Digital Currency Bitcoin As Alternative Currency

Digital versus "virtual"

Although digital and virtual are often used interchangeably when describing currencies based on an electronic medium, the term "virtual" has a negative connotation.  "Virtual" signals something that is "seemingly real" but not exactly "real" when referring to a currency that is stored in a "digital" or electronic register. Indeed, in languages like Chinese, the word "virtual" is interpreted as "created from nothing" () in the sense that it is not "physical" but computer-generated or computer- simulated. 

However, the currencies often described as "virtual" are very "real," in the sense that they exist. Thus, the more neutral term digital currency is generally preferred over virtual currency.

Classifying alternative currencies

Alternative currencies refer to a medium of exchange other than fiat currency. Historically, there are various types of alternative currencies, as classified by Hileman (2014) broadly into two categories: tangible and digital.

Tangible currencies, closely associated with "commodity money," derive their value from relative scarcity and nonmonetary utility: 

(a) Currencies with intrinsic utility This class of currency includes metals and cigarettes in post-WWII Berlin and more contemporary examples are prepaid phone cards and, to some extent, cash value smart cards. This class is not dependent upon governance as in the case of monetary instruments, and more importantly, its intrinsic value is not an abstraction and it is not necessarily geographically bound. 

(b) Token Seventeenth- to nineteenth-century British tokens and the Great Depression scrip of the 1930s are historical examples. More contemporary examples are local or community currencies such as Brixton Pound and Bristol Pound that are used in England, BerkShares that is circulated in Berkshire region of Massachusetts, and Salt Spring Dollar in Canada. 

Token has less intrinsic value as its use is more specific and usually bounded by some social contracts or agreement such as honoring them for exchange for goods or to limit the supply of goods.

(c) Centralized digital currency Examples are loyalty points from financial, telecom, or retail companies; air miles from airlines; Second Life's Linden Dollar and World of Warcraft Gold, which are closed system with transactions within specific entities; and Flooz and Beenz, which are open market system and can be transacted with other entities. 

Local currencies such as Brixton Pound, BerkShares, and Salt Spring Dollar also fall under this category besides being classified as tokens. The governance structure is centralized. 

(d) Distributed and/or decentralized digital currency This includes the cryptocurrencies such as Bitcoin, Litecoin, and Dogecoin. They can be transacted with any outside agents and the governance is decentralized mainly but not necessary due to open-source software. There is no legal entity responsible for the activities, and therefore, they fall outside traditional regulation.

Why Alternative Currencies

There are various socioeconomic forces that drive the demand for alternative currencies: 

(a) Localism By promoting community commerce or "save high street," localism retains consumption within a group of independent retailers or within a geographic area for job creation and improved business conditions. 

(b) Technology It has become much easier to use with improved software and low entry barriers contributing to network effects. 

(c) Political economy There is disillusionment about the high pay of CEOs and bankers and the notion of traditional banks being too big to fail. With high debt and quantitative easing, there is great discomfort with the economic uncertainty. 

(d) Environmentalism There are ecology concerns and the question of whether we have reached the point of maximum extraction of natural resources such as oil.

(e) Inefficiencies Financial services are overpriced and whole financial system is too expensive. 

(f) Financial freedom Some digital currencies such as cryptocurrencies have the advantage of transferring value through the Internet where control is weak. Such digital currencies may allow users to bypass capital controls and may provide safe harbor during a fiat currency crisis. 

(g) Speculation Buyers of some digital currencies such as cryptocurrencies are anticipating a price appreciation due to subsequent wider acceptance. It is very easy to create a cryptocurrency as an alternative currency for free today.

However, most of these new creations will cease circulation within a relatively short time. With many alternative currencies in competition, only a few will be globally adopted, reach a sufficient scale, or find a suitable market.

Unless the idea of national digital currencies takes off, it is likely that many of these alternative currencies will cease circulation because of superseding advancements in technology, tighter regulation, and insufficient demand.

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