Understand virtual currencies, digital currencies, cryptocurrencies, and stablecoins in one article, don't get confused!
As the digital wave sweeps across the globe, various concepts related to digital assets flood in, leaving people dazzled. Among them, the concepts of virtual currency, digital currency, cryptocurrency, and stablecoin frequently appear in news, social media, and financial discussions. They may sound similar, but they each have unique connotations and characteristics. Many people often confuse them, leading to misunderstandings in investment decisions and daily communications. Today, let us delve into these concepts, unveiling their mysterious veils to help everyone better understand the new financial forms in the digital economy era.
1. Virtual Currency: The "Virtual Equivalent" of the Digital World
Virtual currency refers to a form of currency that exists and circulates in a virtual environment, lacking the legal status and national credit backing of real currency. It is typically issued by private entities or specific virtual communities for the exchange of goods or services within that virtual environment. The value of virtual currency is not determined by market supply and demand or national economic strength but rather based on the recognition and acceptance of users within a specific virtual environment.
Common virtual currencies include gaming coins, points, and vouchers. For instance, in a popular online game, players can earn in-game currency by completing tasks or defeating monsters, which can be used to purchase game equipment, items, etc., enhancing the gaming experience. However, this in-game currency is only valid within the virtual world of the game and cannot be used in real life to purchase real goods or services.
The issuance and management of virtual currencies are relatively flexible, and their value fluctuations are often influenced by factors such as the operational strategies of virtual communities and user activity levels. For instance, if a virtual community launches new activities and distributes a large number of virtual currencies, it may lead to a decline in their value; conversely, if the community increases the difficulty of acquiring virtual currency, its value may rise. Due to the lack of legal protection and regulatory constraints on virtual currencies, there are inherent risks, such as the potential for virtual currencies to become worthless if the virtual community collapses.
2. Digital Currency: A New Form of Digital Money
Digital currency is a form of currency that exists in digital form, serving as a substitute for electronic currency, encompassing various types, including both legal digital currency and virtual digital currency. Digital currency employs advanced technical means such as blockchain technology, cryptographic technology, consensus algorithms, and wallet technology, featuring decentralization, anonymity, and traceability.
(1) Legal Digital Currency
Legal digital currency is a type of digital currency issued and managed by the state or central bank, representing the national legal currency, which has the backing of national credit and holds the same legal status and value as traditional paper money and coins. For example, the digital Renminbi (e-CNY), currently being piloted in China, is equivalent to cash in Renminbi and is issued and managed by the People's Bank of China. The introduction of the digital Renminbi aims to enhance payment efficiency, reduce currency issuance costs, strengthen financial regulation, and promote the internationalization of the Renminbi. It enables offline payments, allowing users to complete transactions simply by touching mobile devices equipped with digital Renminbi wallets, making it convenient and efficient.
(2) Virtual Digital Currency
Virtual digital currency refers to digital currencies primarily issued by non-financial institutions, such as Bitcoin and Ethereum. They are based on blockchain and cryptographic technology, allowing for a certain degree of decentralization, peer-to-peer, and cross-border transactions in monetary exchanges. However, virtual digital currencies also have some limitations, such as poor scalability, making it difficult to reliably support large-scale, high-frequency monetary transactions, which hinders widespread use. Meanwhile, most virtual digital currencies lack strong capital support, leading to unstable value and low credibility. For example, Bitcoin's price has experienced severe fluctuations over the past few years, soaring to tens of thousands of dollars at one point, only to plummet significantly afterward. This price instability poses significant risks when used as a store of value and medium of exchange.
3. Cryptocurrency: Digital Assets Based on Cryptography
Cryptocurrency is a type of tradable digital asset or digital currency constructed based on cryptographic principles and built on blockchain technology. Cryptocurrencies use strong cryptography to ensure the security of financial transactions by verifying asset transfers and controlling the issuance of new currency as a medium of exchange. Compared to traditional financial models, the most significant feature of cryptocurrencies is their decentralization, where transaction verification and approval do not rely on central authorities (such as banks or payment companies), but instead are achieved through a peer-to-peer computer network, with consensus reached among nodes to ensure the legality of transactions.
Bitcoin is the first widely recognized and accepted decentralized cryptocurrency, with its open-source software released in 2009. Since then, over 4,000 competing coins and altcoins have emerged in the market, including alternative variants of Bitcoin and other cryptocurrencies. Ethereum is also a well-known cryptocurrency, which not only serves as a currency but also introduces the concept of smart contracts, enabling developers to build various decentralized applications (DApps) on the Ethereum blockchain. For example, some decentralized finance (DeFi) projects are built on the Ethereum blockchain, allowing users to engage in lending, trading, and wealth management activities without relying on traditional financial institutions.
The price of cryptocurrencies is highly volatile, mainly due to their relatively small market size, making them susceptible to market sentiment, manipulation by large holders, and regulatory policies. Additionally, the lack of effective regulation in the cryptocurrency market leads to issues such as information asymmetry and technological risks, requiring investors to cautiously assess risks when participating in cryptocurrency trading.
4. Stablecoins: Cryptocurrencies Pursuing Value Stability
Stablecoins are a special type of cryptocurrency, characterized by their linkage to the value of a stable asset (such as the US dollar, gold, or other fiat currencies) to address the issue of significant price fluctuations in traditional cryptocurrencies. They can be understood as the "cash of digital currencies." Stablecoins play a crucial role in decentralized finance (DeFi), providing a relatively stable store of value and medium of exchange for the cryptocurrency market.
(1) Legal Currency Pegged Stablecoins
This is the most common and mainstream type of stablecoin, with the well-known Tether (USDT) belonging to this category. The issuer of this type of stablecoin promises a "1:1 peg to the US dollar," meaning that for every stablecoin issued, there is 1 dollar in the issuer's bank account as collateral. The value of legal currency pegged stablecoins is relatively stable and can avoid significant fluctuations in the cryptocurrency market to some extent, making them widely used in cryptocurrency trading and investment. However, this type of stablecoin also carries certain risks, such as credit risk of the issuer and the authenticity and liquidity risks of reserve assets. In 2023, after the bankruptcy of Silicon Valley Bank in the United States, the issuer of USDC, Circle, faced a situation where 3.3 billion dollars were held in that bank, causing the price of USDC to deviate from 1 dollar to 0.878 dollars at one point, highlighting the risks associated with legal currency pegged stablecoins.
(2) Asset-Backed Stablecoins
Asset-backed stablecoins are not directly pegged to cash but are anchored to valuable assets, such as gold, corporate bonds, etc. The values of these assets are relatively stable, providing support for stablecoins. For example, certain stablecoins are linked to gold, and their value changes with fluctuations in gold prices. However, as gold itself has certain value-preserving properties, this type of stablecoin can maintain relatively stable value to some extent. The advantage of asset-backed stablecoins is that their value is supported by actual assets, making them relatively reliable; however, issues may arise regarding asset valuation and liquidity, which could impact the stability of the stablecoin.
5. Relationship Overview of the Four Types
Virtual currency is a broad concept that includes the virtual digital currency part of digital currency, while digital currency encompasses cryptocurrencies, and stablecoins are a special branch of cryptocurrencies. Specifically, digital currency is a more advanced form of virtual currency, utilizing advanced digital technologies for higher security and convenience; cryptocurrencies are a class of digital currency that use cryptographic technology to achieve decentralization and secure transactions, with transaction records recorded on the blockchain, making them immutable; stablecoins were created to address the price volatility of cryptocurrencies, linking their value to stable assets to maintain relative stability.
In practical applications, these four forms of currency also exhibit certain connections. For example, on some cryptocurrency trading platforms, users can purchase virtual digital currencies (such as Bitcoin and Ethereum) using legal currencies and can also trade using stablecoins. Stablecoins serve as a bridge in the cryptocurrency market, connecting the traditional financial system with the world of cryptocurrencies, allowing investors to participate in cryptocurrency trading in a relatively stable environment.
6. Investment Risks and Regulation
(1) Investment Risks
Investing in virtual currencies, digital currencies, cryptocurrencies, and stablecoins all carries certain risks. First, price volatility risk is the most prominent. Except for stablecoins that attempt to maintain price stability, the prices of the other currencies can fluctuate significantly in a short period, leading to substantial losses for investors. Second, technological risks cannot be ignored. These currencies rely on complex technologies, such as blockchain and cryptographic algorithms; if technical vulnerabilities or attacks occur, it may result in asset loss and information leakage. Furthermore, market manipulation risks are also quite common due to the relatively small markets of these currencies, where large holders or institutions may manipulate prices through large-scale buying and selling for profit. Additionally, there are policy risks, as different countries and regions have varying regulatory policies regarding these currencies, and changes in policies could significantly impact the market.
(2) Regulatory Status
Currently, countries around the world have varying regulatory attitudes toward virtual currencies, digital currencies, cryptocurrencies, and stablecoins. China has imposed strict restrictions on virtual currency trading, explicitly prohibiting the issuance and financing activities of virtual currencies, and financial institutions and payment organizations are prohibited from engaging in activities related to virtual currencies. This is due to the significant financial risks posed by virtual currency trading, which can easily lead to money laundering, illegal fundraising, and financial fraud, severely disrupting financial order. In contrast, for legal digital currencies, China is actively promoting the pilot and application of the digital Renminbi while strengthening regulation over its research, issuance, and circulation to ensure its safe and stable operation.
In the United States, regulation of cryptocurrencies is gradually strengthening. In 2025, the U.S. Senate passed the GENIUS Act, requiring stablecoins to have full reserves in U.S. dollars or short-term U.S. treasury bills, along with strict information disclosure and auditing mechanisms. This act aims to integrate stablecoins into the dollar system, reinforcing their global dominance while enhancing regulation of the stablecoin market to protect investors' interests. Countries and regions such as the European Union are also fiercely competing for dominance in the stablecoin sector, introducing relevant policies and regulations to standardize the development of the stablecoin market.
Virtual currencies, digital currencies, cryptocurrencies, and stablecoins are products of the digital economy era, each possessing unique characteristics and application scenarios. Understanding the distinctions and connections among these concepts is crucial for grasping the trends in the development of the digital economy and for rational participation in financial investment. When faced with these emerging forms of currency, investors must maintain a clear mind, fully recognize the associated risks, and make cautious investment decisions. Meanwhile, with continuous technological development and gradual market maturation, these forms of currency are expected to play more significant roles in the future financial system, and we should keep a close eye on their evolving dynamics and actively adapt to the changes brought by financial innovation.