Cryptocurrencies continue to expand their market despite warnings from the influential skeptics. However, they are yet to see a widespread adoption and gain momentum over fiat currency. Cryptocurrency and fiat are both technically a form of currency, but only the latter is used as a legal tender. Cryptocurrency, however, offers incredible benefits that are not available to the fiat currency users.
Fiat is physical money issued by the government, while cryptocurrencies are digital currencies, created from code, and it is unregulated. The former is usually stored in bank accounts, and the latter is stored in digital wallets. In the initial years, cryptocurrencies became all the rage due to their unregulated nature. Now, the community of crypto users is growing due to a plethora of reasons –not just because of lack of regulations — including safe, secure and speedy transactions.
Here are some key points to help understand how cryptocurrencies and fiat are different from each other.
Fiat is Backed by Government, and Cryptocurrencies by decentralisation technology
Paper-based fiat currency is backed by the country’s government, which declares it a legal tender. It does not have any intrinsic value, and its value is decided by the forces of supply and demand in the market. A government authority such as central bank has control over fiat, and it oversees its distribution and determines the time to release it into the economy for circulation.
Unlike fiat, cryptocurrencies are the decentralized digital currencies; not available in a physical form such as paper money or coins. Users can trade these virtual currencies only on their computers. Like fiat, they, too, don’t have any intrinsic value. But they are free of all governmental regulations and control. A publicly distributed ledger records the transactions, eliminating the need for a central authority.
Supply of Cryptocurrencies and Fiat
There is an unlimited supply of fiat currencies in the market, and the central bank can issue as many as it wants. The cryptocurrencies, on the other hand, have a limited supply; for example, the popular digital currency Bitcoin has a fixed supply of 21 million. The limited supply ensures higher demand, which in turn increases the value of cryptocurrencies. Moreover, it also makes it easier to track transactions on the blockchain network, which prevents fraudulent activities. It is, however, difficult to trace all fiat transactions, mainly due to its unlimited supply. This makes it easier for criminals to counterfeit paper money and circulate it in the market.
Peer-to-Peer Network
Financial institutions such as banks play a crucial role in fiat currency transactions. They are the intermediaries between the buyers and the sellers, which give them greater control over the funds. However, they have no powers when it comes to cryptocurrencies as the transaction between the sender and the recipient is direct. The peer-to-peer network enables cryptocurrency users to send and receive money without involving a third-party, and therefore providing them with complete financial freedom.
