In a short period, the world has witnessed a tremendous transformation in the concept of digital currencies; they have evolved from being just a new idea to a practical application and a competitive option to traditional currencies. They are now directly impacting central banks and the global economy as a whole, offering new investment opportunities that did not exist before. Furthermore, it is expected that reliance on them will significantly increase across various sectors in the future, becoming part of daily and professional life.
To learn more about the concept of digital currencies, their main types, and how to invest in them, continue reading:
What are digital currencies?
Digital Currency, also known as electronic currency, refers to virtual currencies that exist only in digital form without any tangible physical presence; they can be accessed or used only through digital wallets or dedicated systems and networks online, unlike banknotes and coins that have specific physical characteristics and can only be used or transacted when physically possessed.
It is noted that there are several types of digital currencies, each with specific characteristics and uses; some are "centralized" meaning they are issued and overseen by an official central authority, such as central banks or governments, while others are "decentralized" meaning they are not subject to any official central authority and are created by private entities. Some digital currencies can be invested in and traded for profit due to their large market value, while others are limited to commercial transactions for paying for goods and services from around the world quickly, within seconds.
The World of Digital Currencies: Explore Four Main Types
In general, there are four main types of digital currencies, as follows:
Cryptocurrencies
Initially, it can be said that all cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies; because cryptocurrencies operate based on blockchain technology, which is simply similar to an encrypted database that allows users to create a reliable record of their transaction data and complete it directly between the two parties of the transaction; the sender and the receiver for instance, without the need for a third supervising entity, making it secure and largely protected from manipulation or fraud.
Some prominent examples of cryptocurrencies include Bitcoin, which was launched in 2009, and is the first and most well-known cryptocurrency to date, followed by Ethereum and Litecoin.
Central Bank Digital Currencies
Central Bank Digital Currencies (CBDCs) are digital versions of the official currencies of a country, issued by its central bank, which oversees their use. They resemble the physical banknotes or coins of that country, but they are safer and faster for completing payment transactions in local or cross-border electronic transactions at a low cost, without the need for intermediaries like banks or credit card companies.
It is worth noting that the United Arab Emirates is considered one of the leading countries in activating this feature; the Central Bank of the UAE launched the Central Bank Digital Currency Strategy, known as the "Digital Dirham," in 2023. This is one of nine initiatives adopted by the state in the Financial Infrastructure Transformation Program, which aims to accelerate the digital transformation in the financial services sector and support digital transactions in general.
Stablecoins
Stablecoins are considered one type of cryptocurrency, but they are designed to have a stable value linked to fixed assets, such as traditional paper currencies or gold, making them more stable and less volatile in the market compared to traditional cryptocurrencies like Bitcoin. Some prominent examples of stable digital currencies include Tether and Binance USD.
Virtual Currencies
Virtual currencies are a type of unregulated digital currency; they are not subject to specific laws, central authority, or any regulatory body. Their developers are the only ones who issue and control them, and they are used by members of a virtual community or in electronic games.
How to Invest in Digital Currencies: Basic Methods and Tips
Cryptocurrencies are characterized by being decentralized; they are issued and overseen by private entities and do not follow the central bank or any specific official entity, thus they are not affected by inflation or government taxes, making them safer and more stable than digital currencies issued by central banks. Their market value can change rapidly over a short period, unlike other types of digital currencies, allowing for potentially large profits.
There are several ways to invest in cryptocurrencies, the most notable of which is to buy the currency directly or a portion of it if its total value is very high, such as Bitcoin, through one of the dedicated trading platforms, then hold it and benefit from its value increase over time.
Investment can also be made through public companies that have investments in digital currencies, which is a suitable method for investors who do not wish to buy the cryptocurrencies themselves; they can buy shares in companies that own cryptocurrencies or rely on them for their operations. If there is no desire to invest in those companies, one can invest in exchange-traded funds (ETFs) dedicated to digital currencies; they provide diversification in investment through a basket of different digital currencies, thus reducing risks, and they are an easy method that does not require complicated technical knowledge.
