What is Fiat money? How does it differ from Cryptocurrency?
In this article, we will compare fiat currencies vs. cryptocurrencies across parameters like valuation and governance.
- Fiat currencies are government-issued and regulated, while cryptocurrencies are decentralized, meaning they are not subject to government control.
- Cryptocurrencies are more volatile than fiat currencies. The market is still relatively new, and considering the bearish run of the market currently, we can expect prices to become attractive in the near future.
- Governance is an important consideration when making investment decisions. Cryptocurrencies emphasize freedom and decentralization, while fiat currencies are government-issued and protected.
Investors have been inundated with information about cryptocurrencies over the past few years. With prices skyrocketing (and dropping) and heavy media coverage influencing those fluctuations, it can be hard to know what is true and what is just speculation.
What is Fiat money?
Fiat currency is a government-issued currency not backed by a physical commodity. The value of a fiat currency derives from the faith and credit of the issuing government; for instance, the Euro is an example of a fiat currency.
What are Cryptocurrencies?
A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, control the creation of new units, and verify the transfer of assets.
Cryptocurrencies are decentralized and not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009.
Fiat vs. Crypto: The Pros and Cons
Now that we have a basic understanding of fiat currencies and cryptocurrencies, let’s explore some of the key differences between the two. What is fiat in the crypto world? Is it frowned upon, respected, or avoided altogether?
- Government-issued and regulated, which gives them stability
- More widely accepted than cryptocurrencies
- Investors can use physical cash for transactions
- Centralized, which means they are subject to government control
- Inflationary, as governments can print more money at any time
- Decentralized, which means they are not subject to government control
- More secure than fiat currencies, as they use cryptography to protect transactions
- Limited supply, which means they are not subject to inflation
- Volatile, as prices can fluctuate drastically
- Not widely accepted as a form of payment yet
Crypto investors tend to distrust fiat currencies for their controlling aspects, while fiat investors are wary of crypto volatility.
Fiat vs. Cryptocurrency: Valuation
When considering an investment, one of the most important things to consider is its valuation. How much is the asset worth?
With fiat currencies, this can be tricky; many variables are at play. The government could print more money, leading to inflation and devaluation of a currency. Alternatively, unpredictable global events could increase demand for the currency, causing its value to increase.
On the other hand, there is a limited supply of most cryptocurrencies. The price of cryptocurrencies is more often based on utility. The more people use a particular cryptocurrency, the higher its price goes.
Although both fiat currencies and cryptocurrencies can be volatile, cryptocurrencies are typically more volatile, as the market for cryptocurrencies is still relatively new and small. As more people become interested in investing in cryptocurrencies, the price will likely become more stable.
Fiat Wallet Vs. Crypto Wallet: Governance
Another important consideration when making investment decisions is governance. Who controls the asset, and what regulations are in place?
With fiat currencies, the government and financial institutions are in control. They can print more money, manipulate interest rates, and impose taxes or fees. Fiat currencies are subject to government regulation; the government could decide to ban specific uses of fiat currency or put restrictions on trading.
Cryptocurrencies are not subject to government control. Instead, they are decentralized and controlled by the people who use them. There is more freedom in how people use cryptos but less protection if something goes wrong.
Security varies from one crypto to the next, however – for instance, Bitcoin uses its mining process to both verify transactions and create new coins. Until there is 21 million Bitcoin in circulation, the process will create new coins every 10 minutes.
There are a ton of more cryptocurrencies, altcoins, for instance, each with its unique system. For instance, some mints initially release their whole maximum quantity of coins before progressively removing them from circulation.
Recommended: What are altcoins?
Understanding Fiat vs. Cryptocurrency trading
Fiat currency exchanges are utilized for international currency trading. They are frequently used by investors who transact in foreign currencies and travelers who require cash in the local currency.
The most popular location to purchase, sell, and trade cryptocurrency is on an exchange. You may buy cryptocurrencies on several significant crypto exchanges with fiat money by utilizing wire transfers, credit or debit cards, or bank account transfers. Some exchanges solely permit trading in cryptocurrencies; you cannot swap fiat currency for cryptocurrencies on these platforms.
What does the future look like for Fiat and Crypto?
We have been using fiat currencies for as long as one can remember, so obviously, we aren’t going to just stop using them. Having said that, there is no denying that cryptocurrencies are a part of our ecosystem now and will probably continue to be a significant part of our future. Fiat money could continue to dominate for a long time when it comes to usage, but as cryptocurrencies continue to develop and advance, they are definitely worth considering.
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This blog is for educational purposes only. The information we offer does not constitute investment advice. Please always do your own research before investing. Any views expressed in this blog and by BOTS do not constitute a recommendation that any particular cryptocurrency (or cryptocurrency token/asset/index), portfolio of cryptocurrencies, transaction, or investment strategy is suitable for any specific person.