The Difference Between Virtual and Physical Cash
What is the difference between a “traditional” currency like the United States dollar and a “crypto currency”, such as the “bitcoin”? Let’s take a look.
In a traditional currency, money is simply a promise to pay a specific amount of money for a specific type of asset (typically an ounce of gold). The asset usually carries a certain amount of risk, which is usually represented in the form of interest on debt, or currency exchange rates. In some cases, governments also impose taxes on the ownership of certain assets, which can be compared to taxes on ownership of a “physical asset”.
A “virtual asset”, on the other hand, is not physical. It is not a physical asset, it does not carry a certain amount of risk, and most importantly, it is not issued by a central bank. The currency issued by a virtual asset is not backed by anything tangible, and there is no interest to be paid on it. The only way to get your money back from a virtual asset is to “exchange it” – that is, to send it to someone else and receive payment from them. This process does not require anything tangible and typically costs nothing.
Traditional currencies, on the other hand, are issued by banks. Banks, unlike virtual institutions, have their own security measures in place to “guarantee” the safety of their currency. In fact, they usually print their own currency, which they then give out to their customers.
The security and assurance provided by traditional banks are lost when they issue their own currency. They are essentially gambling machines, which provide you with very little financial security. When they print their own currency, they do so under a variety of conditions, and it is up to you to take the time to evaluate these conditions and understand how they may affect the value of the currency.
A “virtual currency”, on the other hand, is issued by one entity alone – without the need for traditional banks – and is backed by nothing tangible. The underlying asset for a virtual asset is the technology that creates it, which is known as the “blockchain”. The technology is similar to the infrastructure used to create the Internet, because it maintains a network that allows the transfer of information between computers.
The reason why this digital asset is referred to as “virtual” is that it operates entirely online. The only thing to be sure of is that the asset is issued through a network of computers that are “on-line”. These computers can not only hold the key to the issuance of the currency but also process transactions and hold other data about the currency. They are like online stores that can exchange money and other assets among users at any time.
The difference between “physical”virtual” is important because this distinction affects the way you can protect yourself against a “virtual asset”. When a physical asset is stolen, or the issuer of the asset fails to fulfill their end of the deal, you can “exchange” that asset. If you do not have that same assurance, you will lose all of the money that was involved in the issuing of the asset. You may have access to your money, however, as long as you can find another issuer that can “fill in the gap” – that is, if you can find a way to get your money back.
In contrast, if a traditional bank fails to keep its end of the deal, they cannot “exchange” any digital asset. If you lose your money due to a failed transaction, you have no recourse. Since you are unable to “exchange” your money in this case, you have lost everything that was involved in the issuing of the asset.
This is why many people are skeptical of investing in “virtual” currencies such as, for instance, the Bank of England or the Bank of Canada. These institutions may offer a variety of “asset-backed” currencies.
There are ways to “trade” the digital asset known as “Bitcoin”, however. If you know how to “trade” them, you can trade your “real money” for their virtual currency.