As more and more people get interested in cryptocurrency, they are introduced to new terms like blockchain, mining, different types of currencies and exchanges, and more. When learning about these terms, many get confused with what the difference is between fiat currency and traditional money and also how it is different from cryptocurrency. Let’s dive in!
First, let us see why both fiat currency and cryptocurrency are similar. Both of these are a medium of exchange and a store of value. They deliver their utility but they are different in a lot of ways. Let us
The Key Differences
- Fiat currency is issued by the government whereas crypto currency is a digital asset that gets its value according to the blockchain.
- The distribution of fiat currency requires government related permissions and transactions that involve a mediator. However, cryptocurrencies only rely on the network that is decentralized and is distributed without any third party involvement and the transactions will be saved on the blockchain which could be used to verify each transaction.
- Another key difference is that the issuing and governance of fiat currency are dictated by central banks while cryptocurrency is governed by the blockchain protocols and codes.
Fiat Currency
The word ‘Fiat’ means Let it be done. In this world of digital assets, Fiat currency is a type of currency that is issued by the government but not backed by gold or silver, meaning you will not be able to buy gold or silver with this currency. The value of this currency will be what is set by the goods and services offered by the manufacturers. One great example of Fiat currency is the US dollar. Currently, no country uses a gold or silver standard as their traditional money.
This currency is controlled by the country’s money supply. Centralization is one of the key aspects in fiat currencies as it shows the level of control users have over their assets. The government issued the fiat currencies to maintain stability in their economies and the central banks are responsible for management of these currencies through adjustment of money supply by printing more of these currencies.
Crypto Currency
Cryptocurrencies are digital assets that use blockchain technology to track and secure transactions. The blockchain stores the data of each transaction and validates it. These currencies are usually used as a store of value but investors could trade these assets with other cryptocurrencies or even exchange it with money. The value of the currencies though are volatile according to the people who buy and sell them during trade.
Many cryptocurrencies use automated markets and liquidity pools to determine their value. Liquidity pools are pools or groups of different assets and commodities that are used to trade with so that investors have low risk if a sudden downtrend occurs in one of their assets. Even though by presentation, both currencies are similar, this is the key difference between them.
Detailed Comparison Between Cryptocurrency & Fiat Currency
Even though both fiat currencies and cryptocurrencies are basically used for transactions, other than the non-technical aspects of both, there are a lot of differences. To explain,
1. In terms of privacy
There are many ways to manipulate fiat currencies in this modern era; from tracking the transaction and finding out the security pins and other personal information to hacking the banking details of a person. Cryptocurrencies have their transactions encrypted to the blockchain and not even the buyer and seller will know any details of the opposite party while transferring. This makes it hard for hackers to even try to track the same.
2. In terms of security
Needless to say, digital currencies are the safest to carry around as physical form currencies could be stolen. There are cases of theft even in huge amounts, even in places with high security. Cryptocurrency transfers could occur only with the person’s permission and that too, that transfer will be recorded permanently in the blockchains. There are no server related issues or currency being stolen in crypto.
3. Global transactions
Transferring money cross country could be a hassle when it comes to fiat money. This involves intermediaries to exchange the currency involved and the value could vary in each country. This is not an issue for crypto currencies. The value remains the same no matter which country or place it is in tat you are transferring and the process for transfer is also very quick compared to fiat money as the bank could have problems at times transferring money.
4. In terms of regulation
The central attraction of cryptocurrencies was that it had no limit and that it was not guarded by central authorities. This is the opposite in the case of fat currencies. As the government observes the transactions, there is a daily limit and it may also depend on the type of account a user holds. In addition to that, the government also issues interest and tax according to the amount of money that is transferred during a period of time.
5. In terms of value
As we know, fiat currencies offer more stability than cryptocurrencies. Cryptocurrencies are known to rise and fall at a pace that is unpredictable. Although initially, it had very little value, by the pace of uptrend by which it is going now, we have seen a rise of almost $40,000 just over the last few years. Judging by this, the market of cryptocurrencies will only go up or become stable.
This is not seen in fiat currencies, the price is always stable and if not, less than the value it had previously. So, in terms of value, even though fiat offers stability, crypto offers profit.
Conclusion
Money is inevitable in the society we live in today. Financial transactions are the way to go now and as digital currency is becoming popular, one thing we should realize is that even though the value of fiat money does not increase, when there is an option to double or even triple the value of money a person has currently, why not go for it!
The descriptions of money today are not only restricted in fiat money but also digital currencies which also pose as a passive source of income. Cryptocurrencies have made their statement already in the evolution of money and it is widely accepted that way. In the future, digital currencies will also have a role in defining a person’s net worth at the pace at which the value of it is going.