Due to the rise of cryptocurrencies, sometimes there is a tendency to use terms that may be similar to the naked eye, but in the end, have different meanings, an example of this is the terms cryptocurrencies and digital currencies, which sometimes tend to be confused, In this article, we will briefly explain each of these terms as well as knowing what their main differences are.
A “variety” or “branch” of digital currencies
It is important to note that cryptocurrencies are considered a “variety” or “branch” of digital currencies; cryptocurrencies are based on blockchain technology. On the other hand, the term “digital currencies” refers to the money found in online bank accounts that belong to a bank or financial institution.
One of the main differences between a digital currency and a recognized cryptocurrency is the form of issuance. Operations in the digital euro (which is a project) are centralized, and the issuer is the European Central Bank (ECB). In the case of Bitcoin, it is different since mining is carried out by the users themselves. It is a more transparent, distributed process and radically different from a central bank’s issuance since States can issue currencies or coins unlimited digital. In contrast, in the case of Bitcoin, the limit is predefined at 21 million units.
Another difference is the type of support; for example, digital currencies have the support of central banks and their respective financial institutions; an example of this would be the digital euro (which could be a reality within a few years), on the other hand, in the case of cryptocurrencies, such as Bitcoin or Ethereum, they are backed by blockchain technology and by the users themselves.
Another difference refers to volatility, while on the one hand, cryptocurrencies tend to have high volatility since they are subject to the free market (supply vs. demand) without the intervention of supervisory bodies; on the other hand, digital currencies tend to be more stable, since although they are in the free market (supply vs. demand), this market is sometimes “controlled” or “intervened” by different organizations and institutions so that there are no major “rises or falls” in prices.
A digital currency has no creation cost since its creation simply depends on the decision of the central bank or entity that supports it; on the other hand, recognized cryptocurrencies (such as the case of Bitcoin) use mining, which consists of deciphering complex computational calculations to obtain new bitcoins and add new blocks to the blockchain. People engaged in this activity are known as “miners,” and they get as a reward some cryptocurrencies of the same type they mined.
What digital currencies currently exist?
At present, there are many projects of digital currencies; one of these projects is of the European Central Bank (ECB), which carries out different studies and analyses for the creation of the “digital euro” under the concept of Central Bank Digital Currency (CDBC). It is a form of digital money issued by a central bank, which is different from the balances of the traditional reserve or the so-called “settlement accounts” that are totally dependent on the institution.
It is estimated that by the middle of the year 2021, some tests could be carried out. Importantly, unlike cryptocurrencies, digital currencies are still in the ‘project’ or ‘beta phase’ and have not yet been adopted by the general public.
What do you think about this topic? Do you know another difference between digital currencies and cryptocurrencies?
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