Many investors are still confused between digital currencies and cryptocurrencies, which they have mistakenly understood to be the same. However, the two have certain key differences. While all cryptocurrencies are digital currencies, the vice versa case is not true. Cryptocurrencies are a type of digital currency formed and secured through the principles of cryptography.
In this article, you will read about the fundamentals of digital currencies and cryptocurrencies and understand the key differences between the two.
What Are Digital Currencies?
In simple terms, digital currencies refer to all those currencies that exist only in a digital form. They are called electronic money or cybercash. Like ordinary fiat currencies, digital currencies can also be used for trade through digital wallets. Digital currencies can be either centralized or decentralized based on who governs the decision-making related to their day-to-day existence.
Cryptocurrencies, Virtual Currencies, and Central Bank Digital Currencies are the three main types of digital currencies. Cryptocurrencies are decentralized digital currencies that are secured and made transparent through cryptography. Bitcoin and Ethereum are examples of cryptocurrencies.
Virtual currencies are digital currencies made by a group of stakeholders, and they do not fall under the regulatory ambit of any government organization. For example, the in-game currency of a gaming ecosystem is developed and controlled by the game developers and has no relation with any centralized regulatory authority.
Central bank digital currencies (CBDCs) are issued, circulated, and regulated by the central bank of a country.
Advantages And Disadvantages Of Digital Currencies
Digital currencies are beneficial to the users in many ways. At the same time, they have several disadvantages too. The advantages and disadvantages of digital currencies are detailed in the following table.
| Advantages | Disadvantages |
| Digital currencies enable faster transactions. | Storage issues such as the availability of online wallets and internet connectivity are rampant. |
| They lack physical manufacturing facilities. | They are vulnerable to hacking. |
| Monetary and fiscal policy implementation is easy. | Their prices are highly volatile. |
| Digital currency transactions are cheap. | They only have limited acceptance. |
| They are decentralized. | These transactions are irreversible. |
| They emphasize privacy. | There is a widespread lack of trust in digital currencies among the general public. |
| Digital currencies have global accessibility. | Digital currencies are more susceptible to failure. |
What Are Cryptocurrencies?
Cryptocurrencies are a type of digital currency that are made using blockchain technology. The cryptocurrency transactions are recorded on the individual blocks of the blockchain. This makes it impossible to counterfeit or double-spend them. Different cryptographic techniques, such as elliptical curve encryption, public-private key pairs, and hashing functions, are utilized in the creation of cryptocurrencies.
There are different types of cryptocurrencies: utility tokens, transaction tokens, governance tokens, security tokens, platform tokens, and meme tokens.
Advantages And Disadvantages Of Cryptocurrencies
The following table is about the major advantages and disadvantages of using cryptocurrencies.
| Advantages | Disadvantages |
| There are no single points of failure. | Cryptocurrency transactions are pseudonymous. |
| Cryptocurrencies enable easy peer-to-peer transactions. | They can be used for criminal deeds and terrorism funding. |
| There is no third-party interference. | An increased centralization effort is going on regarding cryptocurrencies. |
| Cryptocurrency investments generate returns. | Major profitable cryptocurrencies such as Bitcoins are expensive. |
| They offer streamlined remittances. | There is no guarantee of off-chain security. |
| Transactions are transparent and secure. | Cryptocurrency prices are highly volatile. |
Key Differences Between Digital Currencies And Cryptocurrencies
Cryptocurrencies are a subset of digital currencies. As you already understand, digital currencies and cryptocurrencies have unique features. There are many differences between the two. The major areas where digital currencies and cryptocurrencies differ from each other are explained in detail here.
Production
Digital currencies are produced by the issuing authority, such as the central bank of a country, while cryptocurrencies are mined. Any of the stakeholders can mine cryptocurrencies. This gives them a decentralized character.
Decentralization
Decentralization refers to the process of governance where a project is governed by all its stakeholders together rather than being governed by a central authority. Digital currencies such as the Central Bank Digital Currencies (CBDCs) are governed and regulated by a centralized authority, i.e., the concerned central bank. The value of digital currencies is determined by the central authority, and it varies according to any larger geographical calamities, availability of natural resources, and other political issues.
On the other hand, most cryptocurrencies follow a decentralized governance structure. That means the decision-making concerning these currencies is overseen by the native token holders. Cryptocurrency transactions are done under the supervision of blockchain technology. Unlike digital currencies, the value of cryptocurrencies will not fluctuate due to any political issues or geographical problems.
Transparency
All the transactions related to cryptocurrencies are highly transparent due to the underlying blockchain technology. However, digital currencies lack this amount of transparency as they are controlled by the service providers, senders, receivers, and banking authorities.
All the details about cryptocurrencies are embedded in the blockchain, and in case of an issue, you can access the information directly from the blocks. However, as digital currencies are not transparent in their dealings, any issues related to them are solved by legal procedures.
Security
Cryptocurrency transactions are more secure than other digital currency transactions due to the underlying blockchain technology in use. Even the minute details about a transaction are recorded on the blocks, which makes it impossible to counterfeit these transactions.
Stability
Digital currencies are more stable in the market because they are backed by stable fiat currencies. On the other hand, cryptocurrencies are highly volatile in nature. Their values change within shorter periods.
Legal Validity
Digital currencies have legal validity as they are backed by government agencies or central banks. On the other hand, cryptocurrencies are not attributed any legal status as they are not regulated by any responsible authority.
The Bottom Line
This comparative analysis between digital currencies and cryptocurrencies will serve as a guide to help you decide on what asset you need to invest to cater to your specific requirements. Make informed decisions to make the best use of your assets.
