For a newbie, the world of crypto may seem complex in the beginning, when all these new terms fall on your heads. In order to get to the bottom of it, you need to start with the most basic ones: what is a cryptocurrency, how it is different from digital money, what are its features, and more. In this article, we’ll provide you with a detailed explanation of these notions and help you understand the nature of crypto and why it is gaining popularity with every day.
What is cryptocurrency
Cryptocurrency is sort of digital money: the coins exist only in the electronic form and are intangible. The main technology behind crypto is data encryption which allows for anonymity and safety of transactions.
Consecutively, blockchain technology provides the opportunity for peer-to-peer transactions implying that you can send any amount of money anywhere in the world without the necessity of getting an approval from your bank. On the flipside, cryptocurrencies can be erased from your wallet or lost in case of your device breakdown or if you simply lose the private keys, as there is no central storage of your money.
There are over 2,000 active cryptocurrencies today. The most popular ones are Bitcoin, Ethereum, XRP and Litecoin.
Bitcoin was created in 2008. Bitcoin creators have been encouraged to work on a new means of payment to make transactions faster and accessible to everyone as the multiple banks at that time were being accused of charging high fees and had slow and uncomfortable money transfer systems. As a result, the first cryptocurrency was born. People used their hardware and “mined” Bitcoin, or simply buy it in an exchange. BTC has gained popularity around the globe, and now it is accepted as a means of payment in many places like stores, restaurants or even hospitals. Today, Bitcoin is considered to be more reliable than even some national currencies in the third world countries, as it is the case of Venezuela.
What is digital currency
In contrast to cryptocurrency with its encryption features and blockchain technology, digital currencies are a generic term encompassing all money in the electronic form. In a legal sense, digital money acts exactly as fiat and is regulated by law. You can use it to pay for services, buy goods or simply send to other people. Any currency that can be transferred online falls into the category of digital money, including crypto.
Consecutively, one of the main features of digital money is its intangibility. Fiat money is converted into digital form and is stored in electronic wallets afterward.
Finally, due to its intangible nature, digital money is transactable online, so you are able to perform instantaneous transactions simply by having access to your wallet.
The most obvious and common example of digital money is Paypal: its creation has facilitated cross-border financial transactions and reduced the time of payment processing. Another bright example of digital currencies is WebMoney which is an online payment system. Users have electronic wallets where they keep funds in the digital form.
Similarities between cryptocurrencies and digital money
Both crypto and digital currencies are intangible and are stored in electronic form.
- Identification process Both forms of money require a user information but at different stages. You’ll need to pass through KYC (Know Your Customer) procedure before buying crypto (this is how crypto exchanges protect themselves from money laundering and illegal financial activities), but afterwards there is no need to indicate your personal details. However, user’s information is disclosed in the case of making a transaction with digital money.
- Involvement of third party The third similarity concerns the manipulation of transactions. Even though crypto transactions are decentralized and approved by the community, it still depends on how much money is being sent, and in some cases the transactions might be stopped, as in the case of digital money.
Differences between cryptocurrencies and digital money
- Digital money is a broader concept than crypto
To begin with, digital money is a more general term. Cryptocurrencies are digital money, but digital money may not be exactly crypto in a particular case: it could be any national coin in the electronic form as well.
- Digital money doesn’t require encryption
One of the main differences lies in the very nature of these currencies: while digital money is not classified, cryptocurrencies are more specific and require encryption. Thus, even though both forms of assets are transactable online, they are presented in different forms.
- Digital money is centralized, while crypto is decentralized
Another distinction is that digital currencies are centralized, and all the transactions are regulated by special bodies. So, in order to make payment, you’ll need to get approval from a regulatory authority. Contrary, crypto is decentralized, all the transactions are approved by the community, and there is no regulatory authority over transactions.
- Different level of anonymity
Cryptocurrencies offer a bigger level of anonymity. While to perform a transaction with digital money, you’ll need to pass through verification process, and the transaction details will include information about the sender and the recipient, in the case of crypto, you’ll need only to specify your wallet address which doesn’t contain any personal information. However, you’ll be required to pass through the verification process to buy crypto in the first place, so cryptocurrencies don’t offer fully anonymous transactions.
- Crypto offers transparency of transactions
Even though personal information is hidden for transactions in crypto, it is possible to check all the transfers for a specific wallet if you know the wallet address, so crypto offers a full transparency by placing the revenue streams in a public chain. Contrary, digital currency transfers are confidential, and it is not possible to check on other users.
- Different regulatory bases
Regulations governing digital money utilization have been elaborated by most countries, for example, there is Directive 2009/110/EC establishing the legal framework for digital currencies within the European Union. However, crypto is still in its infancy stage, so its status hasn’t been finalized in the majority of countries.
- Crypto offers irrevocable transactions
Transactions made in crypto are irrevocable which is due to its decentralized nature: there is no third party involved in the process, so as soon as you make a payment, it is not possible to stop or cancel it. On the other hand, digital payment maybe be revocable. Thus, in case of a mistake, you’ll be able to contact the responsible authority and request a cancellation of the transaction if there are reasonable grounds.
Reasons behind crypto’s growing popularity
Faster and more private transactions
Crypto provides users with fast payments: some blockchains are able of processing several transactions per second at their pick, and the average processing time for one transaction is short as well (for example, 3.74 for XRP ledger close time). Contrary, a common bank payment is normally processed during 3 to 5 days. With faster transactions, your business will work faster as well.
Furthermore, you are not limited by geographical borders as it’s the case of sending money via banks: cryptocurrency can be received anywhere in the world. This feature brings international payments to a new level and is very advantageous for industries and corporations.
Transparency and decentralization
The full transparency of crypto allows for the accessibility of data to everyone, as the information about each transaction is saved on a blockchain shared ledger and shared in real time. Once registered, the data can’t be erased, so there is less chance of giving room to fraud.
Building a sustainable and cost-efficient infrastructure
With the blockchain technology and smart contracts used to their best extent, the international market could come up with a new infrastructure that will be less costly and much more efficient. There will be no human involvement providing for faster payment processing and reducing the likelihood of a mistake in manual calculations.
Wrapping it all up
Briefly, digital money is a generic terms for any assets in the electronic form. Cryptocurrencies are a part of digital money, but they have several unique features, such as encryption process, decentralization, anonymous and fast transactions, and more. Today, more and more people understand the benefits of using crypto coins which promotes further development of the blockchain technology and crypto solutions.