We may hear some Pro traders refer to some of our cryptos as convertible currencies. Which we already know is in virtual form. But this means there refer to it as convertible because you can easily swap it with other cryptos or fiat currencies. Or does it mean something else? Learn what is convertible virtual currency on this page and grow your knowledge of different types of currencies.
Meanwhile, know that convertible currencies have great differences from state-backed currencies like the dollar or the euro. As they are virtual, they have no physical presence and no government issuance.
Carefully read this page to see more about convertible virtual currency and even other types of currencies.
What Is Convertible Virtual Currency?
Convertible virtual currency consists of unregulated digital currencies you can use as a substitute for real and legally notable currency even though it does not have the status of legal tender. One can easily exchange convertible digital currencies for fiat currencies such as dollars via cryptocurrency exchanges.
Furthermore, as defined by the Financial Crimes Enforcement Network (FinCEN) convertible virtual currency serves as “a medium of exchange that runs as a currency in some platforms, but does not have all the attributes of real currency.”
A convertible virtual currency usually has a value that you can measure with real money. However, its abilities to be exchangeable make it convertible. Meanwhile, you cannot exchange all virtual currency for legal tender. Hence, why you cannot refer to all virtual currencies as a convertible.
Additionally, a feature of convertible virtual currencies making them appear similar to state-backed currencies includes their tax liability. At least in the US, the sale or other exchange of virtual currencies, the use of VCs to pay for goods/services, or holding VCs as an investment, generally has tax consequences.
How Convertible Virtual Currency Works
Convertible virtual currency works in contrast with non-convertible currencies (or closed virtual currencies). Unlike non-convertible currencies, you can use convertible virtual currency in external commerce or directly exchangeable for other currencies, such as within a video game environment.
The convertible virtual currency appears as a typical example of how technological advances have driven disrupting changes in the traditional way of doing things across the globe.
Types of Convertible Virtual Currencies
The most common form or example of virtual currency remains bitcoin other examples includes ether and XRP. Bitcoin operates on a decentralized peer-to-peer network that utilizes blockchain technology to avoid fraud and control the supply of money. Contrary to traditional currencies where the central banks and treasuries of states regulate the money supply by printing money and taking it out of circulation. Thus, increasing and decreasing interest rates on borrowing, and prosecuting counterfeiters.
You can convert virtual currency for cash through online exchanges or brokers. For instance exchanges like Coinbase and Bitstamp allows users to exchange their bitcoins for their local currency. The bitcoin holder can make a sell order like they should if making a trade with a securities broker. The “sell order” will include the quantity of bitcoin they want to sell off and the price per coin. When the order ticks, the user’s account will receive credit in the local currency.
Furthermore, you can also exchange Bitcoin for real currency using bitcoin ATMs which you can only find in selected countries. While it may take a couple of days for online exchanges to perform euro or dollar transfer to a user’s account, bitcoin ATMs take only seconds to complete the transaction.
Additionally, you can also find centralized convertible virtual currencies. For example, the Linden dollar Includes a centralized virtual currency solely used in a virtual world called Second Life. The “Second Life” consists of a social game with a virtual economy where players trade goods using Linden dollars. Players convert their real money (e.g., US dollars) into Linden euros at the game’s official currency exchange site known as LindeX.
Other Types of Virtual Currencies
#1. Non-convertible (or closed) virtual currency
Close virtual currency intends to focus on a specific virtual domain or the world. An example includes Massively Multiplayer Online Role-Playing Game (MMORPG) or Amazon.com, which you cannot exchange for fiat currency.
#2. Centralized Virtual Currencies
Centralized virtual currencies possess a single administrating authority that issues the currency. The authority also establishes the rules for its use, maintains it as a central payment ledger, and also has the power to redeem the currency. However, the exchange rate of centralized virtual currencies may either be floating as determined by supply and demand or pegged which implies bathing at a fixed set value. Presently, the wide majority of transactions include centralized virtual currencies.
#3. Decentralized Virtual Currencies
Decentralized virtual currencies involve distributed open-source, math-based peer-to-peer virtual currencies having no central administrating authority, and also no central monitoring or oversight. Examples include cryptocurrency tokens and coins.
Cryptocurrency refers to a math-based, decentralized convertible virtual currency protected by cryptography. It depends on private and public keys to transfer value from one person to another. While each transaction must be cryptographically (smart contract) signed each time it is transferred.
Altcoins refers to math-based decentralized convertible virtual currency too. But they includes those other than bitcoins, the original such currency. Some examples include Ripple, PeerCoin, Lite-coin
Frequently Asked Questions About What is Convertible Virtual Currency
What is virtual currency?
Virtual currency (VC) Includes types of digital currencies representing their value only in a digital format, and also active in virtual communities. In most countries, people can use VC as a medium of exchange, but not recognized as a legal tender status.
Is virtual money legal?
Although the government or central banks don’t issue or control virtual currency in most countries as a legal tender. But, according to IRS protocols, virtual money is taxable under the law as any other taxable transaction.
Is virtual currency a good investment?
The virtual currency market may be highly volatile and risky. It still yields great profits. Thus, the higher-risk scenario also points to higher returns. For example, bitcoin prices crossed $1,000 in 2017 and attained a level greater than $60,000 in 2021.
Finally, if you have had any experience with crypto or any virtual convertible currency, you will know they don’t comprise a digital version of a fiat currency. Meanwhile, they serve great purposes and a lead edge to the development of technology.
Meanwhile, you should have learned all there is to convertible virtual currency currently. However, if you have further questions, kindly use the comment box below.