As the world increasingly begins to adopt digital assets as a form of payment and store of value, there has been an increased need and even desire to appropriately classify currencies. You’ve certainly heard the term cryptocurrency but perhaps you’ve not heard of fiat currency. This is a term that’s been around for a very long time but until recently it hasn’t been utilized quite as much.
What is Fiat currencies?
Fiat currency is the method of payment that has acquired the status of legal tender by the government. The core value of fiat money lies in the fact that it is approved by the government and is in fact a trustworthy currency. However, fiat currency may not have much value on the face of it. For instance paper money is essentially a piece of paper that the government has backed a piece of paper has no intrinsic value but only becomes worthwhile after the public instills their trust in the government’s ability to back such a currency. Thus the formation of trust in an organization or simply in the value of a dollar bill lies at the heart of building an acceptance.
This is something cryptocurrencies are yet to fully develop. Those fully familiar with the workings of cryptocurrency often argue that they are no different from the existing fiat currencies. They can also be used as a form of payment and hold no intrinsic value and have powerful underlying software that offers some credibility. So with that in mind many are asking why financial systems across the globe are still hesitant to make cryptocurrencies legal tender.
What are Cryptocurrencies?
Cryptocurrency is a new form of exchange, only a few decade old, that is secured by cryptography. This electronic form of encryption makes it nearly impossible to counterfeit or double-spend. Cryptocurrency trades are entered on a distributed online ledger that is accessible to everyone all the time, so there is no requirement of any central authority. According to CoinMarketCap.com, a market research website, there are more than 10,000 different cryptocurrencies in circulation today.
Cryptocurrencies arguably has many similarities with fiat currency, despite being at opposite ends of the spectrum. Cryptocurrencies represent a shift in power from government regulated systems, towards a self-regulating digital ledger with no place for authoritative or oversight. Crypto enthusiasts have time and again pointed out that fiat money differs from cryptocurrencies only in terms of tangibility. It can be seamlessly applied to daily life as a form of payment as is being seen in El Salvador where bitcoin has become legal tender and thus technically it’s now a fiat currency. Meanwhile crypto supporters consider the existing volatility in the crypto space as a source of apprehension about money.
However, one should not forget that even the us dollar is not free from instability and indeed volatility. Interestingly the case against cryptocurrencies became stronger last year after large dips in the currency’s values were observed. A decline of as large as 40 percent was seen in multiple cryptos within a single month urging many to rethink their interest in the space. Despite existing volatility, cryptocurrencies have a few essential factors providing them with some value.
Pros of Cryptos over fiat
Firstly the underlying blockchain technology is a marvel for modern day businesses as it provides a secure financial system to help them keep track of their transactions with zero possibility of an error. The exceptionally powerful blockchain software relies on the proof-of-work or proof-of-stake mechanism to mint new coins offering a restricted supply. Moreover cryptocurrencies are believed to have the edge over fiat currencies in terms of their universal trading feature. Cryptos can be traded from anywhere by anyone at any time without any need for users to convert their value across nations the practicality and achievements possible with crypto and blockchain technology could well lead to further adoption moving into the future and as a result the lines between fiat and digital assets could blur increasingly moving forward.
Cons of Cryptos (Pros of Fiat Currencies)
Cryptocurrency is not regulated by central authorities or backed by governments. This makes the virtual currency less credible than the real one (hard cash or digital money in bank accounts). Cryptocurrency is also much more volatile than fiat money. The volatility is primarily driven by the speculative nature of the trade, where investors are focused on wealth creation quickly by booking profits.