It is important to know the different types of currencies circulating in the modern world so that we can receive and make payments for the sale and purchase of products easily. Cryptocurrency and the conventional fiat currency both have a store of value in them and act as a medium of transaction between two parties. The buyer and seller both know and trust that both these currencies sustain their value after a transaction is completed. Fiat currency is the part of a traditional money system because the government declares its legal tender.
Cryptocurrency, which is a revolutionary and modern system, adopts digital assets as a means of monetary exchange between parties involved in transaction. It facilitates transactions directly without an intermediate party such as a financial institution like bank and, thus, is considered more secure and autonomous. The concept of a decentralized digital currency is many years old. However, the credit of inventing and implementing the first successful cryptocurrency in 2009, known as Bitcoin, goes to Satoshi Nakamoto – a Japanese resident.
Definitions and meanings
Fiat currency comes in the form of tangible notes, coins, paper bills, or as bank credit and we all are very well aware of it. Examples include dollars, pounds, riyal, rupees, ruble, ringgit, yens and euro. Currency is this form is extensively used and accepted world wide to buy and sell goods and services. Fiat money doesn’t have intrinsic value but instead it is based on the credit of the community using it. Their value is attributed because the government has declared its legal tender. Transactions done through fiat currency are dependent on a central authority such as a governmental institution or the central bank. These intermediaries vouch for the currency’s worth.
Fiat money derives its value from debt. This is because most banks print money when loans are taken out and when people borrow money. Similarly, if consumers don’t take out debts from banks the currency wouldn’t be in circulation. Since it is issued by the government and may not be backed by a physical commodity, it is susceptible to inflation and, in some cases, hyperinflation because of which it might end up losing its value significantly.
It is important to note that fiat money is traceable because the intermediary which is usually a bank has all the information about the transaction, thus it is not private or discrete and any other authority can easily identify the recipient and the sender. Historically, fiat currency first emerged to replace representative and commodity money. Today, central banks play a major role in their control and circulation as they are involved in their printing.
A cryptocurrency is a digital asset through which transactions can be done between buyers and sellers. Cryptocurrencies are represented digitally and are completely secure because they utilize cryptographic and encryption techniques like elliptical curve encryption, public-private keypairs and hashing functions etc.
No bank or central authority is involved or required because these currencies facilitate direct transaction between two parties. Bitcoin is today’s leading cryptocurrency and has about 21.000.000 units which makes it even scarcer than gold. It was introduced by Satoshi Nakamotoas as an autonomous currency in 2009. Bitcoin isn’t regulated by any government and is therefore a decentralized digital currency. It has intrinsic value and it’s worth is determined by how effective it is as a means of exchange.
Examples of other top cryptocurrencies include Ethereum, Litecoin, Bitcoin cash, Tether, Libra, XRP and Ripple. There are a lot more in number but these top currencies make up a larger share of the overall crypto market. According to data taken from Coin Market Cap website, currently there exist 7,800 such digital currencies and more are emerging (at the time of writing this article).
Cryptocurrencies can be sent and received by any person or entity at any time or place in complete privacy as they are encrypted and incognito. They are completely trustable because they are based on blockchain technology. Blockchain comprises a set of computers that have a common copy of the database and it updates its record on the basis of mathematics and consensus. None can tamper with it because all text is converted into unintelligible text as it utilizes a cryptography technique. On a similar note, cryptocurrencies cannot be spent twice unlike fiat currencies where the credit cards can be charged twice mistakenly. Similarly a bitcoin payment cannot be cancelled, reverted or charged back.
Some of the major companies that accept bitcoin as a mode of payment include AT&T, Microsoft, KFC, Overstock, Subway, Pizza Hut.
Difference between fiat and cryptocurrency
The six main points of difference between fiat currency and cryptocurrency are highlighted below:
Fiat currency in the form of notes and bank credit is money that the government of a country has declared as a legal tender. Cryptocurrency is a decentralized monetary system which utilizes digital assets as means of exchange which is backed by an encryption technique.
2. Involves a central bank or not
Circulation of fiat currency is done by a bank and all transactions go through a bank. Cryptocurrency works directly and doesn’t require a bank or financial institution.
3. Common examples
Common examples of fiat currencies include, Euro, Yen, Dollar, Ringgit, Pound and Rupee. On the contrary cryptocurrencies include, Bitcoin, Litecoin, Ethereum and Ripple etc.
Fiat currency has a limitless supply and can be printed by the bank if required. On the other hand, cryptocurrencies like bitcoin have only limited units and are scarce.
5. Represented by
Fiat currency is represented by notes, coins, bills and tangible money whereas, cryptocurrency is represented by private pieces of code.
6. Stored in
Fiat currency is stored at home as notes and checks or in banks as bank credit. Whereas, cryptocurrency is stored in one’s digital wallet.
Fiat currency versus cryptocurrencies – tabular comparison
A tabular comparison of fiat currency and cryptocurrency is given below:
|Doesn’t have intrinsic value and is established as legal tender by government.||It is a digital currency that utilizes encryption for security.|
|Involves government institution like a central bank.||Works directly and no intermediary is involved.|
|Dollar, pound, euro, taka, yen, rupees etc.||Bitcoin, Ethereum, Litecoin and Ripple etc.|
|Has an unlimited supply and can be printed as required.||Only has limited units.|
|Comes in the form of|
|Notes, coins, checks and paper bills.||Private pieces of code.|
|Stored in bank as credit and at home as notes or checks.||Stored as digital units in a digital wallet.|
Conclusion – fiat currency vs cryptocurrency
Cryptocurrency is revolutionary because they can be sent and received by anyone at any time and place while remaining untraceable and undisclosed. Thus all private information is guaranteed to be secured. Furthermore, due to the cryptographic techniques utilized for encryption there are no chances of forgery or fraud which are quite common with fiat currencies while performing transactions online.
This is why bitcoin has become very trustable for a future global monetary system. It is completely transparent as it is only dependent on consensus of its users and pure math. Fiat currency comes in the form of paper notes and coins etc. It is based on debt, doesn’t have an intrinsic value and is less secure as compared to cryptocurrency. Its value and stability is highly associated with the stability of the issuing authority and the supply and demand relationship. As this currency is not backed by a solid physical commodity, it is highly prone to inflation.