Fiat Currency vs Cryptocurrency: How Do They Compare?

Fiat Currency vs Cryptocurrency: How Do They Compare?

As the popularity of cryptocurrency continues to rise and its use becomes more widespread in daily life, people may be wondering what the differences between crypto and traditional currencies are and when it’s more appropriate to use one or the other. Cryptocurrency has undergone a rapid evolution since its inception during the 2000s, with companies recognizing the potential of offering cryptocurrency payment methods alongside traditional ones. For those who have little experience in currency, cryptocurrency may seem a little mysterious and difficult to comprehend.

However, there are a range of reasons to use cryptocurrency and those who know little about it can still reap the benefits. There are some key differences between cryptocurrencies and traditional money, or so-called fiat currency.

The Characteristics of Fiat Currency

Fiat Currency vs Cryptocurrency

The term ‘fiat currency’ refers to government-backed currencies; legal tender such as the US dollar, the Euro and the British pound. As the money is not backed by physical commodities, its worth is determined by the government issuing it.

These currencies allow central banks a degree of control over the economy, allowing them to dictate the supply of money and control its manufacturing and circulation. During periods of economic recession, it is possible to print more money in order to stimulate growth through the creation of more jobs.

It can be argued, however, that the use of fiat currency itself can lead to inflation, and an economy based on physical commodities such as gold, silver or precious metals avoids this scenario. However, it is worth noting that conversely, economies based on fiat currency allow governments to adjust interest rates accordingly.

The Unique Traits of Cryptocurrency

Cryptocurrency differs from traditional currency in several key ways; firstly, it is not issued or governed by a central bank or government. Rather than existing in a physical form as fiat currency does, it exists digitally and functions due to blockchain technology which records crypto transactions. Fundamentally, each digital currency is based on a network covering a large number of computers.

The fact that cryptocurrency does not operate through central banks means that the currency is not regulated by a government and therefore its value can fluctuate. Paying for goods and services using cryptocurrency depends on both parties’ estimation of its worth, although as more and more companies are investing in cryptocurrency, it’s becoming more stable.

For beginner traders who are looking to get started with cryptocurrency, digital wallets are simple to set up, and there are a multitude of tutorials available online to give valuable cryptocurrency help.

What are the Benefits of Using Cryptocurrency?

As fiat currency is so established as a form of payment, some may be sceptical about cryptocurrency. However, while cryptocurrency may be relatively new in comparison, it is bound to go from strength to strength as both companies and individuals alike recognize the advantages of using it.

So, what are these advantages?

  • Speed and efficiency across borders

The decentralized nature of cryptocurrency means that money does not have to pass through a third party, allowing transactions to be completed within a matter of minutes. Eliminating the middle man also vastly reduces the fees that accompany standard purchases, cutting down on costs. In addition, money can be sent both locally and internationally; a process which usually takes much longer with traditional forms of payment.

  • Security and anonymity

The anonymity of cryptocurrency means that individuals have more security when using it to make transactions. The increased protection translates to less risk of being targeted by fraudsters, which is especially key given that cybercrime is an ongoing concern.

Cryptocurrency also gives more opportunity to those who lack adequate access to banking infrastructure. This has the potential to radically change the prospects for more impoverished communities.

  • A tool against inflation

Due to the fact that most key players in cryptocurrencies have a set number of coins in circulation, rates of inflation are generally reduced compared to traditional forms of currency. Fixed amounts of coins mean that demand may overtake supply, translating to a rise in the value of the coins and keeping tabs on inflation in the long run.

  • More accessibility across more platforms

As companies are capitalizing on the potential afforded by cryptocurrency, individuals have more options to pay for goods and services with it, especially as crypto debit and credit cards are becoming more mainstream. Retailers such as Shopify now offer customers the opportunity to pay with crypto, as do travel companies like Expedia.

Given that the gaming industry is predominantly digitalized, it makes sense that cryptocurrency is a recognized form of payment. In addition, there are now games which exclusively employ crypto; for example, Axie Infinity, which encourages its players to earn crypto rewards by playing.

While beginners to cryptocurrency may feel a little daunted when contemplating using cryptocurrencies, it is relatively simple to get started. It’s important to do adequate research before selecting a reputable platform and creating an account, and companies who use two-factor authentication are always preferable. Downloading an app to a mobile phone is the easiest way to begin and enables users to access and trade their funds 24/7.