Money is an important requirement for functioning of the society through financial transactions. It is also one of the collectively recognized stores of value all over the world. Some societies used livestock as money and then gradually evolved to cowrie shells, followed by the introduction of metal coins. The descriptions of money today would generally refer to fiat currency, which is any government-backed legal tender.
Why do you need the fiat currency vs cryptocurrency debate when you have trusted forms of money like physical cash and coins? Interestingly, the evolution of money has paved the path for introduction of cryptocurrencies as a major force of change in the widely accepted forms of money and value. The fiat currency and cryptocurrency differences might play a crucial role in defining the future course of financial advancements. Let us learn more about the differences between fiat currency and cryptocurrencies.
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What are Fiat Currencies and How Do They Work?
The best way to begin a cryptocurrency vs fiat currency comparison involves learning about their definitions. Fiat currency or fiat money refers to a specific type of currency issued by a country’s government or central bank. It is important to note that fiat currencies are not supported by physical commodities like gold. On the contrary, the value of fiat currency depends on the trust of people in the government issuing the currency. Some of the common examples of fiat currency include the US dollar and the Euro.
The most notable aspect in the definition of fiat currencies points towards their centralized nature. It comes under the control of a central authority, such as central banks or the government. Centralization is one of the key factors in the comparison of fiat currency and cryptocurrency as it defines the level of control users have over their assets. The centralized authority controlling the fiat currency can specify interest rates, establish new monetary policies, and control the supply of fiat currency.
Fiat currencies have been serving as the backbone of many economies for centuries. Governments issue and control the supply of fiat currencies with the objective of maintaining stability in their economies. On the other hand, central banks are responsible for management of fiat currencies through adjustment of money supply by printing more fiat currency or withdrawing them from circulation.
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What are Cryptocurrencies and How Do They Work?
Cryptocurrencies are a digital currency that leverages cryptography and blockchain technology to offer decentralization and better security. Questions like “Is cryptocurrency better than fiat currency?” arise from the fact that cryptocurrencies use blockchain technology. Blockchain serves as a distributed ledger for recording all cryptocurrency transactions, alongside ensuring immutability, transparency, and security of transactions. The most prominent trait of cryptocurrencies is decentralization, which implies that central authorities do not issue or control them.
Cryptocurrencies are created through minting or mining, according to the design of the cryptocurrency. For example, Bitcoin uses crypto mining for creation of new cryptocurrencies. On the other hand, Ethereum and other altcoins use the Proof of Stake technology instead of mining. Cryptocurrencies have the advantage in crypto vs fiat currency debate as they emphasize privacy and security. While the transaction details on a public blockchain are visible to everyone, users’ personal information remains anonymous. On top of that, they also offer flexibility when designing decentralized financial systems.
The distinctive traits of cryptocurrencies also invite attention to the limited supply. While fiat currencies can be printed by central banks when the need arises, most of the cryptocurrencies have a predetermined limit on their maximum supply. For example, the maximum supply of Bitcoin is 21 million BTC. The fiat currency and cryptocurrency difference also points out the transparency of cryptocurrencies. Blockchain technology records all transactions on public ledgers, thereby ensuring transparency alongside accountability of all users across the network.
The working mechanism of cryptocurrencies enables users to carry out faster transactions than traditional methods, such as credit card payments and wire transfers. Most importantly, cryptocurrency owners don’t have to rely on banks or other financial intermediaries to hold and manage their money. Users can store crypto assets in their wallets with complete control over what to do with the assets. However, cryptocurrencies also present some limitations owing to regulatory uncertainty and the volatility associated with them.
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What are the Differences between Fiat Currency and Cryptocurrencies?
The fiat currency vs cryptocurrency debate has been emerging as a prominent highlight in situations where the crypto market continues shifting towards a bullish run. It makes everyone think that cryptocurrencies might finally take over fiat currency as a commonly accepted store of value. However, the decline of crypto prices brings back the balance in comparisons between fiat and cryptocurrency. Here is an overview of some of the notable factors that differentiate fiat currencies from cryptocurrencies.
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Decentralization
The foremost factor in differences between cryptocurrencies and fiat currency is decentralization. Fiat currencies are issued and regulated by central authorities such as governments of central banks, thereby making them centralized. Such differences between fiat currency and cryptocurrency are visible in the fact that the central authorities have complete control over the supply of money and interest rates. On top of it, the central authorities can also determine the monetary policies.
Cryptocurrencies leverage the power of decentralization through blockchain technology. The network of nodes in a blockchain contributes to verifying and validating transactions before adding them to the network. The best thing about decentralization is that it does not allow any single entity to take complete control of the cryptocurrency network. Most important of all, consensus mechanisms are responsible for governance of the validation process, thereby ensuring that cryptocurrencies are resistant to unauthorized manipulation and censorship.
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Transparency and Immutability
The differences between fiat currency and cryptocurrencies also invite attention to the transparency and immutability of their systems. These factors are major differentiators in a cryptocurrency vs fiat currency debate, as blockchain provides a transparent and immutable ledger for cryptocurrency transactions. All the transactions are documented in chronological order and cannot be modified without consensus from network participants.
The traditional banking system does not have the same immutability and transparency. Banks and financial service providers maintain records of transactions, albeit with restrictions on accessibility to the public. On top of it, the records can be modified or manipulated by centralized authorities. The same is not applicable to cryptocurrencies, as they offer better trust and security for transaction data.
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Privacy
The next important point of difference between fiat currencies and cryptocurrencies is privacy. You can evaluate the fiat currency and cryptocurrency differences in terms of privacy as it is an important requirement in finance. Fiat currency transactions can showcase a clear trail that leads back to the person who makes the transaction.
On the other hand, cryptocurrencies stand out in terms of privacy as crypto transactions are clearly visible on the public blockchain. However, there is a twist, as you can only see the wallet addresses of senders and receivers rather than their personal information. The emphasis on anonymity in cryptocurrency transactions ensures that it is difficult to trace the origins of transactions.
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Stability
Another point of difference between cryptocurrencies and fiat currencies is stability. Fiat currencies are generally more stable than cryptocurrencies in terms of price. However, the comparison of crypto vs fiat currency must also focus on the fact that fiat currencies are not completely immune to devaluation. For example, the Zimbabwean dollar lost almost 76% of its value in 2022.
Cryptocurrencies have gained notorious levels of attention due to fluctuations in their value. The prices of cryptocurrencies rise and fall in a single day and can cause formidable losses or huge profits for users. However, stablecoins have been created to resolve the problems with extreme price volatility in cryptocurrencies.
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Final Words
The debate over queries like “Is cryptocurrency better than fiat currency?” emerges during bullish cycles in the crypto market. As the crypto market prepares for the next Bull Run, it is important to check whether cryptocurrencies can finally outrun fiat currencies. However, there is no way to discard fiat currencies completely, as they serve as the backbone of the global economy in many ways.
On the contrary, the benefits of cryptocurrencies are likely to attract more users. For example, cryptocurrencies offer complete control over your money and let you protect your privacy. Furthermore, the common criticism of cryptocurrencies on the basis of price volatility also applies to fiat currencies in some cases. Therefore, it is important to learn more about the differences between cryptocurrencies and fiat currencies to pick the ideal option for different applications.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
