What is Virtual Currency?

Globally, more than 95 percent of all currency used is digital money or virtual currency. Credit cards account for most online commerce, but this new finance phenomenon is making inroads into the worldwide market. If you participate in online gaming, you have probably used this kind of currency to pay for things like “extra lives.” Gaming, however, is only one of the uses of the digital money. People can use it to reserve hotel rooms and buy goods online. The greatest use of digital money may be in investing.

What Is it

Virtual currency or cryptocurrency, also mistakenly referred to as digital money, is a type of digital wealth that is issued by its developers and accepted by specific virtual groups. There are more than 200 different kinds of real currency that are issued by countries or other entities and that are regulated by the governments. According to Bitcoin Magazine, all virtual money is digital currency, but not all digital money is virtual or cryptocurrency. Companies like PayPal are digital, but they interface with actual banks and are regulated. Cryptocurrency is issued by people who invent it and is largely unregulated. It relies on a trust-system and does not go through any bank. Some of the better-known types of digital money are Bitcoin, Litecoin, Dash, Peercoin, Dogecoin and Primecoin.

Virtual Money History

The concept of virtual currency is not new. In 1996, a company called E-gold was invented that based its value in real gold and allowed clients to trade virtual gold. In 2006, another company, Liberty Reserve, allowed users to exchange U.S. dollars or Euros for “Liberty Reserve” dollars or “Liberty Reserve” Euros. Then they could be freely exchanged. The fee was one percent. The unregulated companies were used for money laundering and the U.S. government shut them down. PayPal had a similar structure, but it submitted to regulations and restrictions and managed to survive.

How It’s Used

Most consumers are familiar with the way PayPal works. The funds are actually virtual dollars and, although transactions can take place between individuals with PayPal accounts, they may also involve credit card use or bank accounts. Cryptocurrency has historically been a sort of toy that is not used in the real world. Developers manipulate the amount of “currency” that is available by adding new levels to games or selling game pieces for Bitcoins or other currencies. Recently, however, Bitcoin has acquired actual value and is being used for real-world purchases. The major use for the currencies, outside of gaming, is in investments. Recently, a cryptocurrency developer ranked on the list of the country’s wealthiest people ahead of Mark Zuckerberg according to a New York Times article. His virtual wealth was ephemeral. The markets plummeted, and he lost two billion dollars in a matter of days.

Part of the attraction of this type of money is that it is used anonymously; users adopt online IDs. That principle makes it alluring to criminals because it is hard to track. The fact that it has no central base, like national currencies, makes it less stable and more vulnerable to cyber theft and fraud as well. Still, the line between digital money and virtual currency is beginning to blur and the “toy” money may soon be a big player in the real world of finance.