At the most basic level, digital currency is just an electronic form of money. It is currency that can be used to buy goods or services. The transaction and money is entirely done online. What is digital currency then? It can include fiat money that is in digital form. Or, it can include non-government backed currencies that are exclusively in digital form. While you can define digital currency in broad terms, most investors are looking into cryptocurrencies. In this post we’ll continue to explain what are digital currencies and the concerns for investing in them.
What Is Digital Currency?
Government backed currency aside, the framework of digital currency is in development. Currently, a digital currency is online money that can be paid between two parties. The most popular forms of digital currency include cryptocurrencies and virtual currencies. Since these currencies are not regulated by a government, but rather an online system, they can cut out intermediaries. This digital payment process can increase transparency and speed of transactions. Digital currency includes the money and transaction exclusively online.
No Supervising Authority
As we have mentioned, many digital currencies, such as cryptocurrency, are not regulated by an authority. They are decentralized and verified by the network. This verification process uses blockchain technology to complete the transaction. However, it can become extremely risky if this technology fails or becomes corrupted by the network. In the scenario that the network fails, the digital currency would be stopped from conducting transactions and payments. The depreciation formula would fall to zero. Thus, the effectiveness of the given currency ceases to exist.
Where To Store Digital Currency
Even if you invest in digital currency, the secure storage of them can be a major headache. Mostly, digital currencies are stored in digital wallets. The wallets are the only place where you can keep your digital currency like a bank would. Except, these wallets have been hacked and stolen. Unlike depositing money into a bank, there is no FDIC insurance to get your money back. If anything happens to your digital currency wallet, you are out of luck as an investor. It is not nearly as secure as keeping cash in the bank.
Digital Currency Privatization
At the moment, digital currency remains decentralized which attracts people because of lack of influence. This could make for a risky investment as other major enterprises and organizations invest in their own blockchain business technology to deliver trusted, secure digital currency. If you invest in digital currency and a new wave of privatized cryptocurrencies come out, the value could fall over night. Moreover, governments could centralize the currency and introduced government back digital currency too. These changes would dramatically change how to invest in digital currency.
Initial Coin Offerings (ICO)
While penny stock investing gets a bad reputation for “pumping and dumping”, the impacts of digital currency launches could be worse. Keep in mind, none of the initial coin offerings are actually registered with the security and exchange commission (SEC). All of the exchanges are completely unregulated. So, your investment could be subject to fraud or unethical dealings. At the time, an investment in digital currency may seem like it is rising, but it could fall at anytime.
By now, you should know what is digital currency and some of the risks that come with investing in it. The currency held and transacted entirely online is digital currency. There are many concerns to investing in them because of decentralization, storage, privatization and ICOs. If you are planning to invest in digital currencies, know what they are and the risks before putting any money into the asset class.