When Bitcoin was launched in 2009, the cryptocurrency was touted as the future currency. Many thought it was just a matter of time, and shortly, cryptocurrency could replace traditional money. After more than ten years, everything remains the same as it was. We all still use fiat money, while cryptocurrency remains an occupation only for the most ardent adherents. Many users still do not understand the benefits of cryptocurrencies, their use, and what makes fiat and crypto-related different. To sort things out, we suggest you dive into the basics.
What Is Fiat Currency?
Fiat money is a currency declared by the authorities as legal tender. Fiat is the money that most people in the world use daily (dollars, euros, pounds, and so on). The state issues fiat money, independent issue is illegal. Contrary to popular belief, fiat money is not backed by states' gold reserves or the gross domestic product (GDP). But the fiat rate depends on the actions of the government and its economic policy. Since fiat is no longer based on a physical commodity, such as gold or silver, as it was in the past, it is valued only because of the public trust in the authorities. That is, the state's efforts preserve the value of the fiat currency. Other states and citizens from the exchange rate according to the total issue, the market’s supply and demand level, and the size of debt obligations.
What Is Cryptocurrency?
Cryptocurrencies are digital currencies, many of which are built on blockchain technology and use cryptography to ensure security. This security feature also allows you to control the issuing of new units and ensure the safe transfer of assets. Unlike fiat, controlled by central banks and governments, cryptocurrencies are decentralized. To put it simply, cryptocurrency is a system with equal participants that allows any user located anywhere to send and receive payments. Cryptocurrency transactions exist exclusively in digital form in a decentralized database. They do not imply transactions with physical money that have circulation and exchange opportunities in the real world. When transferring funds in cryptocurrency, transactions are recorded in the public register.
Fiat: Pros & Cons
- More noticeable stability, no high volatility. Despite the growing popularity of cryptocurrencies, fiat money is still more in demand. Moreover, unlike cryptocurrencies, whose rate constantly fluctuates, the rate of a fiat currency, as a rule, remains more stable but largely depends on the economic situation of the particular government.
- Since fiat money does not have a limited issue, central banks can manage their supply. This gives them authority to manage, among other things, credit, interest rates, and liquidity.
- Fiat currency can mitigate local recessions and help manage the crisis. However, this is not effective on a large scale or in the case of a global recession.
- Losing a plastic card or forgetting a PIN code does not mean losing money. Funds are still in the bank, where they can be easily withdrawn and ordered a new card, having a passport.
- Operations in the bank are reversible. It is possible to request a chargeback if the fact of fraud is proven, and the bank considers the reasons weighty.
- Fiat money is widely distributed everywhere: in shops, restaurants, taxis, and airports.
- Most projects working with fiat are based on a central server. By hacking it, the hacker gets access to user accounts. Such situations happen with enviable regularity.
- Due to the unlimited supply of fiat, the problem of inflation arises. The state is forced to regularly print new money, which leads to its gradual depreciation.
- Lack of anonymity. To get a bank card or account, you must provide the bank with all your personal information, from your name and passport data to your place of work.
- The risk of instability. When everything is good in the country, banks and fiat currency succeed. However, when a country is poorly managed or suffers from something, the fiat currency also suffers, hence the population.
- Slow transactions. Despite the innovations of the Internet and the acceleration of transactions, electronic transfers still occur with delays, depending on the bank’s work schedule, and high bank commissions are deducted.
- The possibility of forgery. Printed fiat money and checks are particularly easy targets for forgery.
Crypto: Pros & Cons
- No central server, the hacking of which would lead to the loss of money by millions of people. Cryptocurrencies are based on the idea of decentralization. Copies of the blockchain are on many computers worldwide, and to make changes to the blockchain, majority consent is required.
- Transparency of transactions. Information about all payments is permanently stored in the blockchain and is available for viewing by anyone.
- Cryptocurrency is not subject to government or banking structures, although they try hard to gain influence over it. The absence of binding to banks will protect the position of the crypto even in the event of a worldwide default.
- The impossibility of forgery. Due to its decentralized nature, tokens and digital coins are verified on the blockchain and cannot be forged.
- Limited emission. Usually, cryptocurrencies are issued in a given amount, which limits the number of new units and prevents inflation. Central banks or governments can print or mint as much currency as they want, leading to hyperinflation.
- The simplicity of transactions. The transfer amount is unlimited, and the transaction occurs almost instantly.
- Privacy. Even though cryptocurrency addresses and transactions are publicly available, it is impossible to determine who owns the wallet. To use cryptocurrency, you do not need to disclose your identity.
- The value of coins depends only on the ratio of supply and demand. Hence the high volatility, sharp fluctuations in the exchange rate, and the complexity of forecasting. On the other hand, volatility often plays into the hands of traders.
- It is very easy to lose access to the crypto wallet — it is enough to forget the password, not to save the seed phrase or private key to restore it. You can say goodbye to your money if these three conditions are met.
- It is impossible to cancel the transaction and return the funds sent to the wrong address. Nevertheless, this feature of cryptocurrencies is very much to the liking of business owners who face chargeback fraud.
- Facilitating criminal activity. Since cryptocurrencies are still quite young, their regulation to prevent criminal activity in the crypto market is still under development. Before crypto exchanges implemented KYC/AML procedures, criminals and fraudsters could easily avoid detection since transactions could not be tracked or linked to a real person.
Fiat and cryptocurrencies differ little in terms of application. They can be used as a means of exchange for the purchase of goods and services, credit, savings, and transfer of funds. They depend on economic factors that cause an increase or decrease in their value. They are not provided with physical goods; their cost depends on supply and demand. In 2022, cryptocurrency cannot exist without fiat.
Both means of payment complement each other. Large crypto-oriented companies are opening fiat accounts to expand users’ opportunities. For example, fiat on the Binance exchange is represented by more than 50 monetary units, including the dollar, euro, ruble, pounds sterling, yen, and others. On the other hand, many global companies, for example, Microsoft, PayPal, Starbucks, and others, have implemented support for cryptocurrencies.
Nevertheless, fiat money continues to hold a leading position. Fiat remains a simple and understandable tool, and cryptocurrencies continue to move forward with tiny steps, increasing capitalization. The answer to whether crypto dominance is possible in the future remains open. Although it is worth paying tribute, crypto use cases are constantly expanding.