Crypto vs Fiat: similarities and differences

Since the creation of Bitcoin in 2009, the crypto market has intrigued people and drawn a lot of audiences from around the world. Many people talk about its potential and how it has come to stay. In fact, some crypto users have even compared virtual coins to regular fiat money. The comparison between both of these currencies is one that has trended for years and is never-ending. This article sheds more light on the comparison, providing extensive details about the similarities and differences between crypto and fiat. So, Crypto vs Fiat – how are they different and similar to each other? Let’s find out. 

What is fiat currency?

Fiat money is any money that is issued by the governments of various countries. Usually, these kinds of money exist in physical form (cash). It is possible to hold it and give it to another person. The coins and banknotes we use to purchase our everyday commodities are good examples of fiat money. 

Generally, the government controls the value of fiat money. Hence, it is circulated and regulated only by the government. This means that fiat money is only valuable because a government openly declares it as legal tender. It has zero intrinsic value. Also, it has no cap on its total supply and the central bank in a country can easily print it when required. 

What are cryptocurrencies?

Cryptos, short for cryptocurrencies, are digital currencies designed to operate as a medium of exchange via a computer network that doesn’t depend on any centralized authority, such as a bank or government, to maintain it. Essentially, it is a virtual currency, which doesn’t come in physical form.  

Crypto is a digital asset that is generally treated as a medium of trade between two people. Popular examples of cryptocurrencies include Bitcoin and Ethereum. Cryptos are generally fixed in supply, unlike fiat currencies. Bitcoin has a total fixed supply of just 21.000.000 units. This makes it even scarcer than pure gold.

What are the pros and cons of fiat currency?

Below, we’ve highlighted the advantages and disadvantages of fiat currency

Pros

• Fiat currency provides governments with greater flexibility to regulate their currency, establish monetary policy, and stabilize international markets.
• It also gives room for fractional reserve banking. This kind of banking allows commercial banks to multiply the amount of cash on hand to satisfy demand from borrowers.

Cons

• Fiat currencies have government-bound value. This means that they primarily rely on the government for stability. 
• They are at risk of inflation
• High fees and daily limits. Sometimes, banks put daily limits on both spending and withdrawing your hard-earned money.

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What are the pros and cons of cryptocurrency?

Below, we’ve highlighted the advantages and disadvantages of cryptocurrency: 

Pros:

• Cryptocurrencies eliminate the need for intermediaries during trades, as sellers can trade directly with buyers. 
• Blockchain technology provides users with very effective protection against fraud since ledger entries cannot be altered once processed.
• This decentralized nature of cryptocurrency makes its transactions inviolable. 
• Cheaper and faster money transfer

Cons:

• The cryptosystem still remains vulnerable to some cases of hacking and fraud due to advanced techniques used by hackers. 
• Price volatility. Cryptocurrency have extremely volatile prices
• High energy consumption for crypto mining activities 

Crypto vs Fiat – What are the similarities between cryptocurrencies and fiat money?

Here is a list of the similarities between cryptocurrencies and fiat money:

• You can use both cryptocurrencies and fiat money to buy goods and services. 
• It is possible to split up fiat money into smaller units, like 1 Naira into 100 Kobo. You can split up cryptocurrencies. For example, you can split 1 Bitcoin into small units like 0.000001 BTC.
• Both cryptocurrencies and fiat money are not reliant on any commodity such as gold and silver.
• You can easily store and transfer both of these forms of currencies, in different ways, and can easily gift them.
• There are various types of digital currencies like Bitcoin, Litecoin, Ethereum, etc. Fiat money is also readily available in various currencies like the Nigerian Naira, Ghanaian Cedi, etc.

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Crypto vs Fiat – Differences between cryptocurrencies and fiat money

The unique differences between cryptocurrencies and fiat money include: 

• Fiat money is a certified legal tender, while crypto/digital currencies are not yet legalized in so many countries.
• Fiat money is fully backed by governments, however, cryptocurrencies are not controlled by any government.
• A cryptocurrency is solely a virtual form of money, while fiat money exists in both virtual and physical forms (cash). 
• Fiat money needs an intermediary like brokerages or banks to execute a transaction. As for cryptocurrencies, the transactions are strictly completed on a peer-to-peer network, thereby eliminating the need for third parties.
• Cryptocurrencies can serve as a barricade against inflation, but this is not the same for fiat money. This is because cryptos have just a limited supply, however, fiat money has an unlimited supply. 
• All transactions you execute using cryptocurrencies are strictly recorded and irreversible, unlike the common fiat money.

As much as there are similarities between cryptocurrency and fiat money, there are also clear differences between them. The degree of centralization, inflationary or deflationary aspect, level of security, and restrictions of use are some of the major differences between these two currencies. Nevertheless, each of them has individual advantages and disadvantages, just as they have supporters and critics. Although crypto is fast becoming popular, there is no certainty that it will overshadow the use of fiat money in the future. 

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