If you are surprised to hear that, it means that you too are not aware of these differences and think that you have got it all wrong all these years.
Well, do not fret because this article will make you knowledgeable about these two forms of currencies so that you build up your confidence.
The primary reason that people often get confused with digital currency and cryptocurrency is that both are digital and therefore virtual.
This, however, may not be sufficient enough, especially for a beginner, to understand the difference between digital currency and cryptocurrency fully which is why this article will be of significant help for them. If you are one, read on.
11 Differences Between Crypto vs Digital Currency
More often than not, the terms digital currency and cryptocurrencies are used interchangeably because people identify one with the other.
However, this is not right at all because there are significant differences between these two forms, cryptocurrencies and digital currency.
You need to know this so that you know whether or not it is possible to combine the benefits of both to have a more profitable venture. Here they are.
Both crypto and digital currencies differ significantly in their forms. As for the digital currency, which is an umbrella term that comprises cryptocurrencies as well, is ideally an electronic form of currency notes and coins.
Cryptocurrencies, on the other hand, are the encrypted form of digital currency. Crypto transactions are typically done on the blockchain and this technology eliminates the need for a central authority, a financial institution, or a third party to verify these transactions.
2. Money Characteristics
When it comes to digital currency, it is said to have all of the classic characteristics of money. In the financial sector, digital currency is considered to be that specific type of money that can be used to make payments through the internet.
These currencies typically have only a virtual form in terms of their existence. These currencies do not have an equivalent in the real sense. However, you can send, receive, and exchange these currencies just as you do with fiat money.
You can use these currencies to even make payments for the goods you bought from the online stores or for utility payments such as mobile, electricity, the internet as well as for all other services. With the use of digital wallets, you can send to or receive funds from all over the world.
In contrast, cryptocurrency is a special type of digital money that is considered to be a worthier and more reliable tool typically for the exchange of data. The concept is based on cryptography which ensures the accuracy of the crypto algorithms and protocols that are created.
It helps in the analysis of the same while transferring data without making any modifications or causing any disruptions in the process.
Based on the blockchain technology, in cryptocurrency trading and transaction, everything happens within a specific network which typically cannot be controlled or governed by any central authority or regulators.
Digital currencies can also be officially backed by the central banks and issued by them. These currencies can be issued by the states without any limit practically according to the need.
This is one of the most significant differences between digital currency and cryptocurrencies. In digital currencies, all of the operations are centralized which is not so in the case of cryptocurrencies.
On the other hand, as for the cryptocurrencies, the entire thing is radically different from digital currency when it comes to the issuance of the coins. The crypto coins are usually mined by the users.
This is actually a distributed process with no control or governance of a central bank. Crypto coins are issued by a company with a predefined limit and when it exceeds coins are ‘burned’ to keep it within that specified limit so that the prices of the coins are not affected or reduced. For example, the monetary limit of Bitcoin is 21,000,000.
With cryptocurrencies, the valuation of the coins is made in a different way in comparison to the digital currencies. Typically, the crypto coins come into circulation only after a new block is created and the verification of the same is done.
This is done because these coins are created by the users themselves and are not backed by any legal entity. Once it is verified, the value of the coin is determined by the market.
Typically, from an economic perspective, these crypto coins belong to a non-permissive and decentralized network and therefore are not pegged to the value of any other legal tender. It is primarily determined on the basis of the price set by the demand and supply of the coin.
On the other hand, the digital currencies are usually backed and valued by the central agencies and therefore in the event of any technical glitches they may respond to it, unlike crypto coins. The values of these currencies are set as and when these are issued by the central banks.
The digital currencies that are backed by central banks usually have a low volatility in comparison to the crypto coins. This is another significant difference between the two currencies which is due to the fact that the central banks ensure their financial stability by issuing several monetary policies related to it.
However, in relation to other currencies as well as digital currencies, the crypto coins are considered to be more volatile in nature and therefore are subject to frequent and rapid price movements.
The primary reason behind it, according to the experts, is that these coins thrive in an immature market that is not controlled by anyone and is full of high hopes.
However, the economists point out that this will surely change over time and the crypto coins will become more popular resulting in their frequent use and mass adoption.
Typically, the Central Bank Digital Currencies or CBDCs come with as many as 14 unique features as listed by the BIS or the Bank for International Settlements.
It is these characteristic features that give the digital currencies the most desired financial stability and the platform aligns with the specific objectives of the international monetary institutions that govern them.
A few of these characteristic features include low volatility, similar value and conversion as physical money, acceptance and availability all around the clock for making online and offline transactions, and low or no cost creation and final distribution.
It should be safe and resilient against system failures, possible cyber attacks, and disruptions and should also be robust, legal and operable among various banking systems.
On the other hand, the cryptocurrencies do not come with so many distinctive features as compared to the digital currencies. Though the crypto coins can be operated and transacted across different crypto exchanges, it is highly volatile and does not have the same value as physical money.
Moreover, crypto coins may be available all over the globe but are not accepted in several countries and by various merchants which affects their mass adoption adversely.
In terms of transactions, both digital currencies and cryptocurrencies differ significantly. As for the digital currencies, which are centralized in nature and structure, all the transactions made are regulated and controlled by the servers that belong to a specific group of people within the system.
And, while making transactions using digital currencies every user needs to go through a proper, and sometimes strict, identification process. They will typically need to furnish scanned documents of their identity to the system and wait for the verification process to be completed and start trading.
However, digital currency is not transparent because it is not possible to see the information regarding the money transfers made by other people on their respective wallet addresses.
In contrast, the cryptocurrencies being decentralized in nature within the structure, all the terms and rules of transactions are stated and dominated by the majority, if not all, of the participants within the network or in the crypto community.
While making transactions with crypto coins, anonymity is maintained because it does not require the users to go through any identification or verification process.
However, ensuring complete anonymity through cryptocurrency is not provided simply due to the fact that all of the transactions are recorded in the blockchain which is available to and accessible by the public and therefore can be tracked by them.
This makes cryptocurrency transactions more transparent to the users. Transactions can also be made in quick time because there is no wait time since there is no verification process or approvals required.
8. Management and Legality
Management of digital currencies is quite easy as compared to the management of cryptocurrencies. This is once again because the digital currency system is backed by a central authority.
This authority can help in solving problems of any kind whether it is for cancelling a transaction order in a contentious situation or freezing a wallet at the request of the authorities.
Moreover, dealing with digital currencies seems to be much safer than dealing with cryptocurrencies due to its established and foolproof legal framework. Most states have given the digital currencies a legal status and have developed a policy to define the currencies in the legislation as well.
In contrast, such efficient management is not possible in cryptocurrency trading and transactions because the entire matter is controlled by the crypto community or the participants themselves.
They are the ones who verify and approve a transaction and also make changes in the ledger after universal approval. Therefore, in the case of crypto trading, wrong entries can result in fund transfer into wrong wallets and there is very little or nothing a user can do about it.
And, unfortunately, most of the countries have not developed any legal framework for the cryptocurrencies. Adding to the inconvenience, a major portion of this world is yet to determine the official status of cryptocurrencies in the first place.
This is also a major difference between digital currency and cryptocurrency. As far as the digital currencies are concerned, all of these are not encrypted. In order to use the digital currencies, you will first need to open an account and that can be done without requiring any security.
However, when it comes to cryptocurrencies, all of the coins are essentially encrypted. Here, you will need to open an account with the exchange or in a forum that usually has a cyber security system in place to deal with cryptocurrencies.
However, this does not mean that crypto accounts and wallets are not hacked. There have been several instances where crypto coins worth millions of dollars were lost simply due to a cyber attack.
10. Research Requirements
Though you should not skip the research part entirely while dealing with either cryptocurrencies or digital currencies, the research requirement for digital currencies however is not as extensive and mandatory as it is in the case of cryptocurrencies.
This is because the prevailing market rates of the digital currencies are more or less constant. It is quite easy to deal with digital currencies in the global market with minimal research done before making a particular transaction.
You can rest assured that there will be little or no chance of any sudden change in the rate of the digital currencies in the middle of a transaction process.
However, in the case of cryptocurrencies, the same cannot be said with emphasis. This is because the crypto market is extremely volatile and the price movements are not only frequent but are also quite dramatic.
Even a small error made during the transaction or prediction may result in drastic consequences and irrecoverable loss of a significant amount of money.
There are lots of potential risks involved in crypto trading which can only be known and avoided successfully through a proper and extensive research made before making a transaction between two parties or making any investments.
11. Transaction Fee
All types of trading involve a certain amount of fee that you need to pay to the platform or exchange or the broker for using their services.
When you deal with digital currencies, be also ready to pay quite a hefty amount as a transaction fee each and every time you make a payment through your digital wallet. This, needless to say, will eat up a considerable portion of your profit if you trade multiple times on a platform.
On the other hand, there are usually no such transaction fees charged by the crypto exchanges or platforms. Even if some of them do, the rate will be pretty nominal and affordable for all so that it does not adversely affect your profits, reducing it significantly.
The main reason that crypto trading does not involve a transaction fee is that everything is done on the blockchain and therefore there is no need for any broker or a third party service or agents to whom you need to pay commissions on your trades. Therefore, cryptocurrencies are very useful and favored by the investors.
Which is Better – Crypto or Digital Currency?
While choosing between digital currency and the cryptocurrency you will first need to combine and weigh the benefits. For that, you will need to know a few things in depth.
As you may know, the centralized systems, when applied to any decentralized network, make the system more efficient and successful. This is good for more than 2 billion people who do not have any bank account and do not even use such services that are available worldwide.
However, according to reports, there are more than 5 billion people who use mobile phones to communicate with each other.
All these facts indicate that there is a strong indication that there will be a notable increase in the number of bank customers if, and only if, the banking system is integrated with mobile networks.
When it comes to cryptocurrencies, considering all these facts, it is the blockchain technology that provides the users with more transparency and security along with the decentralization nature of it.
However, in comparison, the digital currencies provide security to both the users as well as the governing bodies with their rules and regulations.
Looking at the future of both, it can be said with some emphasis that the digital currencies that are backed by the central banks will have the ability and potential to become a reality in the years ahead.
This is due to the fact that these currencies are not as volatile in nature as the cryptocurrencies. This, in turn, adds to the safety and security aspects of it as well as the mitigation of the risks involved.
Looking at things from a different angle, when it comes to stability, these digital currencies will have much more support in comparison to cryptocurrencies from the respective financial institutions.
This cements its path to become the digital form of money for all the central banks in spite of their differences in balances, settlement accounts, and traditional reserves.
Though everything depends on the financial institutions directly, it is the core features and the foundational principles that give the CBDCs or the Central Bank Digital Currencies a distinct edge over cryptocurrencies according to BIS or the Bank for International Settlements.
Moreover, digital currencies, that are stored in the computers as normal currency but in a digital form, are cheaper in comparison to the banknotes.
This is because there is no need for paper, and in addition to that, it also does not need any specific place to store them.
Most of the leading companies as well as business personalities are now backing digital currency and are favoring this concept.
With such belief in it, the world today is surely moving towards a digital economy with more and more market leaders showing their growing interest in receiving payments in digital coins.
Cryptocurrencies and virtual currencies, both centralized and decentralized, are actually specific types of digital currency and therefore it can be concluded that the financial market is also moving towards a crypto world.
However, at this juncture, it is important to remember that all cryptocurrencies are digital currencies but the converse is not true.
The crypto market is growing at a fast pace day by day and more and more mainstream businesses are showing a lot of interest in it.
It can be therefore said that it is not too late that several major companies will launch their own cryptocurrencies in a few years down the road.
Now the question is whether or not digital currencies are safe. This is a very important aspect because people earn money by working so hard and therefore it is their right to know whether or not it is secured when they make any investments.
Well, when the digital currency is centralized, meaning it is controlled by an organization, any harm to the organization will mean harm to your money, which is not good.
On the other hand, if it is decentralized, which means no one can control it, it will be advantageous.
Typically, the decentralized money works on blockchain technology which by itself is an amazing concept in which information is recorded in such a way that it is difficult for anyone to change it, hack it or cheat others.
This is a digital ledger that records all the transactions, duplicates them, and distributes the same all across the setup of computer systems on the blockchain.
Here, every block, new or old, comprises a number of transactions and is reflected in the ledger of the participants.
The rise in adoption and acceptance of digital currency is inevitable and quite understandable because over the past couple of years the world has experienced an increased dependence on online transactions, e-education, e-marketing, e-business, e-shows and more.
Recording every single transaction and penny ensures that a number of social issues such as financial scams and black money can be resolved easily and more effectively.
Add to that, the most serious of all issues such as terrorist funding can be easily put to an end. Overall, the entire financial sector will be more powerful.
Compared to cryptocurrency which is secured by cryptography, the dollar is secured by nothing really.
Yes, unbelievable as it may seem, there is really no hard limit to the issuance of fiat money by the banks and governments whenever they feel like it. There are only a few rules set to control the amount of it that they can issue legally.
Therefore, when you use the digital currency you will need to trust the entities that control it.
It is applicable whether you make a wire transfer or use your debit card, write a check or send a money-gram, and anything else other than sending cash in person. These entities can stop or manipulate the process, fail to deliver it, or simply take your money!
Cryptocurrency transfer, on the other hand, is much safer and surer since it uses cryptography. This means that there is no need for a third party who can intercept the transfer.
The advanced methods and technologies used in cryptocurrency will one day prove to be more fruitful and efficient than digital currency making it simply a digital token that will have no basis on cryptography or on the blockchain.
Cryptocurrency is a component of digital currency, and there are the differences between the two of them, though the lines are definitely blurred. Hopefully, all your confusion regarding the two is now cleared after reading this article.