfers involving digital currencies is extremely fast.

As payments in digital currencies are made directly between the transacting parties without the need for any intermediaries, the transactions are usually instantaneous and low-cost. This fares better compared to traditional payment methods that involve banks or clearinghouses. Digital-currency-based electronic transactions also bring in the necessary record keeping and transparency in dealings.

No Physical Manufacturing Required

Many requirements for physical currencies, such as the establishment of physical manufacturing facilities, are absent for digital currencies. Such currencies are also immune to physical defects or soiling that are present in physical currency.

Monetary and Fiscal Policy Implementation

Under the current currency regime, the Fed works through a series of intermediaries—banks and financial institutions—to circulate money into an economy. CBDCs can help circumvent this mechanism and enable a government agency to disburse payments directly to citizens. They also simplify the production and distribution methods by obviating the need for physical manufacturing and transportation of currency notes from one location to another.

Cheaper Transaction Costs

Digital currencies enable direct interactions within a network. For example, a customer can pay a shopkeeper directly as long as they are situated in the same network. Even costs involving digital currency transactions between different networks are relatively cheaper as compared to those with physical or fiat currencies. By cutting out middlemen that seek economic rent from processing the transaction, digital currencies can make the overall cost of a transaction cheaper.

Disadvantages of Digital Currencies

The disadvantages of digital currencies are as follows:

Storage and Infrastructure Issues

While they do not require physical wallets, digital currencies have their own set of requirements for storage and processing. For example, an Internet connection is necessary as are smartphones and services related to their provisioning. Online wallets with robust security are also necessary to store digital currencies.

Hacking Potential

Their digital provenance makes digital currencies susceptible to hacking. Hackers can steal digital currencies from online wallets or change the protocol for digital currencies, making them unusable. As the numerous cases of hacks in cryptocurrencies have proved, securing digital systems and currencies is a work-in-progress.

Volatile Value

Digital currencies used for trading can have wild price swings. For example, the decentralized nature of cryptocurrencies has resulted in a profusion of thinly capitalized digital currencies whose prices are prone to sudden changes based on investor whims.

Other digital currencies have followed a similar price trajectory during their initial days. For example, Linden dollars used in the online game Second Life had a similarly volatile price trajectory in its early days.

Pros and Cons of Digital Currencies


  • Faster transaction times.

  • Do not require physical manufacturing.

  • Lower transaction costs.

  • Make it easier to implement monetary and fiscal policy.


Future of Digital Currencies

Cryptocurrencies like bitcoin have exploded in value, but they are largely used for speculation or to buy other speculative assets. Although there have been some signs of merchant adoption in countries like El Salvador, the high volatility and complexity of these currencies make them impractical for most daily applications.

Many companies have tried to reduce volatility by introducing stablecoins, whose value is fixed to the price of fiat currency. This is usually done by depositing an equivalent amount of fiat, which can be used to redeem the tokens. However, stablecoin issuers such as Tether have used these deposits on more speculative investments, raising concerns that they are vulnerable to a market crash.

Another possible application is in central bank digital currencies, which could be issued by a country's bank or monetary authority. These would be used and stored in online wallets, similar to cryptocurrencies, but allowing the central bank to issue and freeze tokens at will. Several countries, such as China, have proposed digital versions of their currencies.

Can You Invest in Central Bank Digital Currencies?

CBDCs are unlikely to be useful for speculative investments since they will likely be pegged to the value of an underlying currency. However, it will still be possible to invest in those currencies through the forex markets.

How Do You Buy China's Digital Yuan?

The digital yuan, or e-CNY, is only available to Chinese cities living in 23 major cities. Users can buy digital yuan by downloading an app and connecting it to their bank accounts.

How Do You Make a Digital Currency?

Most digital currencies are created by issuing them on Ethereum or another blockchain capable of running smart contracts. The issuer must first decide how many tokens to issue, and any special rules that limit transactions or ownership. Once these choices are coded into the smart contract, the issuer pays a small amount of cryptocurrency to pay for the computational cost of issuing the tokens.

The Bottom Line

Digital currencies are assets that are only used for electronic transactions. They do not have any physical form, although they can be exchanged for regular money or other assets. Although the most popular digital currencies are cryptocurrencies like bitcoin, many national governments are considering issuing their own centralized digital currencies.

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Digital Currency Types, Characteristics, Pros & Cons, Future Uses (2024)


What are the pros and cons of digital currencies? ›

Some of the advantages of digital currencies are that they enable seamless transfer of value and can make transaction costs cheaper. Some of the disadvantages of digital currencies are that they can volatile to trade and are susceptible to hacks.

What are the pros of digital currency? ›

Benefits of Digital Currency
  • Faster payments. ...
  • Cheaper international transfers. ...
  • 24/7 access. ...
  • Support for the unbanked and underbanked. ...
  • More efficient government payments.
13 Oct 2022

Which is a digital form of currency to discover its pros and cons? ›

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.

Why digital currency is the future? ›

By transcending global borders, digital currency promises flexibility and economic growth. Adding to the big picture, it also would be inexpensive, easy and fast. Digital currencies can boost trade and open up multiple opportunities to strengthen the financial health of the countries.

What digital currency means? ›

A digital currency is a medium of exchange that is generated, stored and transferred electronically. Digital currencies are not typically associated with any country's government or represented in physical forms like the coins and notes of traditional currencies.

Which is digital currency? ›

Cryptocurrencies are digital tokens. They are a type of digital currency that allows people to make payments directly to each other through an online system. Cryptocurrencies have no legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market.

What is the disadvantages of digital currency? ›

If companies or consumers move to a new cryptocurrency from you or stop using digital currencies entirely, it could lose value and become worthless. Cryptocurrency exchanges are vulnerable to cyber attacks, which could lead to an irreparable loss of your investment. Cryptocurrency can be vulnerable to scams.

Is digital or smart currency the future? ›

Digital currency has the potential to completely change how society thinks about money. The rise of Bitcoin, Ethereum and thousands of other cryptocurrencies that exist only in electronic form has led global central banks to research how national digital currencies might work.

Is digital currency secure? ›

The blockchain technology backing cryptocurrency is inherently secure, thanks to the decentralized — and public — nature of distributed ledger technology and the encryption process every transaction undergoes.

What is the impact of digital currency? ›

Digital currencies will eliminate intermediaries for payments. Since settlements will happen directly without intermediaries, it will reduce transaction time. Further, settlement will be available 24/7 and transaction cost will also be reduced.

Which is the best digital currency? ›

Read on to discover these tokens, learn where to buy them, and how to invest in them.
  • Top 10 Best Cryptocurrencies to Invest In 2023. ...
  • Ethereum (ETH) ...
  • Bitcoin (BTC) ...
  • ApeCoin (APE) ...
  • Solana (SOL) ...
  • Shiba Inu (SHIB) ...
  • Uniswap (UNI) – Best Decentralized Cryptocurrency to Invest in Long Term. ...
  • Decentraland (MANA)
4 Oct 2022

Is digital currency good investment? ›

Cryptocurrency can be a great investment with astronomically high returns overnight; however, there is also a considerable downside. Investors should analyze whether their time horizon, risk tolerance, and liquidity requirements fit their investor profile.

What is the future for money? ›

Money's destiny is to become digital. Throughout the ages physical money in the form of objects, coins and notes has increasingly been replaced by more abstract means of payment such as bills of exchange, cheques and credit cards. In the years to come that trend to virtual money will continue apace.

How did digital currency start? ›

History. In 1983, a research paper titled "Blind Signatures for Untraceable Payments" by David Chaum introduced the idea of digital cash. In 1989, he founded DigiCash, an electronic cash company, in Amsterdam to commercialize the ideas in his research. It filed for bankruptcy in 1998.

Is digital currency real? ›

Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger.

What was the first digital currency? ›

The first decentralized cryptocurrency was Bitcoin, which first released as open-source software in 2009. As of March 2022, there were more than 9,000 other cryptocurrencies in the marketplace, of which more than 70 had a market capitalization exceeding $1 billion.

Who invented digital currency? ›

Satoshi Nakamoto is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin's original reference implementation. As part of the implementation, Nakamoto also devised the first blockchain database.

How many types of digital currency are there? ›

Apart from being a digital representation of fiat currency, there are three other forms of digital money: cryptocurrencies, central bank digital currencies, and stablecoins.

What is advantage and disadvantage of money? ›

Paper money has got several advantages and disadvantages.
  • The following advantages can be mentioned:
  • (i) Economical:
  • (ii) Convenient:
  • (iii) hom*ogeneous:
  • (iv) Stability:
  • (v) Elasticity:
  • (vi) Cheap Remittance:
  • (vii) Advantageous to Banks:

Who controls digital currency? ›

In the United States, there are currently two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.

Can digital currency trade? ›

Crypto exchanges work similar to online brokerages, as users can deposit fiat currency (such as U.S. dollars) and use those funds to purchase cryptocurrency. Users can also trade their cryptocurrency for other cryptocurrencies, and some exchanges allow users to earn interest on assets held within the exchange account.

Can digital currency replace physical currency? ›

Reserve Bank broadly defines CBDC as the legal tender issued by a central bank in a digital form. It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender and a safe store of value.

Can digital currency be hacked? ›

More than $2 billion in digital currency has been stolen in hacks this year, shaking faith in the experimental field of decentralized finance, known as DeFi.

How is digital currency stored? ›

Just the way we keep cash or cards in a physical wallet, bitcoins are also stored in a wallet—a digital wallet. The digital wallet can be hardware-based or web-based.

What are the 4 types of cryptocurrency? ›

Q #1) What are the four types of cryptocurrency? Answer: The four major types include utility, payment, security, and stablecoins. There also are DeFi tokens, NFTs, and asset-backed tokens. Of all cryptocurrencies, the most common are utility and payment tokens.

What are the 4 largest crypto? ›

10 Largest Cryptocurrencies by Market Capitalization
  • Bitcoin (BTC) Market Cap: $458 billion. ...
  • Ethereum (ETH) Market Cap: $216 billion. ...
  • Tether (USDT) Market Cap: $66 billion. ...
  • USD Coin (USDC) Market Cap: $54 billion. ...
  • Binance Coin (BNB) Market Cap: $52 billion. ...
  • Ripple (XRP) ...
  • Cardano (ADA) ...
  • Binance USD (BUSD)
14 Nov 2022

What percentage of currency is digital? ›

Digital money is already prolific, with many modern transactions occurring over digital wallets and systems. According to an October 2021 piece by Harvard Business Review, over 97% of money in circulation is from online transactions.

Why is digital currency expensive? ›

Scarcity. Bitcoin's value is a function of this scarcity. As the supply diminishes, demand for cryptocurrency has increased. Investors are clamoring for a slice of the ever-increasing profit pie that results from trading its limited supply.

Why is cash better than digital money? ›

Real dollars — cash — have a set of qualities that are hard to replicate in a digital currency. Cash is universally accessible, universally accepted, relatively stable in value, and can be exchanged for goods and services without transaction fees.

How much is the future value? ›

How do I calculate future value? You can calculate future value with compound interest using this formula: future value = present value x (1 + interest rate)n. To calculate future value with simple interest, use this formula: future value = present value x [1 + (interest rate x time)].

How can I invest in my future? ›

Invest in Your Future
  1. Start A Retirement Fund. There are many ways to save for retirement. ...
  2. Set Financial Goals. Set financial goals for the future and measure your success by achieving them. ...
  3. Save For A Rainy Day. ...
  4. Grow Your Savings.
30 Jun 2022

What are the risks of digital currency? ›

Risks of Using Virtual Currency
  • Price Change Risk. The price of cryptocurrency fluctuates constantly. ...
  • Business Hours Risk. ...
  • Liquidity Risk. ...
  • Cryptocurrency Network Risk. ...
  • Risk of Losing the Private Key or Password of the External Wallet Services. ...
  • System Risk. ...
  • Bankruptcy Risk.

What are 3 cons or concerns about crypto? ›

5 disadvantages of cryptocurrency
  • Understanding cryptocurrency takes time and effort. ...
  • Cryptocurrencies can be an extremely volatile investment. ...
  • Cryptocurrencies haven't proven themselves as a long-term investment—yet. ...
  • Crypto has serious scalability issues. ...
  • Crypto newbies are vulnerable to security risks.
14 Sept 2022

What is currency risk? ›

Currency risk is the possibility of losing money due to unfavorable moves in exchange rates. Firms and individuals that operate in overseas markets are exposed to currency risk.

What are 3 benefits of cryptocurrency? ›

Advantages of Cryptocurrency :
  • Protection from inflation – Inflation has caused many currencies to get their value declined with time. ...
  • Self-governed and managed – ...
  • Secure and private – ...
  • Currency exchanges can be done easily – ...
  • Decentralized – ...
  • Cost-effective mode of transaction – ...
  • A fast way to transfer funds –
30 Sept 2022

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