Cryptocurrency vs. fiat money

man holding phone with dollar signs coming out of it

Date Published

02/26/2019

For centuries, fiat currency has been the norm in terms of money exchange. Dollars, pounds, euros, and more are used in transactions around the world and have helped establish a global economy. But there are a number of downsides to fiat money that left investors longing for a more modern alternative as we moved into the 21st century. Thus entered the world of cryptocurrency, providing an entirely digital landscape of value with its own list of features and advantages. Here are the primary differences between cryptocurrency and fiat money and the key benefits of both.

What is fiat currency?

We’re all familiar with fiat money – we just never call it that. Fiat money is currency a government has declared as legal tender. It is backed by a central government and can either take the form of physical tender or be represented electronically in differing forms such as bank credit. Rather than being backed by a physical commodity, the value of fiat money is instead based on the overall credit of the economy. Its value is determined by economic factors like supply and demand.

Pros and cons of fiat money

The primary upside of fiat currency is that it is stable and controlled – for the most part. There have been recessions throughout history due to the controlling powers not effectively managing the rise and fall of fiat money’s value. This risk of hyperinflation comes from fiat currency no longer being linked to any physical reserves. Banks are able to manage liquidity, interest rates, and more throughout an economy given the centralized nature of fiat money.

What is cryptocurrency?

Cryptocurrency is a digital monetary system created by computers competing to secure mathematical transactions. More transactions solved in less time while using less energy equals more money. The crypto market is decentralized and global. It can be thought of like bank credit, only without the bank. Crypto isn’t backed by any bank or government, and supply is instead controlled by the algorithms that make up the backbone of each separate currency.

Pros and cons of cryptocurrency

Crypto transactions are all peer-to-peer, meaning there is no middle institution involved like a bank or a credit card. This means there are no third-party fees involved in mining for crypto. It is much more private than fiat, as there’s no way for a seller and purchaser to identify one another. Everyone can see every transaction that takes place, but no one has to share their specific identity to perform a transaction. There is no charge to keep crypto in your digital ledger, and it is less expensive to transfer money across borders. With crypto, you’re able to instantly process transactions versus having to go through a days-long process like you would with fiat money.

Some overlap between the two

Both fiat money and cryptocurrency are used to store and transfer value. Both can be used to purchase things, and both are ultimately governed by the principle of supply and demand. While crypto is purely digital, fiat is both digital and physical, available in both transferrable electronic funds or in tangible tender. There is no supply cap on fiat, but this isn’t the case with crypto. We can always tell how much is left to be mined of a given coin at any point in time, clearly displaying its availability and demand.

Start mining with Compute North

Cryptocurrency is increasing in ease of access and popularity, providing investors with a decentralized, high-potential environment to achieve a profitable future. Contact Compute North today to learn more about our colocation solutions and start making the most of your mining efforts.

Date Published

02/26/2019

Author

First Scribe

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