In the tug of war between the government and technology, which side will win? Will the new age of cryptocurrencies beat the conventional bill and coin? Let’s find out in this article.
Fiat money is physical medium of exchange of nations represented by coins and bills and comes under issuance by the government under specified regulation. On the other hand, cryptocurrency is decentralized virtual currency in blockchain documented by an electronic database secured by various cryptographic tools. Came to use in 2009, one such currency is Bitcoin, the world’s oldest and still most popular cryptocurrency. Both Bitcoin loophole and Fiat money is efficient mediums of exchange, an efficient unit of account, and store of value. However, both differ from each other over varieties of features.
- Pegging: Fiat currency is not pegged by any physical commodity but by the credit of nation’s economy. Currencies such as the US dollar, Pound, Euro, due to not being linked to any physical reserve, fall under the risk of losing their value to hyperinflation. While Bitcoin is not under legal tender and its supply is regulated by an algorithm.
- Regulation: Bitcoin is digital decentralized in nature; neither it requires an administrator. Transactions of Bitcoin between two participants happen over peer-to-peer networks under governance of specified protocols – blockchain – by spending less on wage on, infrastructure earns more. Fiat currency is centralized and comes under an authority.
- Stability: Fiat money is stable and always in control, allowing governments to steer through inflation or recession. This feature helps institutions control other aspects like interest rates, liquidity, and credit supply. Cryptocurrency, such as Bitcoin, is highly volatile and is bound to fluctuate, and can severely affect the coin.
- Issuance: While there is no limit to minting fiat currency, the mining of Bitcoin is limited to 21 million Bitcoins. The central bank of any country can decide to create more fiat money. Still, the amount of Bitcoin is fixed because of hard-coded supply, with mining just 1BTC getting harder and harder as the supply gradually reaches its limit.
- Divisibility: Bitcoins have higher divisibility as compared to Fiat currency. While one Bitcoin can split into 100 million pieces, Fiat currency like the US dollar can break into 100 units, making microtransactions more difficult.
- Storage and Portability: Bitcoins are an intangible form of currency that you can record on paper or USB drives. Fiat currencies are bulky tangible assets. You can deposit limited amount of them into storage. Fiat money transfers require infrastructure with security (banks and trucks), custom authentication protocols, and overall intermediaries.
- Forgery: Counterfeiting Bitcoin is mathematically impossible and requires as many efforts as mining new one. In contrast, how often do you hear news about the FBI or police seizing millions of dollars worth of fake currency?
- Spread and Popularity: Fiat currencies are the backbone of every nation’s economy. They are provided with authorization by governments for citizens and merchants in their daily transactions. Bitcoin has been relatively new and is popular among large-scale investors and retailers but is yet to take over Fiat money as premium mode of exchange. If total capitalization in market is less than big corporations, then it does not have the potential to affect.
While both types of currency have their importance and shortcomings, they are integral parts of present finance sectors.
Note: This article serves as information for knowledge and does not intend to provide any financial advice in any manner.