A guide to the different types of digital currencies

Debit cards transformed the way many people handle money, paving the way for digital transactions. Debit and credit cards generally represent a form of physical money, like the U.S. dollar.

However, not all money can be held in one's hand — we're talking about digital currencies.

Leaping from cold, hard cash to the new types of digital currencies can feel a bit like you've stepped through the looking glass. The concept of money is transforming. From the Bitcoin frenzy to government-backed digital currencies like China's e-CNY, we're entering an era where your dollar bills might live on your phone. After all, if physical money is a medium of exchange, a digital counterpart serves as its electronic currency equivalent.

But how do these new forms of digital money work?  Dive down the rabbit hole, and we'll be your white rabbit, guiding you through the twists and turns of this financial wonderland.

What are digital currencies and how do they work?

Imagine money that lives entirely online. That's the basic idea of digital currencies. Instead of coins and bills, with this type of currency, you have digital tokens stored in an electronic wallet via an app or online account. These tokens in electronic wallets can be used to buy things online or even in some stores, just like regular cash. Of course, many people also hold them as investments.

The big difference is that it's not tangible — you can't hold a digital currency in your hands the way you could hold a dollar, euro, or other physical currency. There may also be no bank involved or physical form representation of that currency (like with a debit card, where your bank account balance is represented in dollars or whatever the local currency is where you bank).

Transactions are secured with fancy computer code and recorded on a public record that everyone can see. The networks are so vast that it's practically impossible to tamper with the digital ledger.

Here's some important lingo to understand:

• Blockchain network: A secure system that underpins many digital currencies, responsible for verifying and recording transactions.

• Digital wallets: Special apps or websites that give you a personal wallet address where you store your digital money.

• Cold storage: Storing virtual currency offline on a device not connected to the internet for extra security.

• Central authority: Some digital currencies have a governing body (like a bank), while others operate without a central figure in charge and instead rely on computer code.

• Market capitalization: The total value of a digital form of currency (how much all of the existing "coins" are worth altogether).

Types of digital currencies

Digital cash is here, but it's not a one-size-fits-all situation! In fact, it's more of a many-sizes-fit-all situation — and there are a lot of moving pieces to understand. Here are some of the most popular types of digital currencies.

1. Crypto

Cryptocurrency is a major piece of the digital currency world. Unlike traditional currencies issued by governments, cryptocurrencies operate on blockchain technology. This technology enables secure and transparent transactions on a public ledger.

Investing in cryptocurrencies is often speculative and can be quite volatile, which means the value of your crypto assets can swing dramatically. Some corners of crypto-land are kind of like the Wild West, so you have to be on guard for scammers and other bad actors.

Not all cryptocurrencies are the same. Here are a few of the most popular of this electronic form of money:

Stablecoins

Stablecoins are designed to offer the stability of traditional money with the flexibility of a digital asset. Pegged to stable assets like the U.S. dollar or gold, stablecoins aim to keep price fluctuations to a minimum.

They can be used for things like securely sending money across the globe or making online purchases.

Bitcoin

Bitcoin, the OG cryptocurrency, is the poster child of the digital finance revolution. It's a whole new way of thinking about money. Bitcoin's decentralized nature means it operates outside the control of central banks, offering a global, peer-to-peer payment system. Most hardcore Bitcoiners fall somewhere between those who believe it's a superior payment system and those who think it's a kind of digital gold. 

Here's the twist: Only a limited amount will ever exist — 21 million Bitcoins total. To keep things safe and keep track of who owns what, a network of computers around the world solves complex puzzles. The first computer to crack the code gets rewarded with some newly minted bitcoin — that's mining! This keeps the system running and limits the creation of new coins, making Bitcoin scarce like real gold.

Then, there are the HODLers (Hold On for Dear Life) hoping to make bank as the price per coin goes to the moon. Bitcoin can be purchased through a cryptocurrency exchange like Coinbase and buy Bitcoin with any dollar amount.

Or, you can invest via a spot Bitcoin ETF, a kind of crypto asset that brings the king crypto into the traditional investment fold. This allows investors to buy into Bitcoin through the stock market, offering a bridge between the old and new financial systems and making it easier than ever to get a piece of the digital currency pie.

Ethereum

Ethereum is not just a cryptocurrency — it's a platform for building decentralized applications (dApps). Its native currency, Ether, powers transactions on the network. But Ethereum's real magic lies in its smart contracts — self-executing contracts with the terms of the agreement directly written into code. Sort of an "I give you this, you pay me X." 

This opens up possibilities from creating decentralized financial services to launching new cryptocurrencies. In fact, a boatload of crypto tokens are built on the Ethereum network. Ethereum is not just a form of currency — it's a whole ecosystem, enabling a future where apps are more secure, transparent, and free from central control.

2. Virtual

Unlike cryptocurrencies, virtual currencies often exist within controlled environments and are governed by private entities. They represent the customization of digital money, tailored to fit the unique needs and dynamics of their specific virtual worlds. 

Frequent flyer miles

Every time you fly with a specific airline (or its partners), you earn miles. Think of it like a rewards program where the prize is free flights! You can also earn miles by spending on special airline credit cards or shopping with their partners.

You can generally sign up on an airline's website, and when you buy flights, you earn a specific number of points per mile flown.

Once you have a bunch of miles, you can use them to book flights, upgrade your seat, or even buy stuff from a dedicated online marketplace.

Gaming tokens

Gaming tokens are basically digital currencies used inside specific games. Think of them like arcade tokens but for online games. Here's how they might work:

• Buying stuff: You can use tokens to buy in-game items like new outfits for your character, power-ups, or fancy weapons.

• Creating things: Some games let you use tokens to create unique items and trade them on a marketplace.

• Rewards: You might earn tokens for playing the game well, winning tournaments, or completing quests.

• Governance: Some tokens even give you a say in how the game develops!

Getting started with gaming tokens depends on the specific game:

• In-game purchase: You might be able to buy them directly within the game.

• Crypto exchanges: Some tokens are listed on exchanges, just like Bitcoin.

• Earning them: Playing the game is often the primary way to earn tokens.

3. CBDC

Central Bank Digital Currencies (CBDCs) represent a groundbreaking fusion of traditional banking and digital innovation. Unlike decentralized cryptocurrencies, a country's central bank issues and regulates CBDCs, offering a digital alternative to physical cash. CBDCs leverage digital technology and aim to streamline financial systems, enhance monetary policy implementation, and increase financial inclusion, marking a significant evolution in how national currencies are conceived and used.

China's digital yuan (e-CNY)

China has a head start on digital money with its e-CNY. It's like a super high-tech version of their regular yuan, but you keep it on your phone instead of jingling coins in your pocket. The e-CNY aims to boost the efficiency of transactions and reduce the costs associated with money circulation. As the first major economy to pilot a new digital currency, China's ambitious project underscores the potential of CBDCs to transform financial landscapes, offering insights into a future where digital and physical currencies coexist harmoniously.

e-CNY is meant to be a spending currency, not an investment, and requires a Chinese bank account to use it. Think of it as a glimpse into the future of money. It's still being tested, but China aims to make e-CNY a convenient and secure payment method.

The Bahamas' Sand Dollar

Just like regular cash, the Bahamas' Sand Dollar is officially backed by the Bahamian government. However, it lives on digital devices instead of a wallet. It's one of the first countries to introduce a CBDC, so bankers around the world are surely watching to see how this new currency experiment turns out.

Some of the intrigues of a CBDC and the Bahamas' digital dollar include:

• Faster and safer: The Sand Dollar makes paying for stuff super quick and secure.

• For everyone: It doesn't matter how old you are, where you live, or if you have a fancy bank account — the Sand Dollar is designed to work for all.

• Good financial vibes: The whole idea is to make managing money easier and cheaper across the Bahamas, opening up more options for people. For example, the Sand Dollar creates a financial history that makes it easier for people to get microloans.

• Less dodgy business: The Sand Dollar reduces the need for cash, which helps to crack down on things like money laundering and counterfeiting.

Make informed decisions about your finances

The world of money is changing fast, and it's not just about coins and bills anymore. To navigate digital currency, you need to understand the different kinds available — from cryptocurrencies to government-backed ones. Whether you're thinking about investing in Bitcoin, playing games with in-game tokens, or keeping an eye on what governments are doing with their official digital cash, do your homework first! 

This may be the financial future your kids will be stepping into. Knowing the basics helps you and your kids make smart money choices. Or else they'll be the ones teaching you! Greenlight's investing app for kids is there to kick off their investment journey. Remember, the future of money isn't just digital — it's about being in the know.