With the advent of the crypto market, the rise of cryptocurrencies has become a global phenomenon. Some say that it might overtake fiat currencies in the future. Its adoption has gain momentum as our society is gearing towards a cashless system. As most people today patronize electronic money, this affirms that cryptocurrencies could be the way to go in the future. However, it won’t be an easy ride, and the crypto market might have a hard time going mainstream, given the strong resistance from many regulators across the globe. Even if the whole world is preparing for a cashless system, not everyone knows how cryptocurrency is different from fiat money. Read on to know more.
Fiat Money: What Is It?
If you’re eager to know how cryptocurrency is different from fiat money, you must first know each meaning. Since the government issued it, fiat money is regulated by a central authority like a central bank. These currencies are not backed by any physical commodity or act as legal tender. Rather, it’s based on the economy’s credit. The U.S. Dollar, Pound, or Euro are samples of fiat currencies, and they obtain their value from the forces of the market’s supply and demand. The fiat currencies are constantly at risk because of hyperinflation as they are not linked to any physical commodity.
Originally, they were based on commodities such as gold. However, during the 20th century, its conversion into gold has been stopped by President Nixon.
Fiat Money: What Are Its Advantages?
Fiat money has been considered legal in most countries where it is controlled and stable. Unlike other types of money like cryptocurrencies, fiat currencies are fairly stable. This stability allows the government and other regulators to steer through the economy and prevent inflation and recession. This might be one reason how cryptocurrency is different from fiat money.
It will allow the fiat currencies to act to store value and promote exchange with stability. Fiat money can also present a statistical account. It will allow the central banks to control diverse economic variables like credit supply, interest, and liquidity to ensure a steady economy with significant control.
What Is Cryptocurrency?
A cryptocurrency is an exchangeable form of digital currency. It can be exchanged from one person to another. Its nature (virtual) uses a so-called cryptographic technology to process and verify all transactions. Any authority doesn’t control cryptocurrencies. Rather, they are restricted entries in a database like a blockchain that nobody can manipulate or change unless requirements are met. It has no central server where transactions can be hosted or controlled.
In a decentralized network like Bitcoin, all transactions that occurred, even in the past, are posted for the public to see. Each transaction has the public keys of the sender and the recipient.
What Are the Advantages of Cryptocurrencies?
Cryptocurrencies are readily available with just a click of a button worldwide. Anyone who can do online transfers can also own digital coins.
Although the process it involves is a bit complicated, it gets easier to transact once you’re in. Cryptocurrencies allow instant settlement, unlike the electronic cash system that takes a couple of days to process. It also comes with cheaper transaction fees. That is why cryptocurrency is the preferred choice for sending money across the borders. Privacy is another reason that makes it beneficial, so users won’t have to share their identity during transactions.
Fiat Money and Cryptocurrencies: How Are They Different?
While both currencies are used as a means of payment, here’s how cryptocurrency is different from fiat money:
Fiat currencies are deemed legal and have been used in finalizing transactions. They are distributed by the government and a central bank that regulates them. The government then controls its supply and policies, which affects its value.
On the other hand, cryptocurrencies are not controlled by the government or any authority. Its decentralization shows that it does not have a central body that can control or affect its value. Although some countries have banned cryptocurrencies, others use them in illegal activities like money laundering.
As cryptocurrencies operate online and virtually, they have no tangibility or no physical feel than fiat money. On the other hand, fiat money has a physical presence as notes and coins exist. However, its physical aspect poses a challenge as it can be challenging to carry around with huge chunks of money.
Cryptocurrencies remain digital. Thus, their exchange process is entirely digital and can only be done online. In contrast, fiat money can exist in both physical and digital form. People can also transfer fiat money digitally through payment for goods and services and physically exchange or transact money.
Another measure of how cryptocurrency is different from fiat money is supply. Central authorities don’t have a cap on producing money, so we could say that fiat money is unlimited. On the other hand, cryptocurrencies have a cap when it comes to supply.
This means that there is a set number of coins in the supply. For example, the entire amount of Bitcoin that will ever be stored is capped at 21 million.
It is impossible to define the amount of money inflow in fiat money but can be possible with crypto.
Because cryptocurrencies are virtual, they can only be available online and stored in digital wallets, most commonly known as cryptocurrency wallets.
Even though digital wallets offer secure and safe storage, some can still be hacked, resulting in people losing many holdings.
On the other hand, you can store fiat money in various forms. For example, payment providers like PayPal allow people to keep their money in digital format. Banks are also considered as guardians of hard money or currencies.
How is cryptocurrency different from fiat money, you asked? Fiat money and cryptocurrencies both have properties that make them stand out. They both have their pros and cons, which may lead to a divided opinion worldwide. While there are various advantages of cryptocurrencies over fiat money, it looks like the cryptosystem hasn’t reached its full maturity yet replaced the popular payment method. Still, there’s always a possibility that its market will most likely evolve and may replace the current money system. Discover more trading tips and hacks here!