Digital currencies: Survival of the fittest

The concept of Survival of the fittest may have originated within evolutionary theory, but as the world of online currencies and virtual economies rapidly grows the debate around digital currencies and the analysis of why some currencies succeed and some fail is, as our writer explores, a detailed and complex one. 

Along with Facebook credits, Microsoft Points will soon be extinct. I can’t help but wonder: why do some virtual currencies flourish while others fizzle out?

Ultimately I think that the answer depends on the environment in which the currency is used. For instance, a currency can add positively to the complexity of an environment. As is the case with in-game currencies like RS gold. Alternatively, a currency can negatively complicate the purchase process. Consider the process flow for purchases made with Microsoft points. If I want to purchase something from Microsoft, I could:

1. Put in my credit card information.
2. Purchase Microsoft points… and then
3. Use those points to make a purchase.

Alternatively, I could just put in my credit card information and then make the purchase. Using points adds an annoying, gratuitous step to the purchase process. On the other hand, for MMO’s and their respective currencies such as Diablo 3 gold, EVEisk, or World of Warcraft (wow gold), in-game currencies add an element of fun to the games by permitting these virtual worlds to behave more like real world environments. In other words, the extra step of purchasing in-game currency does not outweigh the varied benefits that the currency brings to the virtual environment, such as allowing for in-game economies. 

In addition to in-game currencies, some open-loop virtual currencies, like bitcoin, are also growing in popularity. Unlike the closed-loop systems discussed above, bitcoin is decentralized. This means bitcoins are neither issued by a single merchant, like Blizzard or Microsoft, nor by a government. Consequently, there are no restrictions limiting what the currency can be used to buy.

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5 popular virtual currencies

• Bitcoin
• Litecoin
• Peercoin
• Namecoin
• Primecoin
  (Source: Forbes)

[/ezcol_1third] [ezcol_2third_end]For example, I am currently based in Asia and so if I want to buy something from an international store in Australia or the United States one option would be to use a credit card to make the purchase. This incurs not only the usual credit card processing and handling fees but also additional fees to convert any payment into a currency accepted by the store. However, if the store accepted bitcoin as a payment method, I could simply electronically send bitcoins to instantly pay for the purchase. If I use bitcoins, then I can avoid exchange fees and the delays that are normally involved in international payments (i.e. bank transfers, which can take several days in processing time).[/ezcol_2third_end]

The seamless, international, instant, and low fee nature that Bitcoin possesses will, i believe, only continue to drive demand for the currency, especially in e-Commerce.

In conclusion, I’d like to reiterate my first point. Ultimately the answer to whether a virtual currency flourishes or fizzles depends on the environment in which the currency is used. For day-to-day and international purchases from diverse vendors, I believe that bitcoin has a bright future. The seamless, international, instant, and low fee nature that it possesses will only continue to drive demand for the currency, especially in e-Commerce. The success of the merchant-issued currencies dependds on how complecated they are in usage. They might complicate the purchase process like Microsoft Points. Or add in a positive way to the buyer-user’s experience intricacies like Diablo 3 gold.