Today there are more than 80 kinds of virtual currency, David Zeiler in Money Morning US
They are virtual currencies because they don't exist in the physical world as coins or paper bills. They only exist in cyberspace.
But the fact that there are so many types of virtual currency shows that this is a concept that’s not going away.
Critics like to point out that a virtual currency is backed by nothing, like gold or a national government. And that is has no intrinsic value. But virtual currency can serve an important purpose.
A successful virtual currency enables the transfer of money between parties anywhere in the world without the need for intermediaries like banks or payment processors or the fees they like to charge.
And a decentralised digital currency like Bitcoin is also outside the control of any central bank or government.
Virtual currency still in its infancy
Still, the era of virtual currency is just getting started and is littered with the bones of its pioneers. Many early efforts from the 1990s, such as Beenz and Flooz, fell victim to fatal flaws in their design.
More recently, in May, the US government shut down the virtual currency Liberty Reserve. This followed an investigation which showed it was used almost exclusively by criminals around the world to launder money.
And yet the digital currencies continue to grow in popularity. This is a testament to the power of the concept.
Bitcoin itself is a great example of the resiliency of the ideas driving virtual currency. Over its five-year history, it has endured several crashes in the Bitcoin prices, but has recovered in each instance to reach new highs.
And while Bitcoin has the advantage of being the dominant virtual currency right now, that by no means guarantees it will win out as the digital money of the future.
A lot of very smart, innovative programmers continue to work to improve upon the virtual currency concept. They build on existing currencies, seeking to correct what they see as flaws.
In fact, quite a few of the new digital currencies that have emerged in the past couple of years are based on Bitcoin, but with significant tweaks.
But the world does not need or want 80 digital currencies. Consolidation is inevitable. Only the best will survive.
So there you have it, why virtual currency is here to stay.