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What is Digital Currency?

By Sami Yaghma, Aug 1, 2023

Alt text: "Assortment of various cryptocurrency coins with prominent Bitcoin in the foreground, representing the diversity of digital currency.

Imagine a world where you can transact with anyone, anywhere, without borders or middlemen. Sounds like a dream, right? Well, it’s a reality now. Welcome to the world of digital assets. 

Digital assets aren’t merely an emerging trend; they’re here, reshaping our everyday lives. As I’m sure you’ve heard of Bitcoin, NFTs, or perhaps even Ripple and Ethereum, let’s venture further into this intriguing universe. Whether you’re a crypto enthusiast or a curious onlooker, there’s something for everyone here.

Breaking Down the Blockchain

Behind the remarkable phenomenon of digital assets lies a potent technology: blockchain. Think of it as a public ledger, duplicated across numerous computers, ensuring its records can’t be tampered with. Each entry or “block” interlinks with the previous one, forming a chain of blocks—hence the name, blockchain. Digital assets come to life or get “minted” when information is added to this blockchain. The exciting part is, users can trade these assets or even create new ones.

The birth of digital currency can be traced back to 2009 with the creation of Bitcoin, an innovation by a person or group using the alias Satoshi Nakamoto. Amid the tumult of the 2008 financial crisis, Satoshi envisioned a transparent, decentralized currency, free from the control of any central authority, and Bitcoin was born.

The triumph of Bitcoin sparked the emergence of a plethora of alternative cryptocurrencies, commonly known as altcoins. These include Ethereum, Litecoin, and Ripple, each bearing their distinctive features and applications. The surge of Initial Coin Offerings (ICOs) in 2017 further catalyzed the proliferation of digital currencies, contributing to the rich diversity of the digital asset ecosystem.

Digitally Native: A New Age for Currency

Digital currency is a purely digital entity, with no physical manifestation. This exclusively online form of currency operates on the internet, providing remarkable universal accessibility. The inherent digital nature of these currencies allows for transactions that effortlessly cross geographical borders, thereby seamlessly linking the global economy. Platforms like Uphold and Glint have streamlined the use of digital currencies by enabling smooth conversions between cryptocurrencies, fiat currencies, and precious metals.

Borderless Transactions

The freedom digital currencies like Bitcoin grant from traditional banking shackles is nothing short of a revolution. Unfettered by the confines of banking hours or the constraints of national holidays, these currencies provide a round-the-clock capability for fund transfers across the globe. In essence, digital currencies embody the ideal of truly borderless transactions, heralding a seismic shift in global finance. Services like Bitpay further facilitate this transition, simplifying the process for businesses to accept and transfer Bitcoin on a global scale.

The Blockchain Heart: The Power of Decentralization

Blockchain, the technology behind digital currencies, allows for a decentralized network where new entries can be added, but existing ones cannot be altered. This decentralization has been realized in many ways with various digital currencies.

The Bitcoin Paradigm

A cornerstone of Satoshi’s vision was decentralization, which is beautifully manifested in Bitcoin. The power to manage and verify transactions lies with a distributed network of computers or nodes, eliminating the need for a central authority. The nodes together maintain a public ledger known as the blockchain, where all transactions are recorded. Bitcoin, being a decentralized digital currency, introduces a democratic approach to financial transactions, significantly reducing the control of banks and governments.

Ethereum: Beyond Transactions

Satoshi’s legacy inspired many innovations, and Ethereum stands as a shining example. Like Bitcoin, Ethereum functions on a decentralized network based on blockchain technology. However, its distinguishing feature resides in the provision for creating smart contracts and decentralized applications (dApps). Ethereum not only expanded the scope of blockchain with its platform for deploying these smart contracts and dApps, utilized by companies like Alchemy, but it also transcends the boundaries of mere transactions. Consequently, it lays the groundwork for a new and innovative business ecosystem.

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Types of Digital Currency: Diving into the Digital Pool

Digital currencies have branched out into various types, each serving unique purposes.

Cryptocurrencies: The New Age Gold

Cryptocurrencies are the most common type of digital currency, with Bitcoin and altcoins leading the pack.

Bitcoin: The Genesis of Cryptocurrencies

Bitcoin, often referred to as digital gold, acts as a store of value. It was the first digital currency and remains the largest by market capitalization. Companies like iTrustCapital have made it possible for investors to add Bitcoin and other cryptocurrencies to their retirement portfolios.

Altcoins: The Bitcoin Alternative

Altcoins (alternative to Bitcoin) range from currencies like Ethereum, which enables smart contracts and hosts a multitude of DeFi applications, to Ripple’s XRP, which facilitates fast, low-cost international money transfers.

Central Bank Digital Currencies (CBDCs)

CBDCs are digital forms of a country’s fiat currency and are backed by the central bank of that nation. They aim to bring the benefits of digital currencies while still being regulated.

Stablecoins: Bridging the Gap between Fiat & Digital Currencies

Stablecoins are designed to minimize price volatility by being pegged to reserve assets like fiat currencies or commodities. Companies like Circle have developed USD Coin (USDC), a popular stablecoin pegged to the US Dollar.

Tokenized Assets & Non-Fungible Tokens (NFTs)

Tokenized assets represent real-world assets on the blockchain, while Non-Fungible Tokens (NFTs) represent ownership of unique digital items. These can be anything from digital artwork to virtual real estate. The rise of NFTs has revolutionized ownership and value in the digital world. Unstoppable Domains, for example, offers blockchain-based domain names, reshaping the way we address online content.

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Benefits of Digital Currency

The world of digital currency offers numerous benefits over traditional financial systems.

Speed & Accessibility

Digital currencies facilitate swift transactions, overcoming traditional banking limitations. Uphold, for example, allows for instant transactions between various asset classes.

Financial Inclusion

Digital currencies provide access to financial services for everyone with an internet connection.

Enhanced Security

By employing cryptographic algorithms and decentralized networks, digital currencies provide a secure avenue for asset transfers. Companies like Ledger enhance the safety of digital currency storage through the provision of hardware wallets, further fortifying the security of these digital assets.

Cost Efficiency

Digital currencies reduce the cost of transactions, making it beneficial for businesses and individuals alike.

Potential for Innovation: Smart Contracts & DeFi

With the use of blockchain technology and smart contracts, digital currencies have opened the doors to innovations like decentralized finance (DeFi) applications. Figment.io provides infrastructure and services to support such innovations.

Risks of Digital Currency

While digital currencies offer numerous benefits, they also come with risks.

Volatility

Digital currencies, particularly cryptocurrencies, can be highly volatile, presenting potential risks and rewards for investors.

Regulatory Uncertainty

The digital currency landscape faces regulatory ambiguity, which may affect the stability and growth of the market.

Security Concerns

While blockchain technology is secure, digital currencies are still susceptible to hacking, fraud, and technical failures.

Potential Misuse

Due to their anonymous nature, digital currencies can be used for illicit activities, including money laundering and financing terrorism.

Technological Risks

The technology behind digital currencies is still evolving, which can lead to unforeseen technological risks.

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Investing in Digital Currency

Investing in digital currencies requires thorough research and understanding of the digital assets market.

Getting Started

Investing in digital currencies involves opening an account with a cryptocurrency exchange, transferring fiat money, and purchasing the digital currency of your choice. Companies like Ledger offer secure hardware wallets for storing digital assets.

How to Evaluate

Before investing, evaluate the market capitalization, liquidity, usage, and the team behind the digital currency. Use platforms like Chainalysis for in-depth blockchain data and analysis.

Where to Invest

Various exchanges and platforms offer a range of digital currencies for investment. Choose the one that aligns with your needs and complies with the local regulations.

Navigating Regulatory & Tax Implications

Each country has different regulatory and tax laws for digital currencies. Be sure to understand the rules in your country or consult a financial advisor to avoid legal complications. Services like iTrustCapital allow for digital currency investments within the legal framework of an individual retirement account (IRA).

A Final Thought: Embracing the Digital Revolution

Indeed, the world of digital assets is vast, dynamic, and brimming with opportunities. Whether you’re a newcomer taking your first steps into this fascinating universe, or a seasoned explorer, know that you’re participating in a financial revolution.

Platforms like Linqto empower you on this journey, offering an intelligent way to invest. Linqto is an embodiment of the ethos that digital assets stand for – democratization, access, and inclusivity. By providing a platform to invest in pre-IPO companies, Linqto breaks down traditional barriers and widens the horizons for individuals around the globe.

It’s not just about being a part of the change, it’s about driving it. So, while navigating through this landscape, remember that every decision, every investment, contributes to shaping the future of finance. Who knows? Your next move might just spark the next big breakthrough in the world of digital assets.

This material, provided by Linqto, is for informational purposes only and is not intended as investment advice or any form of professional guidance. Before making any investment decision, especially in the dynamic field of private markets, it is recommended that you seek advice from professional advisors. The information contained herein does not imply endorsement of any third parties or investment opportunities mentioned. Our market views and investment insights are subject to change and may not always reflect the most current developments. No assumption should be made regarding the profitability of any securities, sectors, or markets discussed. Past performance is not indicative of future results, and investing in private markets involves unique risks, including the potential for loss. Historical and hypothetical performance figures are provided to illustrate possible market behaviors and should not be relied upon as predictions of future performance.

FAQ’s

What is the difference between digital currency and cryptocurrency?

While often used interchangeably, the terms have subtle differences. Digital currency is an overarching term for all forms of currency that exist in digital form, including both cryptocurrencies and digital representations of traditional currencies, like digital dollars in an online bank account. Cryptocurrency is a specific type of digital currency that uses cryptography for security and operates independently of a central bank. Cryptocurrencies are typically decentralized and operate on technology called blockchain.

How does one acquire digital currency?

Digital currencies can be acquired in several ways. The most common method is buying them on a digital currency exchange using traditional money. Additionally, people can sell goods or services in exchange for digital currency, receive them as a form of remittance, or in the case of Bitcoin and some other cryptocurrencies, ‘mine’ them by participating in the network.

Can digital currency be converted back into physical cash?

Yes, many digital currencies can be converted back into traditional currency. Cryptocurrency exchanges will often allow users to sell their digital currencies in exchange for traditional currencies, which can then be transferred to a bank account.

Is it possible to lose digital currency?

Yes, digital currencies can be lost if you forget your wallet’s password or if your digital wallet is hacked. It’s also possible to lose your digital currencies if the exchange you’re using goes out of business or suffers a breach. That’s why it’s crucial to use secure, reputable platforms for trading and storing digital currencies, and to keep your own security measures up to date.

How can I use digital currency?

Digital currency can be used in a variety of ways, depending on the type of digital currency. Some, like Bitcoin, can be used to buy goods and services directly – both online and in physical stores. Others may be used to access specific services within a digital ecosystem, such as paying for transaction fees in a blockchain network. Additionally, digital currencies can be held as an investment or used to send money across borders.

How do digital currencies contribute to energy consumption?

Certain digital currencies, particularly Bitcoin, have been criticized for their high energy consumption. The process of mining cryptocurrencies requires significant computational power, leading to substantial electricity usage. However, it’s important to note that not all digital currencies are energy-intensive. Also, some crypto projects are exploring more energy-efficient methods of maintaining their networks.

Author

Sami Yaghma

Sami Yaghma

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