Since many people are now learning about cryptocurrencies and starting to use them, some companies have started adopting them as a payment method instead of, or in combination with, fiat currency.
Digital currencies like Bitcoin, Ethereum, Litecoin, and other alts have brought competition to fiat currency which had been in use since the 11th century. While more people are using cryptocurrencies than before, there are still those who do not know anything concerning them or how they differ from fiat money.
In this article, we will be taking a closer look at cryptocurrency and fiat by looking into their biggest differences.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that is decentralized, which means that it is not controlled by any government or financial institution. Crypto is very secure since it uses cryptography, which is the science of securing information and communication by using codes so that only those intended to receive the information can read and process it.
Crypto transactions are recorded on the blockchain, which serves as a public ledger that records everything but cannot be changed in any way. This helps to ensure that whatever information is found on the blockchain is correct. Because of their secure nature, cryptocurrencies are increasingly being accepted by several industries. Within the travel and tourism sector, people can book flights and hotel rooms using digital coins. Additionally, gamers can play games and wager online at crypto casinos. The best crypto casinos allow gamblers to wager using coins like Bitcoin and Ethereum and also bypass tricky KYC requirements, leading to a more convenient and accessible experience. Furthermore, within the e-commerce sector, many online retailers are now also accepting crypto in exchange for goods and services online.
What is Fiat Currency?
Fiat is a word used to refer to a currency that lacks inherent value but gets its worth from the government or central bank that issues it. What this means is that the value of fiat currency comes from the government’s order that it is legal tender, rather than from any built-in value or backing by a physical product. Besides the government’s order, its value is also associated with the amount of currency in circulation. That is why you sometimes find that a currency’s value drops when more notes are printed and circulated. As compared to other currencies like crypto, fiat is stable and controlled by the government. Examples of fiat currency are the Euro, the US Dollar, and the Japanese Yen, to name but a few.
Differences Between Fiat and Crypto
Fiat and crypto are both types of money since they are accepted as legal tenders by various entities but there are several differences between them that can be summarized as follows:
1. Physical Appearance
Fiat exists in two main forms; paper money or coins and digital currencies such as bank deposits whereas cryptocurrency only exists in electronic form, which is data on blockchain.
2. Centralization
Fiat currency is issued and regulated by banks and governments while cryptos are typically regulated through blockchains and decentralized network protocols like in the case of Bitcoin and Ethereum.
3. Supply Control
The central banks control the supply of fiat currency through monetary policies that either increase or decrease it when necessary. The supply of cryptocurrency is usually fixed or capped by its creators for security reasons and to prevent inflation.
4. Backed Value
Fiat currency’s value is backed by the issuing government and the economy’s strength, while cryptocurrencies get their value from market demand and their usefulness. For instance, Ethereum gained popularity because of its role in supporting smart contracts creation and execution thus enabling decentralized applications to run on its blockchain. Smart contracts can be used for a variety of purposes. The real estate sector has started to use smart contracts and online casinos often use smart contracts as well for verification and smooth payouts. Because Ethereum is useful in many ways, like creating and providing smart contracts, its value has increased over time.
5. Transaction Process
Fiat transactions usually involve banks or third parties such as Visa, Mastercard, or PayPal, while cryptocurrency transactions happen directly between individuals without any need for intermediaries. Crypto transactions use blockchain technology and happen often without intermediaries.
6. Transparency
With fiat currency, transaction details are usually private and known only to the people or financial institutions involved. This is so much different from cryptocurrencies, where transactions are publicly recorded on a blockchain for anyone interested to see. However, the only details shared on the blockchain are a crypto user pseudonym, so it is thought to be extremely private and secure.
7. Accessibility
Digital currency can be accessed by nearly anybody in the world with an internet connection while the use of fiat currency depends on one’s country’s economy and cannot easily be used in other countries.
8. Legal Status
Cryptocurrencies do not enjoy the same level of recognition and support from governments and central banks as fiat does because their legality is uncertain and few countries consider them as means of payment.
Advantages of Fiat over Cryptocurrencies
- Fiat currencies’ value is generally more stable and less volatile than cryptocurrencies.
- Fiat is widely accepted and trusted, making it easier to use in everyday transactions.
- Fiat is familiar and easy to understand, with a straightforward value proposition.
- In case of a power outage or loss of internet access, fiat can be used in its physical form for small transactions.
Disadvantages of Fiat Compared to Cryptocurrencies
- Fiat currencies can be devalued due to economic or political instability.
- Storing paper money or coins can be risky since it is easy for them to get stolen, lost, or damaged.
- There are some countries, like Zimbabwe, that do not have stable fiat currencies and instead use a multi-currency system. This can result in inefficient cross-border transfers where people are charged large sums of money for transfers.
Conclusion
Fiat and cryptocurrencies are two different approaches to money and finance, and the latter is still finding its feet in the financial world. The digital space is not static, and things are changing every day, so it should not come as a surprise when people strongly push for crypto to be used more traditionally, just like fiat. Knowing the differences between fiat and cryptocurrencies is important, as it can help people make financial decisions related to both crypto and fiat.
IMAGE CREDIT: Unsplash.com
