With the current trend of blood bath in the crypto market, virtually every media channel is laced with some cryptocurrency-related NEWS. Regardless of this trend, not every internet user understands the basics of digital currencies.
This post is curated specifically to educate the newbies in the crypto sphere. It is paramount to understand what virtual currencies are before venturing into investing in them.
Virtual currencies are tokens that represent value mainly in electronic form. These currencies are digitally traded on the internet via secure, and specially designated networks. Usually, these currencies are a form of storage units, and they double as a medium of exchange of value by a specific body of users belonging to a virtual community.
These currencies are considered unregulated as when issued, the only controlling body in charge of checking, and balancing their operations are its developers. Furthermore, they operate like ‘ real ’ currencies such as the Nigerian Naira which is considered legal tender within Nigeria, and could customarily be used to exchange value.
At this point, it is paramount you understand that some virtual currencies could be referred to as ‘ Convertible ‘. Virtual currencies that have the same value as real money when exchanged, or could be used to digitally transact, and be swapped for real currencies are referred to as convertible.
However, the consistent use of virtual currencies to pay for goods, and services may have long-term tax liability consequences. One of the good sides of using virtual currencies is that it shortens the processes involved in starting, and completing virtual currencies as there are little to no intermediaries. Because they are not regulated, in cases of security breaches, there usually is no legal recourse for investors.
Key Notes
- Virtual currencies are not regulated but, are controlled by their developers.
- Not all digital currencies are virtual currencies but, all virtual currencies are digital currencies.
- Although they are susceptible to hacks, and breaches, virtual currencies fasten transaction speed because of the limited number of intermediaries.
Types of Virtual Currencies
Having stated that not digital currencies are virtual currencies, let us have a sneak peek into the types of virtual currencies :
- Opened Virtual Currency
These virtual currencies are also known as Convertibles. They readily can be converted into other forms of money. The two biggest cryptocurrencies based on their market capitalization; Bitcoin, and Ethereum are examples of open virtual cryptocurrencies. Because they operate in an open ecosystem, the conversion of these cryptocurrencies to fiat is recognized by IRS thus, they are taxed. A good chunk of open virtual currencies are decentralized by design however, a few of them still sustain centralized design systems.
- Closed Virtual Currency
Closed virtual currencies as the name implies, operate, and function in private, and controlled ecosystems. These virtual currencies can not be easily swapped into another form of money, even fiat. For gaming enthusiasts, the currencies they earn after completing certain tasks in form of incentives cannot be changed to fiat. Rather, they only can be used within the ecosystem in which they were earned or obtained.
Key Notes
- Open virtual currencies can be swapped into other forms of money, and be used as a medium of exchange in real-life scenarios.
- Examples of open virtual currencies include Bitcoin, Ethereum, and other stable cryptocurrencies.
- Closed virtual currencies can not be swapped into real-life cash equivalents.
- Closed virtual currencies can only be used in the ecosystems from which they are obtained.
Advantages of Virtual Currencies
- Because of the technology rails of virtual currencies, they are cost-effective as there is no extra cost for physically storing, and managing them.
- They fasten the rate of transactions as a result of limited intermediaries.
- They readily accommodate automation such as the escrow facility that releases payment to users once certain actions are carried out.
Disadvantages of Virtual Currencies
- Virtual currencies are an open-field day for hackers as there have been reports of cryptocurrency blockchain hacks in times past.
- Users of these currencies are susceptible to scam and fraud operations.
- Virtual currencies do not offer legal recourse to investors as they are largely unbacked by physically regulatory, and authority bodies.
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