Cryptocurrency vs. Fiat Money: The Major Differences Explained

What are Fiat Currencies?

Fiat currencies are currencies issued by the government that are not backed by physical commodities like gold. These fiat currencies are often backed by the government that issues them. The stability of fiat currencies is based on the government, the amount of currency in circulation, and the economic conditions of that country.

The value of fiat currency relies on market sentiments and the trustworthiness of the government issuing it—for example, the US dollar, the Euro, the Yen, etc. Additionally, the value of fiat currency is based on the amount of currency that is printed.

Central banks, the Federal Reserve and other government institutions like the United States Treasury control fiat currencies in the US. Fiat currencies are centralized and have been in operation for many years.

Financial institutions or banks decide interest rates, establish new monetary policies, and control the supply of fiat currencies. Fiat currencies are seen as reliable because they have been around for years and are controlled by the government.

What are Cryptocurrency?

Cryptocurrencies are digital or virtual currencies secured by cryptography and backed by distributed ledger and blockchain technology. The distributed ledger technology enables cryptocurrencies to function on decentralized networks run by a dedicated network of computers.

Unlike fiat currencies, cryptocurrencies are not controlled by any central authority, such as the government or any financial institution. Thus, they are decentralized and immune to government and central authorities.

Cryptocurrencies are known for their fast and inexpensive transactions. They can also be used as a store of value, for trading, and to unlock specific utilities. However, cryptocurrencies are highly volatile, with fluctuating prices.

Bitcoin, Litecoin, Dogecoin, and Ethereum Classic are some of the most popular and widely used cryptocurrencies worldwide. Many investors consider cryptocurrencies as potential alternative investments and use them to combat inflation.

Fiat Currencies Vs. Cryptocurrencies

Cryptocurrencies and fiat currencies are used for payments and transactions. However, they differ in many ways. Here is a quick, practical, and easy-to-understand table citing the major differences.

Pros and Cons of Fiat Currencies

Pros

• They are widely accepted.
• They are comparatively more stable.
• They have clear regulations.
• They are controlled by legal authorities.
• They are more stable.

Cons

• They are more prone to inflation.
• They are more complex for cross-border transactions.
• They have high transaction costs.
• They are vulnerable to monetary policies.

Pros and Cons of Cryptocurrencies

Pros

• Faster transactions.
• More transparent.
• No intermediaries are involved.
• Offer unique features like smart contracts.

Cons

• Highly volatile.
• Regulatory uncertainty.
• Not widely accepted.
• Not ideal for all businesses.