Cryptocurrencies first came to life in 2009, and it took them around eight years to gain real attention and become popular. Bitcoin was the trailblazer, but now there’s a whole bunch of other cryptocurrencies like Ethereum, Ripple, and Litecoin, each doing its own thing. So, in about 10 years, they went from being this experimental digital idea to something everyone’s talking about.
With the fiat currencies being the backbone of the existing financial system, the emergence of crypto has kind of changed the way finance and economy are perceived. Cryptocurrencies remain a challenge for some, yet an exciting opportunity for others due to a number of factors that will be explained below. But first, let’s learn what these two things, crypto and fiat, mean.
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Fiat Currency: Basics and Characteristics
Fiat currency is the money that is issued by the government and is used as legal tender. The key concept of fiat money is that it is strictly regulated by an authority such as a Central bank, for example, which means that its amount and value are, to a large extent, controllable.
Fiat money comes in two forms – cash and digital. The concept of cash, hopefully, doesn’t need an explanation. Digital fiat money, on the other hand, is basically what you have in your bank account: the digital representation of cash. You can transfer it from one account to another, withdraw it in the form of cash, pay for goods and services, etc.
Cryptocurrency: Unveiling the Concept
I’d say the key major similarities between crypto and fiat currencies is that they both have a certain value and the word “currency” in them. Ok, and they can also be passed from one person or account to another. However, what is beyond cryptocurrency is totally different from the money we are used to.
First of all, each cryptocurrency has a limited supply determined by the cryptography behind it – the code used to create new coins. Second, it’s significantly more secure, thanks to blockchain technology. Imagine blockchain as a vast, decentralized network of interconnected records that store unique data pieces. Each piece relies on others, making it impossible to tamper with a single block without affecting the whole chain.
Finally, crypto only exists as a Digital currency, unlike fiat money, which has both physical and digital forms.
Differences in Value Perception
Now this is a significant difference. I’d say, one of the key differences.
The notion that the value of fiat and crypto may differ significantly and change disproportionately is based upon the centralized nature of fiat currencies and decentralization of crypto. This basically means that your government tells you how valuable the US dollar, or any other currency will be. It is completely different with crypto though.
Before we continue, let’s remember that crypto is scarce, which is because the total number of available coins doesn’t change rapidly (there’s no institution that can “print” the money like they do with fiat currencies in case of need). Now the basic law of supply and demand comes into play. Someone dropped a substantial amount of BitCoin? Boom – the supply increases, the demand changes slowly – and here you have lower value. Now there’s one more thing called market sentiment. Someone influential is hyping on a cryptocurrency? There you have it; high demand, limited supply, and skyrocketing value. This doesn’t work like that with fiat.
Transaction Mechanisms
Both fiat and crypto currencies can be transferred from one account to another, as we already know. However, the difference is that crypto currency is mostly transferred directly, while fiat transactions are not possible without an intermediary, such as a bank. This is just another difference that stems from the decentralized nature of crypto.
Regulation and Governance
Although there have been attempts to regulate crypto currencies, most of them concern either the platforms on which crypto currencies are traded, or their legal status. There is no governmental regulation of the value, supply and demand of the crypto; rather, they are subject to the natural market laws and principles. There is simply no way for governments to intrude in that realm. However, they can still mess up with fiat currencies that they have full control of.
Read more: The EU introduces new rules on crypto regulation
Volatility and Stability
The crypto realm has gained so much attraction because of its volatility, offering a shot at scoring fast cash through trading. You can’t do that with fiat currencies because they have relatively stable values. You can, of course, buy a currency that grows in value faster than your national currency, but how many years are you likely to wait until it makes any real difference to you? On the other hand, the volatile nature of crypto value makes it less suitable for daily transactions, as the fiat equivalent of a price you bought with crypto may change even before the item is delivered to you.
Use Cases and Adoption
Although fiat money is still a mainstay of financial operations, there are several cases where crypto currencies may be used more efficiently. One of them is transferring money overseas. This is because cryptos only roll in as digital assets, making it a breeze to send around. Besides, you do not need an intermediary who will pocket a few percent commission and take ‘3 to 5 business days’ to complete the transfer. You can also store and exchange crypto. Although this is a bit riskier due to the higher volatility of the crypto market, fiat money also devalues over time, so there’s no safe space, really.
Future Outlook
With more and more people and organizations adopting crypto, there’s a great chance it may revolutionize the way we perceive and interact with money. The adoption of blockchain locks in the safety factor, and with more and more attempts to regulate the market, it may eventually become less volatile making it a safer bet for your day-to-day grind.
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Crypto and fiat currencies have been coexisting peacefully for around a decade, with crypto being in the shadow and fiat continuing to be the most widespread means of money, including being the end value for many crypto traders. However, things are changing and we may be witnessing a major shift toward cryptocurrency very soon.
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