Crypto vs. fiat is the standard term used in the business world. Cryptocurrencies use has increased in recent years, becoming an international phenomenon. They have been the closest rival of fiat money. Learning the differences between the two currencies can help create an informed decision on which currency form to use.
What is Fiat Currency?
The term fiat is a Latin word meaning ”let it be done” or, in other words, ”it shall be”. In the currency world, it means ‘money’ as money can achieve almost everything. It is issued by the government but controlled by central banks. It acts as legal tender.
They are not linked to any physical commodity or asset. That means that its value is not determined by the material used to make it, whether printed on a special paper or minted in a coin.
Public confidence is the primary determinant of this currency value. If people lose trust in the money, then its intrinsic value is lost. This is one of its main disadvantages. It has a risk of becoming valueless, depending on the market demand and supply chain.
An excellent example of this scenario is what happened in Zimbabwe in the early 21st century. The nation was going through a serious economic recession when the government decided to print lots of money to counter it.
This led to the biggest hyperinflation ever seen. At that time, one US Dollar was equal to about 8.3 billion Zimbabwean shillings. Imagine carrying a sack of money just to buy some simple commodities. This is what happens when money loses its value.
Fiat money originated from China in the 11th century before crossing over to other countries. In the United States, it was initially used as a standard bimetallic meaning, a part of it was linked to gold and silver, and the other part was not.
It was until around 1971 when this bimetallic nature stopped when the US government under President Richard Nixon banned fiat currency conversion to gold and silver.
This legal tender can be used for a variety of reasons, including universal transfer services. Some of its common examples include US Dollar, pound sterling, the euro, and many more. Its store of value can be both physical or virtual.
Pros of Using Fiat Money
- It is widely used
These currencies are widely used for various day-to-day transactions, including international transfers. It is also supported by numerous payment systems, which makes the transactions easy and fast.
- They are relatively stable
The currency is continuously regulated by the central authority, who closely checks its issuance and supply in the economy. This regulation allows the government to steer through economic issues like inflation and recession.
- Facilitates control of other economic activities
Its control gives the central bank a chance to navigate other economic matters like interest rates and credit supply of money and banking systems.
- It outpaces the commodity money
Commodity money like gold is expensive to mine, which limits its supply. With increased population growth, these commodities’ supply may be inadequate hence not fully satisfying the increasing population. Since fiat currency has adequate supply, It can meet the population needs.
Cons of Fiat Money
- It may lead to hyperinflation
Changes in demand and supply chain may lead to the continual printing of the money, which leads to inflation. If hyperinflation occurs, the currency fiat will be completely worthless.
- It may lead to economic volatility
Possible inflation may make it difficult to determine the exact prices of commodities, which leads to false data recording hence ineffective government planning. Issues like credit boom, economic collapses, and recessions largely contribute to this.
Cryptocurrency
Cryptocurrency is a digital (virtual) currency that uses the blockchain technology. This technology is a system that records information in such a way that no one can hack it. It protects consumers’ data from external interference.
Crypto is decentralized, meaning it is not regulated by a third party such as the government or central banks. They use the cryptography financial system to protect people’s ledger entries from being accessed by third parties or hackers.
The most popular crypto currently is the bitcoin. At present, it is worth about $10,618. It was created by a mysterious individual or group of individuals named Satoshi Nakamoto from Japan back in January 2009.
There are currently around 18.5 million bitcoins in circulation, with a total market value of about $160 billion. This value has increased at a steep pace during the Covid-19 pandemic.
Other rival cryptocurrencies in the market include Ethereum, Litecoin, Peercoin, Altcoin (launched by Bitcoin), Cardanol, EOS, Name coin, and many others. The market capitalization of all cryptocurrencies as of January 2020 was $237.1 billion.
Crypto can be used for everyday transactions like paying tuitions, fundraising, investment, betting, and purchasing other products like pizza. If you want to learn how to use bitcoins to bet in bitcoin table games and get the best bonuses and promotions, check the casino game guides to get the information.
Pros of Using Cryptocurrencies
- They lead to an easy and fast transactional process due to their decentralized nature, eliminating a lot of paperwork and extra costs.
- Fund transfers are done at minimal costs.
- Transactions are confidential, which protects your ledger entries.
- It is protected from inflation effects due to its limited production quantity.
- Most cryptocurrencies can be traded to fiat currencies.
Cons of Using Cryptocurrencies
- Lack of control by the government can lead to crypto being used for illegal transactions.
- If a user loses his private key, he cannot get a replacement, which leads to the permanent closure of his wallet and available coins. This leads to financial loss.
- Some cryptocurrencies cannot be exchanged for fiat money. It will require you first to convert them to bitcoins or Ethereum and later to fiat money. This slows down the transaction time and increases the fees.
- Transactions cannot be canceled. Once you send funds to the wrong wallet, it cannot be recovered.
Differences Between Fiat Money And Crypto
The two currencies can be differentiated in terms of:
- Control
Fiat money is issued by the government and controlled by the central bank. This means the central authority controls its issuance and supply in the market hence the name ‘legal tender’.
Crypto is decentralized, meaning it doesn’t have any control from a third party.
- Physical form
Cryptocurrencies are part of digital currencies hence cannot be physically touched. Fiat money is printed on special papers or minted into coins that can be physically touched.
- Limitation in supply
Fiat currency has no limit in its supply. It mostly depends on changing trends in the money supply and demand in the economy. They can lead to hyperinflation.
Cryptocurrencies have a limit in their production. For example, bitcoins have a production limit of 21 million. This helps to counter inflation.
- Transfer problems
It is possible to recover your fiat funds if you mistakenly send them to the wrong person. This is different for cryptocurrencies as once you transfer funds to the wrong wallet, they cannot be recovered.
- Medium of exchange
Since crypto is a digital currency, it can only be transferred online. Fiat money can be exchanged or transferred both virtually and physically. Mediums like Payoneer, PayPal, and banks allow this money to be transferred online.
Their store of value is also different cryptocurrencies are stored online, while fiat currencies are stored both online and physically.
Similarities
- Both currencies are used in the purchase of goods and services.
- Both currencies can be stored in an online form.
- Both currencies are affected by demand and scarcity factors.
- Both currencies are used as a medium of exchange.
Frequently Asked Questions
Which is The Safest Currency in The World?
Cryptocurrencies are the safest currencies as they use the blockchain and cryptography systems to protect their users’ financial data from external interference; hence hackers or any other third party cannot access them.
Are There Any Non-fiat Currencies?
Yes, there are other non-fiat currencies you can use, like coupons and loyalty points.
Is Cryptocurrency a Fiat?
No. Fiats’ definition discloses it as a currency issued by the government but controlled by the central bank. On the other hand, cryptocurrency is a digital currency not controlled by any third party like the central bank.
Can Cryptocurrency Replace Fiat?
Yes, that is possible. If cryptocurrency usage continues to rise at the same pace as it is today, it may replace fiat in the future, although this may take years.
Why is Cryptocurrency Better Than Fiat Currency?
Cryptocurrency uses blockchain technology, which offers tight safety of its customers’ transactional data. This makes it difficult for hackers to access them. Crypto transactions are also faster compared to fiat transactions.
Cryptocurrencies are not exposed to inflation problems due to their limited production quantity, unlike the other currency, which is often exposed to inflation.
Conclusion
Fiat money and cryptocurrencies are widely used around the world. They have simplified our daily transactions, making them fast and efficient. It is always essential to learn their differences to have a better choice of which one to use.