What is the Difference Between Cryptocurrencies and Fiat Money?
In every video or article about crypto you come across, there’d likely be a mention of fiat money somewhere. Ever since the introduction of Bitcoin, the proponents of crypto have gone to different lengths to compare crypto against fiat money, primarily explaining why crypto is better than fiat money.
So, what is fiat money? How is it any different from cryptocurrencies? Also, why do these differences even matter? In this article, we will shed more light on all of these questions
What is Fiat Money?
The term “fiat money” essentially describes currency that is issued and controlled by governments and their Central Banks. This typically includes the US Dollar, the Australian Dollar, and other such currencies.
However, you should note that “fiat money” is used in describing all government-issued money, rather than just currency that is backed by government decree. So, you may find some currencies backed by gold or some other fungible assets still being described as “fiat money”.
What are Cryptocurrencies?
Cryptocurrencies are simply digital currencies that are typically built on decentralized blockchain networks. The blockchain works like a public ledger, where new transactions are bundled together in blocks which are added to the end of the existing chain every day. Unlike fiat money, cryptocurrencies like Bitcoin have a fixed supply of tokens. This feature helps to prevent inflation and protects the value of the coins.
Limitations of Fiat money
The major use case for cryptocurrencies like Bitcoin is that it corrects the limitations of fiat money, also known as regular money. So, what are these limitations?
Fiat money is inflationary
The first, and probably the most important, of fiat money’s limitations is that it tends to be inflationary. Because it is issued by decision of Central Bankers, these authorities tend to print more in times of economic downturn, in an attempt to re-inflate the economy.
This usually works, but has the side effect of resulting in inflation; which is money losing its value over time. Translated to everyday life, consumers will begin to witness rising commodity prices. Basically, it results in regular people losing purchasing power.
On the other hand, cryptocurrency value is free from the inflationary problem, as the supply of cryptos like Bitcoin is permanently fixed at 22 million Bitcoins, which can only be obtained by mining (which is a lot of hard work) and buying them on a Bitcoin exchange market.
Exchange is centralized and filled with red tape
Another major limitation of fiat money is that the system is centralized and tends to revolve around an all-powerful Central Bank and its supervising government. There are also intermediaries – banks and other financial services providers, with different processes.
Of course, this creates a system with a lot of red tape and hurdles to the transfer of money. It is even worse if you want to transfer your fiat money across international borders. You may end up waiting days to get your transaction processed. Understandably, this can get quite uncomfortable for both parties involved in the transaction.
With cryptocurrencies like Bitcoin, on the other hand, transactions are entirely peer-to-peer and can be completed in mere minutes on the best Bitcoin exchange in Australia; regardless of geographic borders or jurisdictional differences.
Fees can become quite a bother
Another by-effect of the fiat money being centralized around third-party financial services providers is that fees can quite mount up. A mere credit card swipe at your neighborhood grocer can see you pay fees to your bank, your card provider, and the grocer’s point-of-sale terminal provider, among other fees. These fees can go even higher with international payments.
With cryptocurrencies, all of these fade into the background, as all you have to do is transfer Bitcoins peer-to-peer across a cryptocurrency exchange. You may pay a small transaction fee, but it is usually nothing compared to the huge fees typically charged by the big third-party financial services providers who essentially control the fiat system.
Privacy and control are quite non-existent
Would you prefer that all your financial transactions remain private and undisclosed to anyone else? Or would you like to be able to access your funds at every given time, without fear of confiscation or seizures or account freezes? Well, with fiat currency, you do not get these privileges.
Bank records get subpoenaed, and you will agree with me that it cannot be fun to watch a public jury dissect your every transaction, including your guilty purchases. Also, as part of the heavy regulation of the fiat money system, banks have the leeway to freeze up your accounts, leaving you out of control. Imagine trying to pay for a bag of groceries for your family, only to find out that you no longer have control over the money in your bank account that you worked incredibly hard for.
Bitcoin and other cryptocurrencies offer complete protection from these circumstances. You will not have to bother about getting locked out of your crypto wallets.
Are Cryptocurrencies and Fiat Money the Same?
Cryptocurrencies and fiat money are similar in that they are both currencies. Basically, this means that they can perform similar functions.
Just as you can pay for groceries with fiat money, you can do the same with cryptocurrencies like Bitcoin at outlets that accept it. So in the same way as fiat, it serves as a store of value. The only difference here is that while cryptocurrency value is safe from inflation, fiat money is exposed to inflationary pressures.
Also, they differ in terms of structure, as explained in the section above. While you would need to jump through several hoops to transact in fiat currency both locally and internationally, transactions on a cryptocurrency exchange platform simply occur on a borderless peer-to-peer basis.
Cryptocurrencies and fiat money essentially work the same, as media of exchange. So, if all you want to do is be able to transact funds for your daily business, you can use any of both. However, if you value low fees, transparency, transaction speed, security, and privacy, then cryptocurrencies are definitely your best bet.
Would you like to begin the transition from fiat money to enjoying the absolute freedom provided by cryptocurrencies? Why don’t you head over to the best crypto exchange in Australia to get started?