If you are a fan of interacting with other people in virtual worlds such as Second Life, Twinity, Smallworlds, and the like, you must have heard of the term “virtual currency.” Virtual currency, or in-game currency, is used to purchase virtual goods within an online community. That community may comprise the virtual world itself or online gaming sites and social networking sites that are attached to that virtual world.

With the popularity of virtual worlds and social networking sites, virtual goods and currency are in demand, driving revenue in the US, Europe, and Asia on years. In fact, Zynga, a US-based social network game developer, reports that a large part of their $100 million revenue in 2009 comes from direct purchases of virtual goods using virtual currency. Users of massively multiplayer online games (e.g., World of Warcraft, Everquest, etc.) and social networking games (e.g., FarmVille, Restaurant City, etc.) use, buy, and sell game dollars just like they do in the real world.

Taking it a step further, there are virtual currencies that used beyond gaming. For instance, Hub Culture, a social network service, utilizes its currency called Ven to trade in real world items. In fact, Ven can be used in commodity and carbon credit trades. In another example, Empire Avenue, a stock market simulation social network game, requires its members to purchase virtual currency to be used in buying and selling stocks via US dollars. Payments could be made through PayPal.

Trading with virtual currency provides great benefits.

1. Unlike purchasing with a credit card, you do not need to divulge your bank account information when you make a payment to purchase virtual currency. Thus, the risk of getting your bank account hacked is eliminated.

2. Performing transactions with virtual currency is quick and easy. There is no need (or less effort) in filling up forms and paperwork that is prevalent in doing business in the real world such as using credit cards. The only thing required of you is to make sure you have a sufficient fund of virtual currency on hand.

3. Using virtual currency provides a company an incentive since they have the “right” to use their money as legal tender in their own website. This gives them the advantage of retaining their customers especially if the company’s clients regularly use the company’s goods and services. In addition, a company can create a rewards program for clients who use its issued virtual currency.

4. You can safely teach your children the fundamentals of using money, specifically in scenarios that involve transactions. That’s because they do not need to disclose private information or use a real credit card to buy, sell, and use virtual currency.

5. Trading virtual currency enables you to generate online revenue. This revenue can then be exchanged for real or virtual goods. In addition, some sites allow you to covert virtual money to real money. This is a great business model for people who want to earn money online.

6. As of the moment, virtual currencies are not taxable. Thus, the profit that you make by selling virtual goods can be converted into real monies less tax deductions.

In time, virtual currency will become another accepted alternative form of payment. Its popularity today is an indication that it is most likely to be poised on the road to success