Fiat currency is similar to cryptocurrency. Both currencies share the same market, and some cryptocurrencies like Bitcoin and Ethereum are used in many places in the same way as cash transactions.
However, fiat currency and digital currency are not the same. There are significant differences between them.
Cryptocurrency vs cash: what’s the difference?
So what is the difference between crypto and fiat?
Fiat money is issued by and controlled by traditional banks and government-controlled financial institutions with the central bank. This type of money is highly centralized. From here, such features of centralized fiat are derived:
- The lack of transparency – nobody knows what happens behind the banks’ doors or what governments are up to. You can rely on statements made by them but you cannot impact their decisions and control what is happening there.
- No control over your own money – you completely depend on the institution where you keep your money. Financial institutions can track any of your operations, block your account, freeze your fiat currencies without any further explanations. Opening a new account implies providing personal data.
Cryptocurrencies are of a decentralized nature. They cannot be controlled by a single person or an institution. Instead, they are controlled via blockchain technology.
The users of the same blockchain process transactions and each transaction can be seen on the network for all the network’s users. Nobody can confiscate your funds or control how you use them.
Advantages and disadvantages of crypto
Even though cryptocurrency is being accepted rapidly, it has its pros and cons.
Advantages of crypto
Cryptocurrencies offer many benefits such as:
- Appreciation potential
- Fixed supply
- No intermediary fees
A digital asset, if selected correctly, has great appreciation potential. Bitcoin grew in value from almost 0 to thousands of dollars within just slightly more than a decade. Ethereum also demonstrates impressive growth in value. That’s why investing in these coins may be very beneficial.
Crypto is not controlled by any governments, central banks, or any other central authority. Unlike cash, digital assets rely on blockchain technology where the network participants verify crypto payments. This way, decentralized assets provide you with more freedom to make more profitable investing decisions.
The most valuable decentralized cryptocurrencies can be issued in fixed amounts (finite supply). So, Bitcoin’s maximum supply is capped at 21 million.
It means when all Bitcoins are mined, the number of coins will stop growing. The demand for Bitcoin will be increasing, and it will impact the coin value positively.
Not all coins’ maximum supply is fixed but those cryptocurrencies perform other functions than just being money. Thus, their value doesn’t depend on their supply but on the services provided by the ecosystem and other factors. If we speak about coins pegged to the U.S. dollar or any other currency (they have the same value as the U.S. dollar or a selected asset) or those that perform a function of money, their money supply is fixed.
No intermediary commissions for crypto transactions
Banks charge commissions for each transfer. When you send crypto, you pay only transaction fees, no intermediaries’ commissions are taken unlike what happens in the case with traditional currencies. That’s why you pay lower fees for cryptocurrency transactions than those paid for transactions in dollar or another traditional cash.
Digital assets are accessible to everyone. Even unbanked people can own crypto and use it if they have a digital wallet that can accept cryptocurrency and an internet connection to access the network and perform crypto transactions. This detail also enables investors to be free in their investment decisions.
Disadvantages of digital currency
Even though many people believe that crypto may change the world of finance and replace cash, it has some drawbacks, too. The main ones are the following.
- High volatility
- No regulation
- No worldwide acceptance
- No protection against fraud
Crypto is extremely volatile. Within a very short time, the value of a coin can drop, and you may lose a lot of money. So, the Bitcoin value dropped from over 69,000 USD to less than 20,000 USD over just a couple of months which caused its investors to bear huge losses. The value drops can be caused by any factor, and it is difficult to forecast such movements.
Crypto is not regulated. Even though some countries are trying to create laws applicable to this field, we are still very far from a proper regulation that will consider all details of the asset. It leads to massive scams, hacks, and abuse of technology. So, before making any investment in crypto, check the project very carefully.
No worldwide acceptance
Crypto is accepted in very few places compared to fiat, and in most cases, we speak about just a couple of coins like Bitcoin or Ethereum. Some countries ban the use of cryptocurrency. In this regard, the use of crypto is still very limited compared to cash.
No protection against criminals
If your coins are stolen from your wallet, nobody can help you.
Advantages and disadvantages of fiat currency
Fiat money has been used for ages, and it lays the foundation for the modern payment system. It has the following benefits:
Advantages of fiat money
Fiat offers several advantages.
- Fiat currencies are backed by the government
- It is accepted widely
- The prices of fiat currencies are stable
- Protection from fraud
Fiat currencies are backed by the government
Fiat currencies are issued, controlled, and fully backed by the government. In the USA, the government insures your first 250,000 USD deposited in a bank account. If your cash is stolen, you get insurance.
It is accepted widely
You can make any payment with fiat currencies anywhere in the country. And if you own widely accepted currencies such as EUR or the U.S. dollar, you can exchange them for any local currency almost anywhere in the world.
Fiat prices are stable
The prices of goods and gold are measured in a local currency. The purchasing power of paper bills doesn’t change over one day. We speak about a constant depreciation of fiat money but the price fluctuation rates are very low compared to digital currencies.
Protection from fraud
Governments take measures to protect funds from criminals. If you notice illegal activities in your account, you can file a complaint, and your funds are likely to be returned.
Disadvantages of fiat money
However, fiat has some significant drawbacks, too.
- Dependance on the government
- Cash is guaranteed to drop in price
- Intermediary fees
- Not accessible to anyone
Dependance on the government
Your funds are lent to you by the government. They are controlled by the government, too. You can lose all if the government decides that it needs your money more than you. Interest rates are also set by the system. Needless to mention that you provide all your personal data to open an account in a bank and in some countries, even to exchange one currency for another.
Any fiat currency is guaranteed to drop in price
Inflation decreases the purchasing power of any fiat currency on a constant basis. The number of fiat funds that can be printed (money supply) is unlimited which makes it even more inflationary. Such factors as political and economic instability, conflicts, natural disasters, etc., also contribute to the inflation increase.
Banks charge their fees for each exchange, transfer or other services. If other intermediaries are involved, they charge additional fees for their services, too.
Not accessible to anyone
The biggest part of the population doesn’t have access to banking services. In 2017, over 1,7 mln people didn’t have a bank account and couldn’t access the benefits of the traditional financial system. The problem of financial inclusion stays among the main issues that fiat needs to solve.
If governments want, they can issue more cash, or stop issuing it at all to regulate the inflation rates and enable greater control over their citizens. The exchange of cash for goods can be also controlled by issuing food cards, etc.
Crypto vs fiat and planet environment
Now, that the impact of human activities on the environment has become evident, environmental protection matters have grown in importance. And here, crypto beats fiat completely.
Cryptocurrency helps to increase the climate-conscious use of money. By using cash, you support institutions that subsidize the purchase of fossil fuels. By using crypto, you don’t support anybody but enjoy all the benefits of a completely decentralized ecosystem. More information about how crypto is used to save the planet is in this video:
Is cryptocurrency better than traditional currency?
The worldwide crypto acceptance is far and the traditional fiat money system is too strong. However, crypto’s benefits overweigh those of fiat money.
So why is cryptocurrency better than real money?
Crypto enables equality among representatives of different social classes, eliminates borders, and finally, it provides more opportunities for its holders. It has some drawbacks but because the ecosystem is very young and lacks some features that will be developed over time.
Disclaimer. This material should not be construed as a basis for making investment decisions or as a recommendation to participate in investment transactions. Trading digital assets may involve significant risks and can result in the loss of invested capital. Therefore, you must ensure that you fully understand the risk involved, consider your level of experience, investment objectives, and seek independent financial advice if necessary.