The cryptocurrency industry is densely packed with jargon terms that can easily be miscommunicated, misunderstood, or simply cause confusion for many newcomers to the industry. One of the most difficult challenges is defining the difference between cryptocurrency and fiat, which are two of the most common terms used when buying, selling, and trading any type of digital asset.
Let’s get started.
Before you begin, you must ensure that you have a thorough understanding of cryptocurrency and the broader industry that surrounds it.
To begin, let’s define cryptocurrency and consider how you might use it in the digital world.
What is Cryptocurrency?
In its most basic form, cryptocurrency is a digital currency, which is a type of currency that does not exist physically but is instead maintained and monitored by a series of computer programs. Crypto, like fiat money, is another form of payment that can be used to pay for goods and services, sent as a gift, or saved as a form of investment for the future.
Cryptocurrency can be sent and received in a variety of ways, but you must have access to an account that supports digital currency transactions to do so.
Now, what is a Fiat Currency?
The term “fiat currency” refers to the money you use every day. The United States dollar, like most modern currencies in circulation around the world, is a fiat currency. Its value is generally supported by a government’s economic power. This is distinct from asset-backed currency, which derives its value from an underlying asset.
This asset-backed currency would be one based on the value of gold. Although asset-backed currencies are legal tenders, the international monetary system has prioritised fiat currency since the Great Depression.
Let’s talk about the advantages of Fiat Currency
Fiat money is not only inexpensive to produce, but it is also simple to transport and exchange. One of the most significant advantages is that fiat money is not backed by a commodity, so it is not scarce like gold. As a result, a government has more control over the currency supply, allowing it to manage economic variables such as interest rates, liquidity, and credit supply.
As a government controls the money supply, it can protect the country from a financial crisis.
What are the disadvantages of Fiat Money?
Although a government has control over its currency supply, it is not a guarantee that the economy will be protected from a financial crisis, such as a recession.
Another disadvantage of fiat money is that it is susceptible to inflation, and a government may mismanage and print too much money, resulting in hyperinflation.
Furthermore, the price of fiat money is influenced by government regulations and fiscal policy, which could lead to a bubble with rapid price increases and decreases.
Some major differences between Fiat Currency and Cryptocurrency
The difference between fiat currencies and cryptocurrencies is that fiat currency transactions can be easily tracked and recognised by both the issuer and the recipient.
The Medium of Exchange:
Fiat currency is a physical or traditional medium of exchange, whereas cryptocurrency is a digital or virtual medium of exchange.
Safe and Secure:
Because fiat currency is backed by the government and money transfers can be traced, it is safer than cryptocurrency. Transactions in cryptocurrency are anonymous.
Fiat money has an infinite supply, which means that central banks can print as much money as they want. Many cryptocurrencies have a supply limit, ensuring that only a certain number of coins are ever available.
Governments control the supply of fiat money and enact policies that affect its value. Cryptocurrencies are digital assets that serve as a medium of exchange but are not governed by governments.
What are the similarities between Fiat currency and Cryptocurrency?
Both of these forms of currency derive a large portion of their value from their global acceptance. More acceptance means more credibility. They are also divisible; just as a rupee can be divided into 100 paise, one Bitcoin can be divided into as few as 0.00000001 BTC. Crypto coins, like fiat money, can be used to pay for goods and services. They can also be used as a value store and given as a gift.
The Future of Fiat: Could Crypto Replace It?
Cryptocurrency is not the future, but rather the present. Cryptocurrencies and blockchain technology have swept the globe.
Can they, however, displace the US dollar, Euro, Indian rupee, and other fiat currencies?
According to a Deloitte survey, most financial professionals believe digital assets will replace government-issued currencies within a decade, or at the very least provide a viable alternative to them.
Given this, financial services firms must embrace cryptocurrencies, digital assets, and blockchain or risk losing ground to competitors as crypto shakes up the industry, according to respondents.
According to Deloitte’s blockchain survey report published last week, 76% believe digital assets will be a strong alternative or replace fiat in the next five to ten years.
It noted that the flow of funds into digital assets is increasing as institutions and investors become more interested in them as a store of value. New business models based on cryptocurrency have grown dramatically, reflecting a shift in the financial industry.
According to a Deloitte report, companies are considering how to adapt their traditional products to meet the needs of their customers in the future.
To answer this question in short, yes cryptocurrency most probably will replace fiat currency or at least be used more commonly in the near future.
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