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Kc  · 09/01/22

Digital Currency vs Cryptocurrency: 4 Key Differences

04/06/22 · Reports · This is not a financial advice
Altcoin Trading Blog

Note: This report was written in 2022 and remains published for reference purposes.


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These days, there is nothing uncommon about believing that digital currencies are the best way to conduct transactions.

But to cryptocurrencies the world has warmed up only recently, and that especially in the financial sector.

Some believe that cryptocurrencies are the future of financial technology, but many believe that digital currencies are the right compromise - not crypto.

The two terms seem similar at first glance, but there is a significant difference between them.

Digital currency vs cryptocurrency

  • Digital currency is a concept where money only exists digitally. Digital currency includes any monetary tokens or instruments that exist exclusively in electronic form. It can be used to buy goods or services through the internet.

  • Cryptocurrency is a type of digital currency that uses cryptography for security purposes. The encryption techniques regulate the generation of currency units as well as the transfer of funds. In that sense, encryption replaces what has been traditionally the task of a central bank. Since cryptocurrencies function independently from central banks, they have no physical form and cannot be controlled by any government or central authority.

4 Key Differences Between Crypto vs Digital Currencies

  1. Supply

    Supply of traditional digital currencies is usually controlled by the issuing central bank. This means that they can increase and decrease the supply, which is commonly done to help the economy. The downside of this is that it devalues the currency over time.

    Cryptocurrencies are not issued by a central authority. Cryptocurrencies are decentralized, and an algorithm determines their supply. So, for example, the total bitcoin limit is set at 21 million - there won’t be any more than that.

    This means that you cannot increase or decrease the supply to benefit an economy. This advantage is that your money's value doesn't decrease over time.

  2. Decentralization

    Digital currency can be centralized or decentralized.

    Centralized means that the digital currency is regulated by a central authority like banks, governments, etc.

    Decentralized means that no central authority controls the money supply or, to a good extent, what is done with that money.

    In cryptocurrencies, the most striking example of that freedom is not their use in crime, but rather the (thriving!) existence of products like dog money and meme tokens. If you are wondering where to buy Shiba Inu coin in UK for the best possible price, take a closer look at the detailed beginner's guide.

  3. Privacy and Data Security

    A traditional digital currency transaction usually requires clearing, that is the validation by a trusted third party, such as a bank or credit card company.

    Cryptocurrency transactions are validated with mathematical algorithms.

    The difference lies in the fact that it is impossible to counterfeit cryptocurrency, which means there is no need for a third party validation.

    The result is that cryptocurrency usually provides better privacy than digital currency, which in turn means more security for their users: At least in principle, there is no need to share any personal data to use cryptocurrencies.

    In the broad sense, this level of privacy is why finance is one of the first industries disrupted by crypto. People can now invest or yield income independently, such as via DeFi staking. In the past, this was a job for financial institutions who had literally no competition.

  4. Third-party Validation

    A bank or government authority validates transactions of legacy currencies to ensure the user has enough funds to cover the transaction in their account.

    Cryptocurrencies use a blockchain. This immutable ledger records all transactions and updates in real-time across a network of computers without any third party involved.

Conclusion

Cryptocurrency and digital currency are often used interchangeably, but as you have seen, in practice they differ substantially.

Cryptocurrency is a decentralized digital currency. No central authorities manage this form of digital money, so banks can't monitor or control it.

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