Digital Currency
Internet and Its Uses
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 (no single authority; many computers around the world keep copies of the ledger and agree on it together).
Common exam question
Features of digital currency
Question: Give two features of digital currency, or complete a description of it using terms from a word box (1–2 marks).
Asked in 2 of the 17 papers. The feature credited every time is that a digital currency only exists electronically: it has no physical form, so it is held and spent through computer systems rather than as notes and coins. The other credited features are that it can be centralised or decentralised and that it is usually encrypted. Read the stem before answering: one paper states that digital currencies are tracked using digital ledgers and then asks for two other features, and the ledger is not on its credited list.
In the gap-fill the wanted word is "physically" (a digital currency does not exist physically), with "virtually" in the word box as a distractor. The specimen paper's one-mark definition wants the same idea: a currency that exists in electronic form only.
Cryptocurrency
Cryptocurrency is a type of that uses cryptography to secure transactions and that runs on a 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 (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: the papers only ever say "digital currency" and never use the word "cryptocurrency". 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.