Digital currencies are the electronic and digital equivalents of the real-world money that we use for everyday transactions, like paying for products and services.
At the moment, the world is experiencing a shift in how the financial world operates. We are slowly transitioning from traditional payments with physical money to making use of digital wallets, which can both be used for storing fiat currency and cryptocurrencies. Because there are a huge variety of digital currencies out there, it is important to know the differences between them.
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For example, digital currency is the electronic equivalent of the fiat money issued by the government. On the other hand, cryptocurrency is a digital currency that is issued by a private network of computers. Cryptocurrencies are decentralised and run on blockchain technology, meaning that they do not have the need for intermediaries and are not regulated by any governing authority. There are also NFTs, which stand for Non-Fungible Tokens, which are the digital equivalent for real-world assets like art, fashion, etcetera. NFTs can be used to represent any kind of entity and can serve as a way to monetise a skill.
To further differentiate these digital assets, here is a closer look at each of them:
As stated earlier, digital currencies are the electronic equivalent of real-world money. Even if digital currencies remain purely digital, they can still be used to conduct transactions and pay for products and services despite not having any kind of physical presence. Digital currencies typically do not require any kind of encryption, but users are still obliged to use strong and secure passwords in order to protect themselves from getting their digital wallets from being hacked.
Cryptocurrencies make use of blockchain technology to keep records and store their data on a public ledger that anyone can view. All and any kind of transactions that happen in the network will be recorded onto the blockchain. Cryptocurrencies are decentralised, meaning that they do not rely on any kind of intermediary. Decentralisation also means that any kind of central authority is not needed to oversee it. And as the name suggests, cryptocurrencies are protected through the use of strong encryption methods.
Cryptocurrencies can be a great way to diversify your investment portfolio if you have a high-risk appetite and are looking for a long-term investment that you can add to your portfolio.
Non-Fungible Tokens or NFTs are the digital representation or equivalent of any kind of real-world items that are treated as assets. Unlike cryptocurrencies, they are not interchangeable, hence the term ‘non-fungible. And because the value of non-fungible tokens is not the same, they cannot be traded the same way that cryptocurrencies can be converted from one coin to another. NFT transactions are also purely online, and they also make use of a digital ledger to record transactions.
What are their differences?
The main difference between the three digital assets is that non-fungible tokens cannot be traded for each other since the value that each token has is unique and would make any kind of conversion of value difficult. On the other hand, digital currencies and cryptocurrencies can be traded to each other with no loss in value since their value can certainly be determined even after going through conversion.
When it comes to regulations, though, digital currencies are the odd one out since cryptocurrencies, and non-fungible tokens do not rely on any kind of regulatory authority because of decentralisation. Digital currencies, on the other hand, are subject to regulation from the proper authorities like banks and/or governments.
Additionally, digital currencies do not use public ledgers, and information about transactions are confidential. This is in contrast to cryptocurrencies and NFTs, which make use of public ledgers so that transaction records can be accessed by anyone on the network.