How to Keep Bitcoins Safe What is an Altcoin? How to Get Bitcoins Is Bitcoin Legal? This article originally appeared in Bitcoin Redeem bitcoin Issue 22.
The reality is that virtual currencies are a type of digital currency, meaning that all virtual currencies are digital, but the converse is incorrect. Cryptocurrencies like Bitcoin are another type of digital currency, but they are in a separate category from virtual ones. Digital currencies are exactly what they sound like: currencies stored and transferred electronically. Real digital currencies have been around for some time. One of the first was E-gold, founded in 1996 and backed by gold. Both services were centralized, reputed to be used for money laundering, and inevitably shut down by the US government. Based on offshore tax havens beloved by the wealthy and unscrupulous, early digital currencies gave the industry a bad image.
Virtual currencies, by contrast, are intended to be light-hearted and fun: they, too, have been around far longer than cryptocurrencies like Bitcoin, and are used primarily for online entertainment in virtual worlds. Pretty much all virtual currencies are centralized, with control of the money supply resting in the hands of the virtual world’s developers. Most massive multiplayer online games hire trained economists for this sort of thing, and their power dwarfs that of the American Federal Reserve. When they want to increase the money supply, they add some new quests with increased gold rewards. Blizzard does this primarily to avoid legal headaches, as their currency would incur taxes if the government recognized it as having actual value. Other online game developers want to promote a deeper and more dynamic virtual economy, such as the team behind EVE Online. EVE, if you’re not familiar, is a very complicated online space-faring game, replete with drop-down menus and statistics.
Players construct corporations and empires spanning galaxies, in a massive game-world where almost the entire experience is built by players on top of existing economic infrastructure. The EVE Online developers still issue ongoing updates as players discover exploits that throw the economy out of whack, and maintain certain restrictions. While all items can be freely traded, EVE still has to maintain that its virtual currency has no real value. Technically, you cannot buy ISK with dollars, but you can buy game time cards, which can be traded in-game for ISK. At the far end of the spectrum are virtual worlds like Second Life, an online life simulator developed by Linden Labs. Linden Labs tolerates the exchange of Linden Dollars and real-world currency, but they still control the supply of Linden Dollars. Linden Dollars are still a virtual currency because Linden Dollars are practically never redeemed directly for real goods or services.
Other digital currencies, meanwhile, are redeemed for physical goods and services all the time. Cryptocurrencies are designed to be capable of replacing cash, and there’s nothing virtual about that. The other obvious factor differentiating cryptocurrencies like Bitcoin from other digital currencies is that they’re generally decentralized. Bitcoin runs on a network of participating computers that agree to the same standard.