A virtual currency is a subset of digital currencies and includes another type of unregulated digital currency. Virtual Currencies are not regulated or issued by a central bank. Examples of virtual currencies are Bitcoin, Litecoin, and XRP. Virtual currencies are stored and traded through designated mobile, software, or computer applications. Transactions of virtual currencies befall through protected, online networks or over the Internet. They are distributed by private parties or groups of developers.
Virtual currencies, for-example cryptocurrencies, and tokens issued by private organizations. The benefits of virtual currencies are faster transaction speeds and ease to use. The drawbacks of virtual currencies are that they do not provide much legal support to investors because they are not regulated and can be hacked easily.
Types of Virtual Currency
There are two main types of virtual currencies in terms of legal status:
- Centralized
- Decentralized
1. Centralized
A centralized virtual currency owns a central repository or administrator. The central administrator of virtual currencies is typically the emitter of that currency. The role is alike to a central bank in a regulated currency system.
2. Decentralized
Decentralized currencies don’t have a third-party central administrator. A distributed system will verify the transactions of decentralized virtual currencies.
Several decentralized currencies are based on blockchain networks for example Litecoin, Bitcoin, and Ethereum. A blockchain network links a list of records, which is recognized as blocks, with cryptography. When a transaction is requested, the request is broadcasted in the network consisting of multiple nodes (computers).
As compared to centralized virtual currency, the decentralized currency consists peer-to-peer network that avoids a central administrator. It also evades a centralized security breakdown. Also, due to the absence of negotiators, decentralization gives more transparency between parties and lower transaction rates.
As compared to centralized virtual currency, the decentralized currency consists peer-to-peer network that avoids a central administrator. It also evades a centralized security breakdown. But, the lack of central authority channels to regulatory concerns. Money laundering and other illegal transactions can take benefit of the decentralized setup.
Advantages of Virtual Currencies
- Convenient
One of the major advantages of virtual currencies is they are convenient. Transactions of virtual currencies are fast due to their network-based nature. The usage of virtual currencies is especially beneficial in international transactions.
- Decentralized
Decentralization also avoids intermediaries. It has lowered transaction rates and avoids the security failure of the central administrator.
Disadvantages of Virtual Currencies
- Absence comprehensive regulation
The regulations over virtual currencies are not so comprehensive or systematic, that blocking their worldwide acceptance. In the absence of administration from a central administrator, decentralized virtual currencies provide possibilities for illegal transactions and money laundering.
- Highly volatile
The value of a virtual currency is extremely volatile. Hence, it is a less favorable tool to save value or medium of exchange. For instance, Bitcoin climaxed at the end of 2017 at nearly $20,000 per unit. It later dropped to around $3,000 per unit in one year.
- Potential security concerns
Virtual currencies also raise security concerns. In spite of improving encryption techniques, the absence of valid data is still possible and that can cause high losses to virtual currency owners.
The Bottom Line
Virtual currencies are digital currencies that can exist only in electronic form. Transactions of virtual currencies occur on dedicated networks or over the Internet. Instances of virtual currencies involve tokens and cryptocurrencies. Virtual currencies are a novel form of currency and are mostly unregulated. But that situation is changing, and an expanding number of government agencies and countries are considering the implications of introducing virtual currencies into their economies.