A digital currency is a store of value that can be used in exchange for goods and services like traditional currencies. However, the key difference between digital currencies and traditional currencies is that digital currencies like cryptocurrency exist only in an electronic form without any physical form.
Transactions involving digital currencies are made using computers or digital wallets that connect to the internet or designated networks. Physical currencies are also stored in electronic form, but they also have physical and tangible banknotes and minted coins that can be exchanged during transactions. Transactions with such currencies are only possible when their holders have physical possession of these currencies. The money you have in your bank account is stored electronically, but the digitized form also represents the physical form.
Digital currencies can be used in the same way as physical currencies to purchase goods and pay for services. You can also find a use for them in closed online communities or social networks. An increasing number of retailers are also accepting different cryptocurrencies as a form of viable payment.
The Advent Of Cryptocurrencies
Cryptocurrencies and digital currencies first burst onto the scene in 2009 with the advent of Bitcoin. At the time, telling someone that you are investing a portion of your portfolio in cryptocurrencies might have gotten you ridiculed, or nobody might have known what you are talking about. Fast forward to today – not owning or even knowing about digital currencies will mean that you have been left behind.
In a span of a few years, cryptocurrencies have grown from being a novelty for a select online community into being a revolutionary new technology that has the potential to disrupt the global financial system as we know it. Bitcoin and hundreds of other cryptocurrencies are gaining popularity as a valuable asset class.
From being an alternative to gold as an asset you can buy and hold to profit from its increasing value to using it to make purchases at an ecommerce store, cryptocurrencies are now used for everything. For cryptocurrency proponents, this new form of currency is a democratizing force that is taking the central control over all our finances away from governments and central banks and transferring it to everyone else.
Critics of cryptocurrencies say that the new technology is an unregulated space that is empowering criminal groups, rogue states and facilitating other dangerous entities who can use them to conduct illegal activities without fear of being traced.
Why Are Digital Currencies So Popular?
There are pressing concerns about the cryptocurrency world that is largely unregulated. This is a speculative space that is prone to attacks from cybercriminals, and it has the potential to facilitate criminals conducting illegal activity. However, the financial framework necessary to prevent these issues is finding its form and becoming stronger every day.
Bitcoin, the world’s first cryptocurrency, was once dismissed as something only a few tech evangelists adored. That same cryptocurrency has skyrocketed in value, even getting the likes of Elon Musk’s Tesla, PayPal, and Venmo involved in doing business using it. 2021 saw the value of a single Bitcoin unit soar past the $60,000 mark.
Decentralizing Global Finance
There are thousands of cryptocurrencies out there now, and each of them offers different appeals. The popularity of the cryptocurrency world as a whole largely stems from its decentralized nature. You can transfer cryptocurrency units quickly and with relative anonymity even across borders. You do not need to go through a bank that knows how you are using your funds and can block your transactions or charge a fee for facilitating the transaction.
Access To Better Currency For Poorer Countries
Countries that have had historically weak currencies, including several African and Latin American nations, are now seeing a significant surge in cryptocurrency popularity. People prefer to store their savings in Bitcoin and use it as a means to transact with each other. 2021 saw El Salvador become the first country to recognize Bitcoin as a legal tender. It means that the country officially recognized Bitcoin as a means to pay taxes, settle debts, and transact with each other.
The Potential To Disrupt The Existing Financial World
Most cryptocurrencies derive their values from the demand and supply for the particular cryptocurrency, and that makes them highly speculative. Using Bitcoin as a means to transact with traders might not be practical due to its volatility. But stablecoins are a type of cryptocurrency that can change the role cryptocurrencies play in global finance.
Stabloecoins can rival traditional currencies as a form of payment. Stablecoins do not derive their value from demand and supply. Instead, their value is backed by a reserve asset. Stablecoins have become increasingly popular in recent years because they offer the convenience of cryptocurrencies with the relative stability associated with the valuation of traditional currencies.
Wrapping Things Up
The potential decentralization of the global financial system through cryptocurrencies has spurred global authorities into action. In an effort to continue asserting sovereignty, many central banks worldwide are considering introducing their own digital currencies called Central Bank Digital Currencies (CBDCs).
CBDCs offer the speed and several other advantages that are associated with cryptocurrencies without the risks traditionally associated with them. Several global economies are working towards establishing viable CBDCs to retain the relevance of their own currencies. A CBDC can be used to supplement or even replace traditional fiat currency. Unlike fiat currency, CBDCs exist entirely in digital form. Several countries are already experimenting with CBDCs, and a few of them have even launched their digital currencies.
In a world that is increasingly digital, technological innovations will pave the way for a better future. Digital currencies are the next step for global finance. Whether it comes through cryptocurrencies, CBDCs, stablecoins, or a combination of all three, digital currencies will most likely and gradually replace traditional currencies.
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