Digital Currency

Digital currency is money that exists only in digital form. There are no physical coins or banknotes; balances and transactions live entirely on computer systems.

Key features of digital currency:

• Stored in digital wallets or in online accounts rather than as cash in a pocket.
• Transferred over a network (typically the internet) to pay for goods, pay other people, or move money between countries.
• Recorded electronically: every payment is a database entry rather than the physical movement of notes or coins.
• Often very fast: a payment can move from one side of the world to the other in seconds.

Some digital currencies are centralised (one trusted authority, such as a bank or a payment company, runs the whole system). Others are decentralised (no single authority; many computers around the world keep copies of the ledger and agree on it together).

Cryptocurrency

Cryptocurrency is a type of digital currency that uses cryptography to secure transactions and that runs on a decentralised network rather than under any single authority.

Common examples: Bitcoin, Ethereum, Litecoin.

Cryptocurrency features:

• Cryptographic security: each transaction is signed with the sender's private key, so only the legitimate owner of the funds can spend them.
• Public ledger: every transaction is recorded openly on the blockchain (covered in section 3), so anyone can verify the history of every coin.
• Decentralised: many computers ("nodes") around the world hold copies of the ledger; no single bank, government or company controls it.
• Pseudonymous: identities are represented by wallet addresses (long random-looking strings), not real names; the addresses are public, but real-world identities behind them often are not.

Exam note: in exam answers, "digital currency" and "cryptocurrency" are usually treated as the same idea. In real life cryptocurrency is just one kind of digital currency (centralised bank-issued digital currencies also exist), but this distinction is not tested.

Volatility

Cryptocurrencies are famously volatile: their value in dollars or pounds can rise or fall sharply over short periods. A coin worth £100 one week may be worth £150 or £60 the next. This makes them risky to hold as an investment and tricky to use for everyday pricing.