The word “virtual” has several meanings. But the most obvious meaning people think of is “not real”. The uninformed often call Bitcoin a “virtual currency”, and contrast it with “real currency” such as the US dollar.
This is of course nonsensical. You could make stronger arguments for Bitcoin being real than for the US dollar. This is why Bitcoin should be more correctly referred to as a “digital currency”, emphasizing the fact that its existence consists in bits of digital information; or as a “cryptographic currency”, emphasizing that its operation is based on cryptography.
Similarly, the defining feature of the US dollar and its kin is that their issuing and usage is mandated by governments (regardless of whether an external body such as the Federal Reserve is charged with doing the actual issuing), and thus should be referred to as “government currency”. Alternatively, the terms “traditional currency” and “legacy currency” are slightly broader and emphasize that this is the kind of currency we have used so far. The term “fiat currency” is sometimes used to mean government currency, but personally I am not fond of that, as the literal meaning of the term is too broad.
A deeper understanding of the phrase “virtual currency” can be achieved only by contrasting it with something which is truly a virtual currency, such as World of Warcraft Gold. In the WoW game, virtual warriors are paying virtual gold to buy virtual swords with which to slay virtual dragons (or something like that. I’ve never actually played WoW).
None of this is real. Dragons of the kind featured in WoW have never existed in our physical universe. The WoW Gold does not correspond to any actual Au atoms. These are things that exist only in the virtual, simulated world.
The virtual dragons are encoded as bits, manifested as electrical and magnetic signals on computing devices somewhere. The bits are very real – they are configurations of actual electrons in our universe. But they are bits, not dragons.
Within the virtual world, the WoW gold is the ubiquitous currency used by the population, it is actual metal the people go out and mine, and it is not controlled by anyone. As such, the WoW gold is a virtual, physical, decentralized currency.
But just as the virtual dragons double as real bits, the WoW gold doubles as a real, digital, centralized currency.
The owners of this currency are the real players with user accounts that possess WoW Gold. And it has real value – real people offer real money (such as USD) to get WoW Gold, because they prefer to spend their real time playing WoW and slaying virtual dragons than farming virtual gold. And there are real sweatshops in China where real people work in real terrible conditions to play the game, earn WoW Gold, and sell it to aforementioned real players.
Of course, as a real digital currency, WoW Gold is centralized and is thus barely usable. It is completely controlled by Blizzard, hence is inefficient, and tricky to use because, AFAIK, its exchange for things of real value is an EULA violation. So WoW Gold is a bad real currency, whose saving grace is the extra semantics placed on it by the controlling company – which is entitlement to in-game virtual currency.
Since WoW Gold and its kin double as both digital currency and virtual currency, it is easy to see why people would get confused. But the contrast with Bitcoin becomes clear: It is digital, but it is not virtual. There is no virtual world in which Bitcoin is the currency. Rather, it is a currency used in our real world to pay for real products and services. It is digital and still fledgling, to be sure – but unlike WoW Gold, which is centralized and thus a bad currency, Bitcoin is decentralized and has all it takes to become a ubiquitous currency.
When in doubt, we should remember – that which vanishes is virtual, that which remains is real.