Cryptocurrencies. Intro

Bitcoin picture link here

Let's clarify the attributes of the different types of currencies. Because, while a cryptocurrency is a digital currency, not all digital currencies are cryptocurrency. Mmm. So now you might wonder, what is virtual money then? Does it have anything to do with fiat money? What are the differences? How can one differentiate between all these seemingly complex trading tools? 

The funds that most of us currently use, i.e. national currencies like the US dollar (USD) or the Euro (EUR), are labelled Fiat money. This money is mostly physical, which means it comes in the form of banknotes or coins. It doesn't hold a value in itself and is not backed by a physical commodity, such as Gold or Silver. Its real value is agreed upon between governments or other entities that resort to it as a means of exchange and hence depends on the supply and demand of such a product on the markets. The term fiat has Latin origins, "meaning let it be done used in the sense of an order, decree or resolution" (see Wikipedia page for more details). These currencies are printed at the request of governments / central banks who designate their value. This facilitates money flows inland and across borders, as long as the value is mutually acknowledged. In the case of inflation or hyperinflation, and because there is ordinarily no link to assets like gold or silver, fiat money can become totally worthless. If you wish to know more about fiat money, you can consult the Investopedia article here.

The other type of currencies consist of digital, virtual and crypto-currencies. The reason why I group these is because they somehow are connected. Let me explain.

A digital currency, details on the Investopedia page here, is in fact a bunch of numbers on a computer or a mobile phone. Yes, that's right. You cannot touch or feel this money. It only exists in electronic form and is therefore sometimes called cyber cash. Therefore, you cannot "see" the activity in real life as it has no physical existence. The money can still pay for that product or service, online, at 3am from the comfort of your bed or sofa, using your debit or credit card via your bank's web portal or app, or any other app such as PayPal or your electronic Wallet. The main advantage of digital money is that moving it across borders requires little to no time and also little effort. Additionally, because transactions are linked to banking systems, they are mostly regulated, and "cash in- and out-flow" can be monitored. This is what is referred to as "blockchain technology". And an other essential edge, especially for my friends out there who feel insecure when they cannot see or touch their money, digital currency can be converted into fiat currency. The downside of this marvelous tool is however security. Even if huge efforts have been undergone on the legal frameworks to safeguard the operations that are kept in secret directories, not all are encrypted and the risk of being hacked is higher than when you have you paper money at your hand and in your pocket. Or at the bank. So, lack of trust in digital currencies is understandable. But, I still don't see you carrying / transporting millions of USD or EUR in cash to buy a certain item, or you would, but that is not really practical, you've got to admit that!

Link to the Bitcoin not accepted cartoon here

The main difference between a digital currency and a virtual currency is that the latter is not regulated. Which can obviously cause trouble. It is also only available electronically and its value is more volatile, since it depends on private customers. No banks or governments are involved in this process. This in turn incurs different trade processes, which all happen online. Beware though, the virtual currencies have zero value outside the online platforms / communities they belong to. Even if in some cases, they can be converted to fiat money. Since virtual money is basically traded on online networks, it can be designated as global. You just need to rely on your Internet connection. Hiding in your basement and trying to execute that virtual deal in secret will probably not work. Or it might. Maybe you do have a strong signal even underground, lucky you! If you would like to take that risk, then it's on you. Let's be serious here. Virtual currencies might be coming in the near future to more people than ever. Especially with the Covid frenzy plaguing the whole planet for more than a year now and the banking systems starting to seem somehow obsolete with their old-fashioned services. Yet the high risk of such transactions needs to be considered before taking the plunge. Because who would you turn to when something does not go as you had planned? More on the definition of virtual currency on Investopedia here. 

Link to the Cryptocurrencies gang here

And finally, drum rolls, let's talk about cryptocurrencies! As you can guess, crypto refers to encrypting algorithms and techniques to make this currency more secure.. and this is a specific type of digital currency. The main differences are the following: cryptocurrencies are totally decentralized, which means they are not controlled by any central authority and / or institution. There are currently more than a thousand different cryptocurrencies, and many are scams. If you want to go beyond the pros and cons, and the satanic theories related thereto, and that's for another publication, be careful what you let yourself into because cryptocurrencies are unregulated and their value is determined by the community holding them. The transaction directories are visible to all, in an effort to ensure transparency. And to guarantee the integrity of transactional data, the information is organized by blocks that are chained together, hence the term blockchains, that constitutes the organizational methods used in dealing with cryptocurrencies. Cryptocurrencies are deemed controversial for multiple reasons: their exchange rate / value is extremely volatile, the current price surge of Bitcoin, the most know and the eldest of cryptocurrencies, is an example thereof, and they can be (mis-)used for illegal activities such as money laundering because of their mobility and the infrastructures they operate within. A short YouTube video by Blockgeeks explaining What is Cryptocurrency? can be found here.

In the next article, I will go over the main cryptocurrencies available and will explain a little more about the major ones in use. Stay tuned!