I want to discuss a major question have been asked on 9jacashflow, which is about the major difference between a Fiat Currency and a Cryptocurrency.
What is Fiat Currency?
Simply put, fiat currency(popularly referred to as money) is a legal tender that derives its value from its issuing government rather than a physical good or commodity. The strength of the government that establishes the value of fiat currency is key in this type of money.
Most countries around the world use the fiat currency system to purchase goods and services, invest and save. Fiat currency replaced the gold standard and other commodity-based systems in establishing the value of legal tender.
Fiat Currency vs. Cryptocurrency
According to Binance Academy, both Fiat currency and cryptocurrency have a bit of common ground in that neither of them is backed by a physical commodity – but that’s where the similarity ends. In addition to that, Fiat and cryptocurrency are also similar in the sense that they are both Digital Currencies since they can both be stored and transferred electronically.
While fiat money is controlled by governments and central banks, cryptocurrencies are essentially decentralized, largely due to a distributed digital ledger called Blockchain. Another notable difference between these two currency systems is the manner in which each of these forms of money is generated. Bitcoin(the first mainstream cryptocurrency) has a controlled and limited supply – in contrast to fiat money which banks can basically create out of nothing, according to their judgment of a nation’s economic needs.
As a digital form of money, cryptocurrencies have no physical counterpart and are borderless, making them less restrictive for worldwide transactions. Moreover, the transactions are irreversible and the nature of cryptocurrencies makes tracking considerably more difficult when compared to the fiat currency system.
Noteworthy, the cryptocurrency market is much smaller and, thus, way more volatile than traditional markets. This is probably one of the reasons cryptocurrencies are not yet universally accepted, but as the crypto economy grows and mature, volatility will likely decrease.
The future of both these forms of currency is in no way certain. While cryptocurrencies still have a long way to go and will certainly face many more challenges, the history of fiat currency demonstrates the vulnerability of this form of money. That’s a big reason many people are exploring the possibilities of moving towards a cryptocurrency system for their financial transactions – at least in some percentage.