Crypto vs Fiat. Which is better? Investors and finance leaders have asked this question since the beginning of the Bitcoin boom.
Currently, institutions trust fiat money because they have been using it for hundreds of years. But, internet users have started using cryptocurrencies with more frequency. Crypto gambling players use Ether and Bitcoin to play at the best crypto casino.
Additionally, Bitcoin investment has benefited many traders over the last decade. But let us first look at what constitutes money.
Then we will dig into crypto vs fiat for their advantages and disadvantages and take a brief look at the history of these two currency types.
The Main Features Of Money
Before discussing crypto vs fiat, we have to look at what qualities an asset needs to be considered money.
An asset must be a store of value, act as a medium of exchange, and be a unit of account.
Store Of Value
An asset or new currency has to be a store of value. This means that people should trust that an asset will retain its value during transactions.
Fiat currencies are relatively stable forms of money. They are linked to supply and demand. They are also subject to a central bank. Banks determine the value of fiat currencies by issuing more money. Though, these fiat currencies might lose value due to political unrest or a credit crisis.
Cryptocurrencies are known for their volatility. Bitcoin and Ether rise and fall by thousands of dollars each day, but some cryptocurrencies use underlying assets to balance their value. Stablecoins use a fiat currency, a commodity like gold, or a group of fiat currencies to determine their value.
Medium Of Exchange
Next, the asset needs to be an accepted form of payment. Buyers and sellers should be able to use the asset across multiple territories, and both parties need to accept the asset’s value.
For example, if a person buys a TV from an online store using Bitcoin, both the consumer and the online store needs to rely on BTC’s value.
Cryptocurrencies are popular modes of payment online but have seen little adoption at physical stores. Some vendors and institutions have begun accepting Bitcoin. For example, PayPal has Bitcoin support. Other applications like Spedn, allow consumers to use crypto as fiat at retailers.
On the other hand, fiat currencies dominate as a form of payment. Cryptocurrencies have some catching up to do. But because they are digital and divisible, they can become a flexible mode of payment.
Unit Of Account
Furthermore, an asset needs to be able to denominate the value of different products and services. It needs to do this in relation to the value of these products and services. For example, a sports car needs to be more expensive than a smartphone.
Central banks achieve this with fiat currencies. They manage the value of a fiat currency in relation to others. They print more money or adjust interest rates.
Cryptocurrencies are subject to crypto market prices. These prices adhere to supply and demand. Moreover, a unit of account can be divided. Bitcoin is divisible to one hundred millionth of 1 Bitcoin while fiat currencies have cents.
Crypto vs Fiat: What They Are
It is a currency that holds no intrinsic value. This means that you can only use it to buy things; it has no other uses. It is also issued by a regulator. This is usually a central authority like a government.
Fiat currencies’ value rises and falls due to supply and demand. A central authority can adjust its value. For example, they could increase the supply by printing more notes and increase demand by issuing credit.
Cryptocurrency is a mode of payment that works with blockchain technology. Companies create their own cryptocurrencies, usually called tokens. These companies make these tokens for use on their platform. Users typically have to use these tokens to perform functions on the blockchain.
Kinds of Cryptocurrencies
There are many kinds of cryptocurrencies currently available, the first being Bitcoin. This cryptocurrency is a recognized form of payment on many platforms so much so that PayPal and other big companies have begun accepting BTC.
Next are Altcoins. These are cryptos other than Bitcoin, including Ether (ETH), Litecoin, Dogecoin, and ADA. They provide users with different functions. Users need to use these tokens to use blockchain services.
The final kind is Stablecoins. These coins derive their value from an underlying asset. For example, Tether (USDT) is equivalent to $1. Other tokens use gold and blockchain protocols to keep values stable.
How The Currencies Work
Fiat currency is not backed by any reserve assets or commodities. This means that institutions and consumers trust fiat currencies as storage mediums for purchasing power.
For instance, in the past, people used the barter system. Both parties traded products and services that had a similar value. Three cows could equal one shed. Now people trust fiat currencies as a determiner of purchasing power. Both the cows and the shed could equal $5,000.
Governments also deem fiat currencies as legal tender. This means people can use it to pay taxes, buy property, and receive credit. Because governments control the currency, it is tied to political stability. If a government is unstable, its fiat currency’s value decreases.
Blockchains are distributed ledgers. They consist of blocks of transactions. Once someone adds a block to the blockchain, they cannot change the information. Also, anyone can see the blocks on the chain. This means that it is challenging to perform malicious actions.
Moreover, users have to mine tokens on the blockchain. They need to use their computing resources to receive a token reward.
Other companies with blockchains issue tokens to the public. They start an ICO (Initial Coin Offering) and sell a proportion of their pre-mined tokens. One example is Ethereum, which did this with ETH (Ether).
Accordingly, Bitcoin has a limited supply of 21 million tokens. In comparison, Ether has an unlimited supply. Cryptocurrencies differ in their supply and also how users obtain them. In crypto vs fiat, cryptocurrencies have more minting options.
A History Of Bitcoin vs Fiat
China first used a fiat currency during the 10th century. The state started using paper money because there was a shortage of copper. The rapid economic growth in the Sichuan region at the time prompted traders to issue notes that were protected by a monetary reserve. During the Yuan Dynasty, paper money became the only currency in the nation.
In the 19th century, during the USA’s civil war, the government issued fiat currency to preserve the value of gold and other precious metals. They also prevented people from converting their fiat currency into gold.
Then in the 20th century, the president of the United States created economic measures. These measures removed the convertibility of dollars into gold. Currently, most nations derive their value from their government and their relation to other fiat currencies.
Satoshi Nakamoto created the Bitcoin blockchain in 2009. He/ she wanted to develop a network where users did not have to rely on a centralized entity to make and verify transactions.
Instead, users on Bitcoin rely on a network of nodes that verify transactions using a consensus protocol: Proof of Work. Here miners need to use their computing power to solve complex cryptographic problems. After they solve a problem, they get a Bitcoin reward.
In the early days of Bitcoin, miners could receive Bitcoin rewards with little computing power. But as the blockchain grew, it became increasingly difficult to get rewards.
Accordingly, lots of companies built mining farms. Here they used expensive and powerful mining rigs. This meant that the ordinary miner could not gain significant BTC rewards from mining. Currently, many people join mining pools or trade Bitcoin on crypto exchanges.
The second-biggest cryptocurrency according to market cap is Ethereum. This blockchain allows developers to create decentralized applications. Users have to use ETH to pay for services.
Today, there are lots of cryptocurrencies available to the public. They range from Altcoins, Stablecoins, and NFTs (Non-fungible tokens). Each of these blockchain projects approaches cryptocurrencies differently.
Advantages & Disadvantages Of Fiat Vs Crypto
In crypto vs fiat, fiat currencies are more stable. They do not fluctuate as often as commodity currencies like gold or silver. Controlling authorities can also adjust fiat currency value when the need arises.
Furthermore, it is an accepted mode of payment around the world. Most countries use fiat currency as the default form of money.
Fiat currencies are also secure. Regulators ensure that fraudsters do not counterfeit currencies. If they do, there are harsh punishments for perpetrators. Entire law enforcement departments investigate crimes linked to fiat currencies.
In contrast, the most recent global financial crisis showed the world that central authorities can do little to prevent recessions. Even with their control over fiat issuance and governance, these authorities could not halt the recessions.
In nations like Venezuela and Zimbabwe, their fiat currencies bottomed out. This happened because their respective governments were unstable. This led to their currencies losing purchasing power and ultimately leading their economies into recession.
In crypto vs fiat, cryptocurrencies have a few advantages over fiat currencies. Firstly, it is decentralized. A centralized entity does not control it. This means that cryptocurrency users can make transactions in a trustless environment without paying an intermediary.
Secondly, cryptocurrencies are secure. It is nearly impossible to commit fraud on the blockchain unless the tokens themselves are fraudulent.
Thirdly, cryptocurrencies hold more value than just being forms of payment. For example, NFTs hold value depending on what they represent. They are also more flexible and transparent than fiat currencies. People can use cryptocurrencies in various territories without regulations. Also, all transactions using tokens are public.
In fiat vs crypto, the former are more popular and accepted. Citizens and governments trust fiat currencies. Convincing people that cryptocurrencies are a valid alternative or even replacement for fiat currencies is a massive challenge.
Moreover, very few countries have officially accepted cryptocurrencies as a mode of payment. The USA allows crypto transactions, but the government imposes strict regulations on it.
China has completely banned cryptocurrencies in the country, and many other countries like India are also considering it. Ultimately, cryptocurrency still needs to achieve mass adoption.
Cryptocurrencies fluctuate pretty regularly. There are extended periods of value growth but also periods of value downturns. For example, Bitcoin rose to over $64,800 before stabilizing at $50,000. This kind of price volatility prevents Bitcoin and other linked cryptocurrencies from becoming accepted modes of payment.
What Does The Future Hold?
Central banks and governments have begun fighting back against cryptocurrency growth. Many private companies and banks have started their own cryptocurrencies. They want to take advantage of blockchain technology, but without decentralization.
They suggest creating Central Bank Digital Currencies (CBDC). The central banks will allow account holders direct access to a digital currency. Similarly, the banks will determine the supply and governance of the CBDC. Accordingly, it would have the flexibility of Bitcoin without the trustless environment.
Cryptocurrencies continue disrupting the financial sector. There are crypto loan platforms, crypto application development networks, and even crypto virtual worlds.
Soon the internet will rely on blockchains to create web applications and run smart contracts. These contracts could range from rental agreements to marriage certificates. And all these technological advances will require cryptocurrencies.
This means that the internet might get its own native currency. For example, an internet user might need a crypto token to play their favorite game online, or they need to pay ETH to sign a contract or subscription.
In summary, while central authorities dive into blockchain technology with CBDC, cryptocurrencies are building a new ecosystem where tokens are the preferred form of payment.
With crypto vs fiat, fiat currencies are the most widely used form of money. It is highly regulated and has a relatively stable value. On the other hand, it remains vulnerable to political unrest and devaluation.
Cryptocurrencies might be volatile on the markets and have little mass adoption. Yet, it has limitless growth potential. There are thousands of cryptocurrencies, and a handful of them are starting to shape a new paradigm for finance.