We are all familiar with the cash – or “fiat” – we deal with daily. It comes to mind when we think of the word “money”. But recently, the market has been disrupted by a new form of money called crypto. This includes several popular tokens you may have heard of like Bitcoin, Dogecoin and Ethereum. But what is fiat money or crypto? How are they both different?
What is Fiat Currency?
Most of the money we have used throughout human history has its own value. Under the barter system, we traded commodities directly. This changed when metal coins were created. These could be in copper, silver, gold or other materials, each with its own value.
Today’s money is a little different. They are paper notes that do not have value on their own. Instead, the government gives this paper legitimacy and ensures that its value is maintained. Any money that does not have any “intrinsic value” like gold or silver is considered fiat money.
What is a Crypto?
Popularised by Bitcoin, crypto coins or tokens are digital assets – they are essentially digital money. Instead of being issued by a government, their creation is governed by computer algorithms.
Crypto tokens derive their name from the fact that they are encrypted and secured using complex cryptographic methods. They live on a “blockchain”, a publicly-available digital transaction ledger. This system makes the crypto network highly transparent and verifiable.
Fiat Vs Crypto: Differences Between Both
|Definition||Government-issued currency||Decentralised digital money|
|Control||Central Banks||The user base of a token has the power to control it|
|Supply||Unlimited – supply is altered by central banks through monetary policy||Can be limited or unlimited, based on the crypto’s underlying code|
|Reach||Most fiat money is only accepted in the country it is issued||Accepted internationally|
|Common Forms||Banknotes, coins||Digital tokens|
Fiat Vs Crypto: Pros and Cons
Pros and Cons of Fiat
|Legitimised by Governments||Can be counterfieted|
|They are Stable in the short term||It is limited by geography|
Fiat Currency Pros
- Government Approval – Since fiat money is issued by governments, it also has their approval and support. This makes it universally accepted within your country as everyone is sure of its legitimacy.
- Stability – Currency is a very old and established market. The forex market moves by fractions of a per cent every day. If there is too much variability in a currency, the central banks step in to stabilise the price.
Fiat Currency Cons
- Counterfeiting – While many banknotes have various checks in place to ensure they cannot be forged, some malicious individuals are still successful in creating counterfeit currency. This can trick unsuspecting individuals into accepting fake notes.
- Low Reach – Fiat currency is only accepted in the country it has been created. For example, Indian Rupee is only accepted within India. It cannot be widely used abroad.
Pros and Cons of Crypto
|Decentraised and powered by blockchain||Volatile|
|Simplified transaction process||Regulations are still being developed|
- Community Driven and Decentralised – Most crypto projects are controlled directly by their user base through blockchain governance. Therefore, if you use Bitcoin or Ethereum, you can also participate in its network operations and decision-making process.
- Simplified Transactions – Crypto tokens make it much easier to send transactions anywhere in the world digitally. There is no financial institution to restrict these payments. Transfers between bank accounts can also take 2-4 days for settlement, while this can be done in seconds with crypto.
- Volatile – Crypto is a highly volatile market. We have all read news of crypto tokens rising over 1000% in a single day, while others can also fall 95% during the same time. This makes it difficult to use crypto for regular transactions.
- Regulation – There is very little regulation of the crypto industry currently. This can be a disadvantage if you get scammed or your service provider goes bankrupt. In such cases, the government cannot help you as these new companies are not regulated by them.
Read more: What is a Crypto Scam
Choosing between crypto and fiat is not an easy task. There are several considerations such as your tolerance for volatility, use case and need for regulation. But crypto has certainly shaken up the financial market. This has cemented its place in the future as an effective alternative to traditional money.
Read more: Forex vs Crypto
You can read more about the latest events in the crypto market on ZebPay blogs. Trade confidently with ZebPay Australia.
FAQ on Fiat vs Crypto
What Happens If Crypto Replaces Fiat?
The most important change will be that governments will no longer have direct control over
money. Currently, the supply and circulation of fiat money are controlled directly by central banks.
Crypto gaining ground will mean that this is instead decided by its users rather than a central authority.
Will Crypto Ever be as Stable as Fiat Money?
Crypto is still very volatile, even though it has been in operation for many years. However, there is a class of crypto tokens known as “stablecoins”. They are tied or “pegged” to the value of an underlying asset like gold or the US dollar.
Is Fiat Better Than Crypto?
Both forms of money have their advantages and disadvantages. Fiat is regulated and stable while crypto is decentralised and cannot be duplicated. Thus, it is difficult to say whether fiat is better than crypto.