Digital Currency: What It Is, How It Works, Types, Pros and Cons

The rise of digital currencies has revolutionized the global financial landscape, making waves in markets and industries around the world. What began as a niche innovation with the introduction of Bitcoin has evolved into a complex ecosystem with various types of digital currencies now available. 

From cryptocurrencies to Central Bank Digital Currencies (CBDCs), digital currency has fundamentally changed how we perceive and conduct transactions. Understanding digital currency is crucial for anyone interested in the future of finance, whether you're an investor, a startup founder, or someone simply curious about the evolving world of digital assets.

In this blog, we’ll explore digital currency, from its definition to how it works, its types, and its potential advantages and challenges. Plus, we'll tie in insights from our podcast series Strugbits Unplugged, where we discussed the intersection of digital currency, innovation, and the future of startups. So, if you’re looking to understand digital currency better, this is the perfect guide for you! 

Table Of Contents

1. What is Digital Currency?

2. Types of Digital Currency

3. How Does Digital Currency Work?

4. Digital Currency Prices: What Affects Their Value?

5. Digital Currency Exchange: Where and How to Trade?

6. Best Digital Currency to Invest In (2025 Edition)

7. How to Buy Digital Currency: A Step-by-Step Guide

8. Creativity and Practicality in Digital Currency

9. How Effective Is Marketing for Crypto?

10. Advantages and Disadvantages of Digital Currency

11. How Startup Funding Works in the Crypto Space

12. Why Embracing Cryptocurrency Can Benefit You

13. Difference Between Seed and Pre-Seed Funding

14. What Every Young Founder Should Know About Digital Currency & Startups

15. Conclusion

16. FAQs

What is Digital Currency?

Digital currency is a form of money  that exists only in electronic or digital form. It has no physical counterpart—no coins or notes—and is accessed through computers, smartphones, or other digital devices. Unlike traditional currencies, which are issued and regulated by governments and central banks, digital currencies can be decentralized (like Bitcoin) or centralized (like Central Bank Digital Currencies, or CBDCs).

In simple terms, if traditional money is what you keep in your wallet, digital currency is what you keep in your digital wallet.

Digital currencies are designed for instant transactions and seamless transfer of ownership, making them a fast and efficient alternative to paper-based money. These currencies rely on encryption technologies, distributed ledgers (like blockchain), and peer-to-peer systems to operate securely without needing a traditional bank.

How It Differs from Traditional Money and Electronic Transactions

While digital currency might sound similar to the digital transactions we already make with bank cards or mobile apps, there's a clear difference.

In essence, electronic transactions still rely on traditional banks and fiat money. Digital currencies, on the other hand, are independent systems—some even designed to function entirely outside traditional finance structures.

Examples of Widely Used Digital Currencies

1. Bitcoin (BTC)

   • The first and most well-known cryptocurrency.

   • Launched in 2009 by a creator, Satoshi Nakamoto.

   • Built on blockchain and known for its decentralized, peer-to-peer design.

2. Ethereum (ETH)

   • More than just a currency, Ethereum is a platform for smart contracts and decentralized applications (dApps).

   • ETH is the native token used to power the network.

3. Tether (USDT)

   • A stablecoin pegged to the US dollar, designed to reduce the price volatility of cryptocurrencies.

   • Popular for trading and transfers between exchanges.

4. USD Coin (USDC)

   • Another stablecoin backed by US dollar reserves.

   • Issued by regulated financial institutions and widely used in DeFi platforms.

5. Central Bank Digital Currencies (CBDCs)

   • Examples include China’s digital yuan and the upcoming digital euro.

   • These are official digital versions of national currencies created by governments to modernize money systems and increase efficiency.

Each of these digital currencies plays a different role. Some are investment assets, some are transactional tools, and others are technological foundations for broader digital ecosystems.

Types of Digital Currency

There are various types of digital currency, each designed for different use cases and built on distinct principles. Understanding these categories is essential if you’re exploring investments, launching a startup, or simply trying to grasp how this digital economy works.

1. Cryptocurrency

Cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are decentralized digital currencies built on blockchain technology. Unlike government-issued fiat currencies, no single entity—such as a bank or central authority—controls them. Instead, they operate through peer-to-peer networks where transactions are validated by distributed nodes using cryptographic protocols.

• Bitcoin serves primarily as a store of value and a medium of exchange.

• Ethereum extends the idea by enabling smart contracts—self-executing agreements coded directly into the blockchain.

These digital currencies are known for:

• Decentralization: No central control.

• Security: Backed by strong encryption.

• Transparency: A Public ledger allows full traceability.

• Volatility: Prices can swing dramatically.

Today, cryptocurrencies are used for more than just trading—they also power decentralized finance (DeFi) apps, NFTs, gaming platforms, and more.

2. Stablecoins

Stablecoins aim to combine the best of both worlds: the speed and efficiency of digital currency with the stability of traditional fiat. These tokens are typically pegged 1:1 to assets like the US dollar, euro, or even gold.

➡️Examples include:

• USDT (Tether): One of the most widely used stablecoins for trading across global exchanges.

• USDC (USD Coin): Backed by audited reserves and issued by regulated financial institutions in the U.S.

Why are stablecoins important?

• They reduce volatility, making them useful for everyday transactions.

• They’re ideal for cross-border payments, without the fees and delays of banks.

• Many DeFi platforms rely on stablecoins as a stable trading or lending base.

3. Central Bank Digital Currencies (CBDCs)

CBDCs are government-issued digital currencies designed to function as legal tender, just like traditional money. However, they exist entirely in digital form and are typically controlled by a central bank.

Countries are actively researching and piloting CBDCs:

• China’s Digital Yuan (e-CNY) is already in advanced testing.

• The European Central Bank is exploring the Digital Euro.

• The Bahamas has already launched the Sand Dollar, one of the first fully implemented CBDCs.

Key features of CBDCs:

• Regulated and centralized.

• Digital representation of sovereign currency.

• Intended to improve financial inclusion, streamline monetary policy, and reduce transaction costs.

CBDCs are seen as a way to modernize financial systems while maintaining government control over currency issuance and regulation.

4. Utility Tokens vs. Security Tokens

This distinction is crucial if you’re considering token-based startups or digital investment vehicles.

• Utility Tokens: These give holders access to a product, service, or platform. For example, you might use a utility token to pay for cloud storage, access a blockchain-based app, or vote on governance issues within a DAO (decentralized autonomous organization). These are not considered financial investments in the traditional sense.

➡️Example: BAT (Basic Attention Token) is used to reward users and creators within the Brave browser ecosystem.

• Security Tokens: These represent ownership in a real-world asset, such as company shares, real estate, or profit-sharing agreements. Because they resemble traditional financial securities, they are regulated and often require compliance with securities laws.

➡️Example: A tokenized stock or real estate fund where your digital token gives you dividend rights or voting power—much like owning a company share.

These categories represent just the starting point of understanding digital currency. As innovation continues, we’ll likely see hybrid models emerge—combining elements of utility, security, and even governance in ways we haven’t imagined yet.

Whether you're an investor looking for the best digital currency to invest in or a startup founder exploring how digital assets can boost your ecosystem, knowing the types of digital currency gives you a stronger foundation for making informed decisions.

Want to hear from a real innovator? In our Strugbits Unplugged episode with Moshe Cohen, we break down the evolution of ad tech and digital currency. He discusses the creativity and practicality in digital currency, as well as what every young founder should know  about navigating the crypto world.

How Does Digital Currency Work?

To understand the backbone of digital currency, you need to explore the powerful technology that supports it: blockchain. Digital currency doesn't exist in your wallet or in a vault—it's code, cryptography, and computation all working together to create a secure, decentralized form of money.

The Role of Blockchain Technology in Digital Currency

At the heart of most digital currencies lies blockchain technology, a type of decentralized digital ledger that records transactions across a distributed network of computers, or nodes.

Instead of relying on a central authority (like a bank or government), blockchain allows users to transact directly with each other, with every transaction being verified by multiple participants in the network.

Here’s what makes blockchain vital for digital currency:

• Decentralization: No single point of control means increased security and reduced risk of corruption or failure.

• Transparency: All transactions are recorded and time-stamped, creating a permanent and public history.

• Immutability: Once a transaction is added to the blockchain, it cannot be altered, ensuring data integrity.

This structure is what makes digital currency trustworthy without needing traditional institutions.

Public vs. Private Ledgers

Not all digital currencies use the same kind of blockchain.

• Public Ledgers: These are open and transparent. Anyone can join the network, view transactions, and even help validate them. Bitcoin and Ethereum are the most well-known public ledger systems. They embody the core ideals of decentralization and open access.

• Private Ledgers: These are closed systems maintained by a trusted organization or group. Access is restricted to selected participants. Central Bank Digital Currencies (CBDCs) often use private ledgers to maintain control and comply with regulatory standards.

The choice between public and private ledgers often depends on the goal: open financial ecosystems versus controlled environments for compliance and scalability.

Mining and Transaction Validation

One of the most fascinating elements of how digital currency works is mining—but don’t picture pickaxes and hard hats. In the digital world, mining involves solving complex cryptographic puzzles.

Here's a simple breakdown:

• Mining: Computers (called miners) compete to solve mathematical problems. The first to solve it gets to validate a batch of transactions (called a block) and is rewarded with newly minted digital currency (like Bitcoin).

• Proof-of-Work (PoW): This is the most famous mining system. It’s energy-intensive but extremely secure. Used by Bitcoin.

• Proof-of-Stake (PoS): A newer, more energy-efficient system used by Ethereum 2.0 and others. Instead of mining, validators are chosen to confirm transactions based on the amount of currency they hold and are willing to "stake" as collateral.

Once validated, the block is added to the blockchain and shared with all nodes in the network, ensuring consensus—everyone agrees on the current state of the ledger.

Smart Contracts and Automation

Some digital currencies, like Ethereum, go beyond just handling money. They can also execute code, known as smart contracts—self-operating agreements that execute once specific conditions are met.

➡️Example: A smart contract could release payment to a freelancer only after the job is confirmed complete—automatically, without the need for a third party.

This is revolutionizing industries from finance to real estate, enabling the trustless automation of agreements and workflows.

Digital Currency Prices: What Affects Their Value?

If you’ve ever tracked digital currency prices, you’ve probably noticed how fast they can rise or drop. But what causes these dramatic shifts? The value of a digital currency isn’t random; it’s influenced by a mix of economic principles, global events, investor behavior, and technology.

1. Market Demand and Supply

At its core, digital currency pricing follows basic economic principles: when demand increases and supply remains fixed or limited, prices rise. Most cryptocurrencies, like Bitcoin, have a capped supply (Bitcoin’s is limited to 21 million coins), which naturally creates scarcity. If more people want to own Bitcoin than the number available, the price increases.

On the flip side, if a large number of holders sell at once, it can create downward pressure on the price.

➡️Pro Tip: Follow on-chain metrics like wallet addresses and transaction volume to gauge real-time demand.

2. Speculation and Investor Sentiment

Much of the digital currency market is still driven by speculation. News, hype, social media trends, and public sentiment can trigger massive price swings. For example, when high-profile investors or celebrities endorse a cryptocurrency, prices can spike within minutes.

This emotion-driven behavior can create short-term bubbles followed by corrections. While traders may benefit from this volatility, long-term investors need to tread carefully.

➡️Case in Point: The Dogecoin rally in 2021, sparked largely by memes and Elon Musk’s tweets, is a prime example of sentiment-driven pricing.

3. Regulations and Government Policies

The legal and regulatory environment plays a huge role in shaping digital currency prices. When a country bans crypto trading, restricts mining, or introduces harsh taxation rules, it often causes panic in the markets.

Conversely, when governments show support or announce clearer frameworks for crypto regulation, investor confidence often surges.

• China’s multiple bans on crypto activities caused Bitcoin to plunge multiple times.

• On the other hand, the approval of Bitcoin ETFs in the U.S. helped legitimize crypto and pushed prices higher.

➡️Did You Know? CBDCs (Central Bank Digital Currencies) are government-backed and may influence how regulators treat decentralized assets.

4. Technological Advancements and Network Upgrades

Digital currency projects are constantly evolving. When a cryptocurrency undergoes a major upgrade (like Ethereum’s transition from proof-of-work to proof-of-stake), it often attracts positive investor sentiment.

These improvements might include:

• Faster transaction speeds

• Lower fees

• Better scalability and energy efficiency

• Improved security features

New use cases, such as NFTs, DeFi (decentralized finance), and smart contract platforms, also drive interest and boost demand.

5. Media Coverage and Hype Cycles

Media outlets and influencers have a surprising amount of power over digital currency prices. A single headline can cause a market-wide rally—or crash. That’s why staying informed through credible sources is critical.

Projects with strong marketing, compelling use cases, and a loyal community tend to perform better. However, beware of hype without substance—it often leads to “pump and dump” scenarios.

Want to learn how startup founders navigate these ups and downs? Check out our Strugbits Unplugged episode  with Moshe Cohen, where he dives into how startup funding works , investor behavior, and his insights into why embracing cryptocurrency can benefit you as both a founder and a consumer.

Digital Currency Exchange: Where and How to Trade?

A digital currency exchange is a platform that allows users to buy, sell, and trade digital currencies. There are two types of exchanges:

1. Centralized Exchanges (CEX): These exchanges are operated by centralized entities that control the transactions and security of the platform. Popular examples include Coinbase and Binance.

2. Decentralized Exchanges (DEX): These exchanges allow users to trade directly with each other without the need for a third-party intermediary. Examples include Uniswap and PancakeSwap.

When choosing a digital currency exchange, it’s essential to consider factors such as security, fees, and available currencies. Always conduct due diligence to ensure you're using a trustworthy platform.

Best Digital Currency to Invest In (2025 Edition)

When it comes to investing in digital currencies, it’s crucial to research which assets have the potential for long-term growth. Here’s a look at some of the best digital currencies to invest in:

• Bitcoin: As the first and most widely recognized cryptocurrency, Bitcoin remains a solid investment choice, often referred to as "digital gold."

• Ethereum: Known for its smart contract functionality, Ethereum is considered one of the most promising projects for future growth.

• Stablecoins: If you're looking for a less volatile option, stablecoins like USDT or USDC may be a good choice for maintaining value.

Investing in digital currencies requires careful consideration of your risk tolerance, the market landscape, and your investment goals.

How to Buy Digital Currency: A Step-by-Step Guide

Buying digital currency is easier than ever. Here's a step-by-step guide on how to buy digital currency:

1. Choose a Crypto Wallet: First, you'll need a crypto wallet to store your digital assets. There are hot wallets (software-based) and cold wallets (hardware-based), each offering varying levels of security.

2. Select a Digital Currency Exchange: Choose a reliable exchange where you can purchase your chosen cryptocurrency. Popular exchanges like Coinbase or Kraken offer beginner-friendly interfaces.

3. Payment Methods: Most exchanges accept payments via credit card, bank transfer, or peer-to-peer methods. Choose the payment method that works best for you.

4. Storing Your Digital Assets: Once purchased, you can store your digital assets in your wallet, either online or offline, depending on the security level you desire.

Creativity and Practicality in Digital Currency

Digital currency isn’t just a financial revolution—it’s a creative and technological movement that’s changing how we think about money, value, and innovation.

How Digital Currency Fosters Innovation in Financial Technology

The rise of digital currency has sparked a wave of innovation in fintech. Traditional banking systems, once considered slow and inflexible, are now being challenged by decentralized technologies that allow for faster, cheaper, and borderless financial interactions.

Blockchain, the backbone of digital currency, enables developers to build systems that are:

• More transparent

• More efficient

• Less reliant on central authorities

From instant global payments to programmable money, digital currency is reshaping financial services and putting more power into the hands of users. This fusion of creativity and practicality in digital currency  is what makes it so disruptive—and exciting.

Real-World Applications: DeFi, NFTs, and Smart Contracts

Let’s talk about real-world impact.

• DeFi (Decentralized Finance) platforms like Uniswap, Compound, and Aave let users lend, borrow, and trade without a bank. No middleman. No waiting. Just code, smart contracts, and users interacting directly.

• NFTs (Non-Fungible Tokens) gave artists and creators a new way to monetize their work while maintaining ownership and royalties. A digital painting can now sell for millions—and its value is verified on the blockchain.

• Smart Contracts are perhaps the most powerful innovation yet. These are self-executing agreements written in code that only trigger when certain conditions are met. No need for lawyers or middlemen.

From real estate to gaming to healthcare, digital currency and blockchain-based tools are breaking into every major industry.

Future Trends and Emerging Use Cases

What’s next?

• Tokenized assets: Imagine owning a fraction of a rare painting or a skyscraper in New York, all through blockchain-based tokens.

• Cross-border payroll systems: Companies can pay freelancers and employees globally with stablecoins instantly.

• Blockchain in supply chains: Companies are using tokens to track goods from origin to delivery.

And don’t forget AI + blockchain. With AI creating more autonomous systems, the use of programmable money is expected to grow.

How Effective Is Marketing for Crypto?

Crypto may run on tech, but its adoption is powered by marketing.

The Role of Digital Marketing in Promoting Crypto Projects

With thousands of new tokens and platforms launching every year, standing out is no easy feat. That’s where digital marketing comes in.

Crypto brands use strategic marketing to:

• Build trust with investors

• Educate users

• Create hype before token launches or new features

Marketing bridges the gap between a complex technology and the everyday user. Without it, even the most brilliant crypto ideas may never take off.

SEO, Influencer Marketing, and Social Media for Crypto Brands

Let’s break down the top marketing channels in crypto:

• SEO helps crypto projects rank on search engines when users look up things like “how to buy digital currency” or “best digital currency to invest in.” Targeted blogs, keyword strategies, and strong backlink profiles make a huge difference in discoverability.

• Influencer Marketing is big in crypto. Thought leaders and YouTubers often have millions of loyal followers who trust their recommendations. A single tweet or video can move markets—or crash them.

• Social Media platforms like Twitter (or X), Reddit, and Discord are home bases for most crypto communities. Memes, real-time updates, and viral campaigns all start here.

➡️Remember: community = credibility in the crypto world.

Regulatory Challenges in Crypto Advertising

Marketing in crypto isn’t all smooth sailing. Many platforms like Google, Facebook, and TikTok have strict policies about crypto ads due to concerns over scams and unregulated financial products.

Crypto marketers must be:

• Transparent

• Compliant with local regulations (like SEC or FCA guidelines)

• Be careful not to make exaggerated claims

This regulatory tightrope forces crypto brands to be creative while staying ethical.

So, how effective is marketing for crypto ? Extremely—when done right. It’s not just about hype. It’s about storytelling, community, and long-term trust.

Want to hear how crypto founders actually market their ideas? In Strugbits Unplugged, our guest, Moshe Cohen, reveals the behind-the-scenes of building community, leveraging PR, and navigating marketing limits while staying compliant.

Advantages and Disadvantages of Digital Currency

It is important to analyze both the pros and cons of digital currency. So, let's explore!

Pros:

• Faster transactions with lower fees.

• Increased financial accessibility for unbanked populations.

• Enhanced security through encryption and decentralized systems.

Cons:

• Price volatility and market instability.

• Regulatory uncertainties and potential government crackdowns.

• Security risks, such as hacking, fraud, and scams.

How Startup Funding Works in the Crypto Space

Crypto startups usually begin with bootstrapping—founders self-fund to build MVPs. Then comes pre-seed (early support from friends, family, or angels), followed by seed funding for product-market fit and early growth.

Blockchain startups also raise money through:

• ICOs (Initial Coin Offerings)

• IDOs (Initial DEX Offerings)

• Venture Capital, often from firms that specialize in Web3.

Success stories? Ethereum, Solana, and Chainlink all began with token sales and now lead the crypto space.

Why Embracing Cryptocurrency Can Benefit You

Using crypto gives you control over your finances without needing a bank. You can send, receive, and store money globally, 24/7. Long-term investors have seen huge gains, especially early adopters of Bitcoin or Ethereum. 

While the market is volatile, it offers a significant upside for those who research well. And as digital banking evolves, crypto helps you future-proof your money in an increasingly decentralized world—one of the key reasons why embracing cryptocurrency can benefit you  both financially and strategically.

Difference Between Seed and Pre-Seed Funding

• Pre-seed funding happens when a startup is still an idea or MVP stage. It’s all about validating the concept.

• Seed funding supports early growth—hiring, marketing, and product development.

Pre-seed investors: angel investors, startup accelerators.

Seed investors: VCs, crypto funds, or larger angel networks.

The difference between seed and pre-seed  funding lies in the startup’s maturity and the investor's expectations. The line can be blurry, but understanding the goals of each helps founders plan smarter.

What Every Young Founder Should Know About Digital Currency & Startups

• Financial literacy is essential. Understand tokenomics, blockchain scalability, and how funding works in this space.

• Network like crazy—Telegram, Discord, crypto Twitter, and events like ETHGlobal are great places to connect.

• Mistakes to avoid? Overpromising, launching without utility, or ignoring regulations. Learn fast, pivot smart, and always put community trust first.

Want deeper insights from real founders? Check out Strugbits Unplugged for raw, unfiltered startup stories straight from the crypto trenches.

Conclusion

The future of digital currency is bright, with innovation and new applications emerging daily. Understanding how digital currency works, its types, and its potential can help you navigate this exciting space. 

If you’re looking for more insights on the intersection of digital currency, startups, and entrepreneurship, be sure to check out Strugbits Unplugged, where we delve deeper into these topics and offer valuable advice for founders in the digital age.

FAQs

1. What are the different types of digital currency?

Digital currencies fall into several categories: cryptocurrencies (like Bitcoin and Ethereum), stablecoins (such as USDT and USDC), and central bank digital currencies (CBDCs). Some platforms also use utility tokens and security tokens, each with distinct use cases.

2. How does digital currency work?

Digital currency operates using blockchain technology, a decentralized ledger that verifies and records transactions across a network. It eliminates the need for central authorities and enables secure, peer-to-peer exchanges in real time.

3. How to buy digital currency safely?

To buy digital currency, start by choosing a trusted exchange like Coinbase or Binance. Create an account, verify your identity, fund your wallet using a bank card or transfer, then select your preferred currency and make the purchase.

4. What is the best digital currency to invest in right now?

The best digital currency to invest in depends on your goals and risk tolerance. Bitcoin and Ethereum remain popular choices, but newer projects like Solana and Chainlink also show potential. Always research before investing.

5. Why are there so many types of digital currency?

Each type serves a different purpose. Cryptocurrencies offer decentralization, stablecoins provide price stability, and CBDCs are backed by governments. The growing diversity in types of digital currency reflects innovation across financial systems.

6. Can beginners understand how digital currency works?

Yes! While the tech behind it is complex, the basics are simple: digital currencies are online money powered by blockchain. Once you learn how digital currency works, you’ll see its potential in everyday finance.