What Is a Virtual Currency?

By Adam Levy – Updated Dec 13, 2024 at 9:49 AM

Key Points

Virtual currencies offer rapid, low-cost transactions without physical manufacturing costs.
Cryptocurrencies, a form of virtual currency, allow direct transactions eliminating intermediaries.
Virtual currency markets are unregulated, posing risks of scams and hacker attacks.

If you've ever used an in-game currency like Second Life's Linden or bought a plane ticket with frequent flyer miles, you've used a virtual currency. A virtual currency is a type of digital currency that only exists in electronic form and includes many types of currencies, including cryptocurrency.

Virtual currency can provide several advantages over fiat currency for businesses and individuals, and they exist across various industries, including gaming, travel, and finance.

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About the Author

Adam Levy is a contributing Motley Fool stock market analyst covering technology, consumer, and financial stocks and how policy, economic, and consumer trends shape personal finance, Social Security and retirement savings. Before The Motley Fool, Adam was a financial advisor at Edward Jones. He studied finance and electrical engineering at Carnegie Mellon University.

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Adam Levy has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.

Pros of virtual currency

Faster transactions. Virtual currencies are designed to clear transactions almost instantly. There's no need to wait for a clearing house or cross-border remittance service to ensure the money ends up where it's going. Even a slow cryptocurrency transaction is confirmed within an hour, whereas it typically takes days to settle other digital currency payments.

Lower-cost transactions. The cost of transacting in virtual currency can be free, which saves businesses and consumers money. In the case of sending money internationally, using cryptocurrency is often less expensive than traditional services.

No manufacturing or storage costs. Since virtual currency is strictly electronic, there's no cost to produce a physical representation of the currency as there is with most central bank-backed currency.

Improved cash flow for businesses. Businesses can sell their virtual currency to increase cash flow without having to provide any goods or services in return. For example, airlines sold frequent flyer miles to credit card companies in 2020 to bolster cash flow during a time when travel plummeted.

Eliminate intermediaries. Cryptocurrencies provide a decentralized monetary system that allows two transacting parties to directly connect instead of relying on a bank or third party as an intermediary. This may be preferred in some instances.

Cons of virtual currency

A target for hackers. As virtual currencies rise in popularity, hackers can find significant amounts of value stored on computers. Cryptocurrency exchanges have been targeted, as have travel loyalty programs. If a hacker gets access to virtual currency, it can be tough to get back.

Unregulated and unprotected. Virtual currency isn't subject to regulations, which means consumers have little recourse if transactions go awry. This makes virtual currencies a breeding ground for scams.

Hidden costs. While the transaction costs of virtual currencies are typically very low, there are hidden costs to some virtual currencies. For example, the Bitcoin network consumes a massive amount of energy. If you keep your cryptocurrency on an exchange, it may have custody costs.

Easily traced. Since virtual currency can only be used electronically, there's always a paper trail showing the transactions made. That's true even with cryptocurrency, which is anonymous but still traceable. Using paper money allows for truly anonymous and untraceable transactions.

Subject to price swings and devaluation. Virtual currency doesn't always hold its value stable to your preferred fiat currency. Cryptocurrency is known to be extremely volatile. Meanwhile, travel loyalty programs periodically decrease the value of their points and miles to adjust for inflation or to reduce their outstanding liability.

The future of virtual currencies

Virtual currencies are still developing. Cryptocurrency, in particular, is a nascent industry with the potential for blockchain technology to fuel a lot more business and financial applications. Businesses may adopt more virtual currencies to foster greater customer loyalty, and central banks are exploring the potential for cashless virtual currencies.

As consumers begin to show greater trust in virtual currencies, we should see broader applications going forward.

What Is a Virtual Currency?

Key Points

Investing in Cryptocurrency in 2025

How Is Cryptocurrency Taxed? (2025 IRS Rules)

Is Cryptocurrency a Good Investment?

What Is the Next Cryptocurrency to Explode in 2025?

About the Author

Our Guides

Premium Investing Services

Investing in Cryptocurrency in 2025

How Is Cryptocurrency Taxed? (2025 IRS Rules)

Is Cryptocurrency a Good Investment?

What Is the Next Cryptocurrency to Explode in 2025?

Types of virtual currencies

Closed

Virtual currencies with currency flow in one direction

Convertible

Virtual currency, digital currency, and cryptocurrency

Pros of virtual currency

Cons of virtual currency

The future of virtual currencies

What makes up a virtual currency?