What Is a Digital Coin?

Cryptocurrency has grown from a digital novelty to a trillion-dollar technology with the potential to disrupt global finance. This money is digitally backed by blockchain, an unchangeable record that tracks assets and transactions. Third parties are eliminated through distributed ledgers; blind signatures hide transacting parties’ identities; and zero-knowledge proofs encrypt transaction details.

A cryptocurrency can be mined, which means that users’ computers power computational algorithms to verify and create new coins. Users can then exchange these currencies for goods and services. In contrast, traditional currency is produced by the government and backed by the creditworthiness of the financial institution that backs it.

Bitcoin was the first cryptocurrency, but there are now thousands of others that vary in price and function. These digital monies are unregulated and can be used for online transactions or as investments. Some also serve as a store of value or are backed by real-world assets.

Many people are drawn to cryptocurrencies because they can be transferred relatively quickly and cheaply from one party to another, even across borders. This capability could help people in countries with weaker banking infrastructures, and it might offer more privacy than traditional bank transfers.

But a major downside of digital money is its vulnerability to hackers. This is particularly true for blockchain networks, which use encryption to secure transactions but are not as resilient as existing systems. A successful hack could bring a blockchain network down and cause a loss of value or information.

It’s also not always clear who is behind a digital currency, which can make it harder to track criminal activity. For example, ransomware attacks, in which hackers shut down computer networks and demand payment in a virtual currency, have increased over the past few years. And drug cartels are increasingly incorporating digital money into their activities to hide and launder profits.

Stablecoins are an emerging form of digital money that promises to solve some of these problems. They are based on blockchain technology and cryptography but are designed not to fluctuate as much as traditional cryptocurrencies. Some stablecoins are backed by the dollar or gold; others track an index such as the S&P 500 or Nasdaq Composite. Stablecoins are not widely available yet, but companies such as Tether and Meta Platforms are working on them.

In addition to cryptocurrencies, blockchain-based technologies are enabling other kinds of digital money. For example, “smart contracts” are code that runs on a blockchain and can automatically execute transactions. For instance, a smart contract can be set up to automatically buy or sell a cryptocurrency at certain intervals. This may be useful for companies that want to automate trading or for people who wish to avoid the high fees associated with a traditional broker. Smart contracts are still being tested, however, and it remains to be seen whether they will become a mainstream tool.