May 29, 2023
5 min read
Today physical currencies in cash and coins are being used significantly less. As transactions are becoming more digitalized, there is a higher demand for other forms of money like cryptocurrencies (Bitcoin, Ethereum, Ripple) and digital currencies (PayPal, Wepay, Webmoney, Qiwi). This simply means that more and more people tend to use electronic money to pay for goods and services instead of old-fashioned paper money, which is also called fiat.
You can often hear people mixing up terms cryptocurrencies and digital currencies, creating a certain level of confusion. Make no mistake, these are two different things, and there is a massive difference between them. It is crucial to understand the essentials – digital currency, also called ‘digital cash’, is a term used to describe all electronic money, while cryptocurrency is a variation of it – a currency powered by blockchain technology that involves cryptography.
Now that we straightened this out let’s take a closer look at fiat money versus cryptocurrencies, lay down their benefits and disadvantages.
Fiat means paper money issued by the government in a legal tender. A simple example is a country’s currency like a US dollar, euro, franc, British pound, and the world’s other major currencies. It’s a piece of paper which value is determined by the strength of the government and is not backed by a commodity such as silver or gold. So, in other words, this currency exists as long as the government maintains its value.
Fiat currency goes all the way back to the 11th century when the Chinese started to issue paper money in exchange for silk, gold, or silver. Over time it became highly popular across the world when governments and banks took necessary measures to protect their country’s economies from fraudulent attacks. But to understand the world’s interest in cryptocurrencies, let’s take a look at the benefits of fiat money, which are also considered as substantial disadvantages.
As fiat money can less or more be controlled by the government, it is considered that countries have more flexibility when facing economic changes or standing on the verge of a crisis.
Potential for growth
The government can increase the supply of fiat money by merely printing new bills, which can surely stimulate economic growth.
Because the government can easily print extra bills, fiat is highly likely to suffer inflation. Sadly, there are too many documented cases when the government printed too much money, which leads to inflation.
Value Tied to Government
As fiat’s value is not really backed by any commodities like silver or gold, we have to rely on the government’s stability. Worst case scenario – fiat value can fall to the extent of a crisis.
The government can quickly identify and track who, when, and where is spending money and for which purposes.
High fees and limits
It’s quite ridiculous how banks often set daily limits on withdrawing and spending your own money. It gets worse when it comes to international transfers when you have to go through hell and pay high commissions to send money to a foreign country.
A cryptocurrency is a form of a digital currency that is secured by high-level encryption. Powered by blockchain technology, it ensures complete security of your money against those who are willing to obtain your money by illegal means, for example through phishing or scamming. As the name implies, this technology is based on the chain of digital blocks that hold records of information. Each block is connected to blocks before and after it. All records are additionally secured with high-level cryptography. Each person has their private keys that act like a digital signature, required for the transactions to go through.
Cryptocurrencies are decentralized, which means that it does not belong to a central body. The chains of blocks are distributed across what’s called peer-to-peer networks – computer systems connected through the Internet. These blocks are being continually updated and synchronized. As they are not stored in a central location, they can’t be changed from one computer. It would require significant computing power to alter them all simultaneously.
The first cryptocurrency ever introduced to mankind is Bitcoin. It was created in 2009 by an anonymous developer named Satoshi Nakamoto. Bitcoin did not gain its popularity within a day. In fact, several years passed until it started to become huge.
Like any other cryptocurrency, Bitcoin is anonymous. The wallet where the bitcoins are stored is not bound to a person. Instead, it is tied to one or more specific keys. What’s even better is that only you have complete control over your funds, which can only be accessed using a personal private key to enter your cryptocurrency wallet. As no currency is ideal, let’s dig into its pros and cons.
Low transaction fees
Thanks to the blockchain technology that lies at the heart of cryptocurrencies, you are free from paying extra fees to third-parties and middlemen, which significantly reduces the transaction fee itself. The only expanses you bare are those for the exchange rate. So if you are transferring USD 20’000 through Bitcoin, you’ll have to pay a dollar worth of commission. Doing the same thing via Western Union will cost you around $200. You do the math.
All cryptocurrency transactions are irreversible, meaning that once the payment is complete, no one can undo it. This reduces the risk of fraud and when dealing with dishonest suppliers.
Most cryptocurrencies, including Bitcoin, have a maximum supply, which means there is a fixed amount of the currency, and no more can be emitted. Only by its nature, there can never be more than 21 million Bitcoins in circulation.
As some governments are not able to manage their economies to the extent that fiat is rendered useless by hyperinflation, cryptocurrency can serve as a reserve currency in countries that are unable to handle inflation.
For example, let’s look at Venezuela’s situation. This summer, the country’s inflation nearly reached 1M%. As the money was quickly losing its value, most people’s wages were reduced to almost none. To prevent such a significant loss of lifesaving and current income, a lot of citizens decided to convert their local currency to Bitcoin.
Major cryptocurrencies are known for their volatility because they are treated more than investments, rather than real means of payments. Sadly, a lot of people consider it attractive and speculate on the price changes to make a profit.
Some hesitate to use cryptocurrencies simply because they are not regulated or guaranteed by governments. Although Bitcoin is accepted in the United States, the current president Donald Trump recently tweeted that he was “not a fan of Bitcoin” and declared all cryptocurrencies to be based on “thin air.”
Over time cryptocurrencies were abused by the shady part of the business because they are anonymous and easier to handle. At some point, there was a splash of Ponzi scheme and pyramids that shattered the confidence of many people.
Blockchain technology and cryptocurrencies are not warm-heartedly welcomed by many government regulators. In fact, in some countries like China, Russia, and Vietnam, any cryptocurrency-related activities are prohibited by law.
Compared to traditional means of payments, cryptocurrencies haven’t been around for so long. Although there was a big boom followed by an increasing interest in cryptocurrencies, many of us are still reluctant and doubting its value against other types of payments like bank transfers, fiat, e-wallets, or PayPal.
And yet, many countries are already taking a big step by legalizing cryptocurrencies and making it an official type of payment. According to the WSJ report, “central banks in Sweden, Canada, Switzerland, and the Eastern Caribbean have experimented with or are exploring the technology.” In blossoming countries like Korea and Singapore, cryptocurrencies are already widely used for p2p transfers and to pay for goods and services. With PundiX crypto terminals and Tangem cards getting a cup of coffee with the cryptocurrency of your choice has never been easier. Like as if you were paying with your card or phone.
Some of the world’s biggest companies are stepping up the game by introducing their cryptocurrencies. Telegram, an encrypted messaging app is launching its coin Gram, while Facebook is opening new possibilities for many by launching Libra, a global currency and financial infrastructure, built on their own version of blockchain. Facebook’s intentions are straightforward – the company wants to expand the market share and reach people who don’t have access to a bank account.
There is no doubt that in the current economy, we can’t survive without fiat money. But we can already see that cryptocurrencies and p2p currencies have a bright future and are possibly an excellent solution to many existing problems.
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