The words “digital assets” and “digital currency” are mostly used interchangeably – so much so- that these often imply the same thing.
But is this true?
Do digital assets and digital currencies imply the same thing?
Confusions are mounting up around these two terms, especially because both the terms embody the word “digital” and both have got something to do with money. However, the reality could be slightly different.
The post below offers a brief on digital currencies and digital assets, and the difference between the two.
Are these two the same?
Technically, digital currency and digital assets are not the same things. Yes, there are similarities between the two- both are assets and belong to the virtual world. The other aspect is that these both serve as modes of payment. However, the functionality of digital assets stretches beyond payment affairs.
Digital currency, in simple words, refers to the virtual representation of fiat currency. The online representation of 1 USD will be the digital currency of USD. Like physical fiat currency, digital currency is issued by central banks and they serve as “currency” only.
As these are placed on the digital plane, their transactions are executed online. It means you can’t physically hand over 1 USD digital currency to a shop the way you can do with a 1 USD physical bill. For the 1 USD digital currency, the entire process has to be conducted online.
As digital currencies are issued by centralized authority, the transactions will be processed through an intermediary, such as a central bank.
These are assets that are developed in the digital world and they operate mostly on a digital plane. The major difference between digital currency and digital assets is that the “assets” are not issued by a centralized authority. And, hence these instruments cannot come under the category of “assets”.
As digital assets are not issued by a centralized authority, unlike digital currency, these assets operate independently.
In other words, digital asset transactions do not involve processing by an intermediary. There is more of a P2P or “direct” approach when it comes to transaction of digital assets.
The most significant example of digital assets is cryptocurrency.
Cryptocurrency is the most popular blockchain application that is backed by cryptography technology. Crypto can serve as payment mode as well as a store-of-value.
You can use cryptocurrency as a payment in almost all industries out there. As of now, over 15,000 businesses accept cryptocurrency as a payment.
Then, cryptocurrency has emerged as a highly coveted investment asset today. One of the popular investment strategies in the cryptocurrency world is HODLing.
In this case, investors buy crypto when the prices are low and then keep them on hold for a long period of time- extending for up to a few years.
The crypto industry is growing with each passing year- HODLing offers a great opportunity to sell off the cryptos on hold at high prices after a few years.
Questions might arise as to why cryptocurrency cannot be called a “digital currency” even when there is a mention of “currency” in the term. It’s simply because cryptocurrency is not issued by any centralized authority the way fiat currency or digital currency is.
The official definition of “currency” includes an asset that has been authorized and issued by a centralized authority. Cryptocurrency is not issued by any centralized authority and operates in a decentralized environment.
Each crypto project is an independent development and each crypto transaction follows a P2P approach. You will be able to buy and sell cryptos through crypto exchanges.
It’s to note here that Bitcoin is now acknowledged as a “currency” in two countries. It’s because BTC has received legal tender from these two countries. BTC is co-existing as a legit currency alongside the national currency of these two countries.
Added to cryptocurrency, NFT is another crucial asset that is ruling the digital asset world today. These can be defined as Non-fungible tokens that are absolutely exclusive – there cannot be two same NFTs.
Akin to cryptocurrency, NFT is also a blockchain application backed by cryptography. NFTs are mostly trading and investment assets that can be used as a staking instrument too.
In fact, every single NFT in an NFT collection is unique. However, there is a major difference between NFT and cryptocurrency- while NFT is non-fungible, cryptocurrency is fungible. You can have two 1 Ether that will carry completely equivalent value.
As NFTs are developed in a decentralized environment, NFT transactions also follow a direct P2P approach. There is no centralized bank to process the NFT transactions.
Also Read: buy btc with fiat
Summing up the differences
Here is a sum up of the key differences between digital currency and digital assets-
First, digital currency is a currency since it is issued by a centralized bank. It represents fiat currency in the digital space and is able to carry all the functions that are possible with physical fiat currency.
On the other hand, digital assets have not been issued by any kind of centralized authority. As a result, the value of digital assets is the same in every country of the world. But digital currency belongs to a specific country. As a result, the value of a digital currency varies from one country to another.
The other major difference is that digital currency operates in a centralized environment where transactions are processed by intermediaries like banks. But, digital assets operate in a decentralized environment and do not involve middlemen and intermediaries.
You won’t have to pay middlemen fees with digital asset transactions. As a result, digital asset transactions are always faster and more economical in comparison to that of digital currency.
This is one big reason why crypto assets like Bitcoin have received the status of legal tender in countries where a large niche of the population still falls under the unbanked category.
The decentralized nature of digital assets like crypto has helped a lot, especially in regard to international transactions. Crypto-based cross-border transactions are way faster and more affordable than fiat-based ones.