Virtually worth it: are digital currencies a serious form of commerce or just frivolous froth?

254207_10151494730974323_838135451_nOver recent days, we have seen a lot of headlines about virtual currencies their risks and pitfalls. What’s the truth?

The truth is that most virtual currencies are high risk. They are often fledgling, unproven and used by a small group of users for a highly targeted and specific purpose. A good example is airmiles, which are usually tied to a specific airline to increase loyalty and frequency of flights. Airmiles are a real currency – they are tradable for something that has value, a flight – but are not usually exchanged outside the specific sphere of usage with the airline.

However, there are other currencies appearing that appear to have more serious usage. For example, the Amazon Coin. The Coin was announced in February 2013 for usage on the Amazon Kindle and in May, Kindle users received an email giving them 500 coins, worth $5, to use on their tablet. Again, this is a possible virtual currency that has potential, especially if Amazon expands its usage outside the Kindle to be tradable across all Amazon’s goods and services. Whether this will happen remains to be seen, as most equivalents of the Amazon Coin have disappeared as fast as they were launched. Facebook Credits and Microsoft Points being cases in point, as these were launched to encourage gaming but both companies found that users did not understand or like the alternative currencies restrictions or perceptions, and preferred to use real money for gaming.

Even where we have seen gaming growth in virtual currencies, such as the flourishing economy of the virtual world Second Life in the mid-2000s, the operations have been flawed. In Second Life’s case it was an issue of regulation. The virtual world allowed people to convert real US dollars into virtual Linden dollars, which could then be used to buy virtual goods and services.

A great example of its usage was in a virtual art shop you could buy virtual paintings to hang in your virtual apartment with your virtual currencies. If you liked the other world artwork that much, you could also buy the real painting from a real art shop to hang in your real apartment using your real money.

This was why Second Life gained so many headlines, because it straddled the real and virtual worlds of commerce, but the whole thing failed when Second Life’s banks found themselves challenged by withdrawals. This occurred in 2008, after the organisers of the virtual world banned gambling in accordance with US law. The unintended consequence of the ban was a run on bank deposits at the virtual world’s banks which almost inevitably disappeared. This is because each bank was being run by individuals, and so these individuals just deleted their accounts. The loss of trust in virtual currency meant that the Second Life’s support disappeared and the virtual world’s economy has never fully recovered since.

As can be seen, there are many challenges with virtual currencies, but the one that has gained the most headlines is Bitcoin, which is starting to show serious gains in credibility and growth. Why? Because Bitcoin is a fully secure, encrypted currency that can be traded globally without friction or control from central authorities. It is like a Wikicoin for the Wikileaks generation. Will Bitcoin overcome the confusion and distrust of its predecessors? So far, yes. For that reason, you should take Bitcoin seriously, especially as it is the first fully tradable global digital currency that works. Whether it will continue to work as governments try to squeeze the currencies usage is the biggest barrier and concern for its future but, for now, if you were betting on any future virtual currency, then Bitcoin has to be the one to back.

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