Fiat vs Cryptocurrency: Pros and Cons

While some early-adapters may not need convincing to join the cryptocurrency craze, others are left wondering, what exactly is it good for? I can’t put it in my bank, I can’t use it at (most) stores, what can I do with cryptocurrencies? Before we get into the ins and outs of cryptocurrency and how it can be used, first let’s look at some of the similarities and differences between fiat and cryptocurrency.

Fiat:

Fiat money is a currency that is declared legal tender by a government, but it is not actually backed by a physical commodity. Fiat is the kind of money most people around the world use on a day to day basis. However, since fiat is no longer based on a physical commodity, such as gold or silver as it was in the past, it is essentially just valuable by faith and credit and is the standard for debt repayment, as declared by a country’s government.

Fiat currencies only gained popularity in the 20th century when the demand for currency increased and fixed resources like gold and silver were too scarce to rely on and considered unstable.

Pros:

• Because fiat money does not need to rely on a fixed resource, central banks can manage their supply, which gives them the economic power to manage credit, interest rates, and liquidity, to name a few.
• Recession relief. Fiat can cushion against local recessions by being printed or held and help manage a crisis. This, however, is not effective on a large scale or when dealing with a global recession.
• Relatively stable. Unlike gold or cryptocurrency whose value fluctuates depending on the market, the strength of fiat typically remains stable but is largely connected to the strength of the government it is tied too.

Cons:

• Inflation becomes an issue with fiat because of its unlimited supply. Currencies tied to fixed resources are more stable in the long run due to the limited supply of the resource, such as gold or silver.
• Subject to high taxation depending on wealth accumulation and location.
• It can no longer be redeemed. Is not backed by a physical commodity.
• Subject to instability dependent on the government. When a country is doing well, its banks are doing well and its fiat does well. However, when a country is being poorly managed or suffers for any reason, its fiat also suffers, which means the population depending on that fiat also suffers.
• Slow transactions. Even with the innovation of the internet and faster transaction times, electronic cash transactions often take days and are still subject to banking fees or delays depending on the bank’s schedule.
• Potential to be forged or counterfeit. Printed fiat and cheques are particularly easy targets for forgery.

Cryptocurrency:

Cryptocurrencies are digital currencies, many of which are based or built on blockchain technology and use cryptography for security. This security feature also allows the control and creation of additional units and to verify the safe transfer of assets. Unlike fiat, which is controlled by central banks and the government, cryptocurrencies have decentralized control.

Bitcoin was the first successful decentralized cryptocurrency, which appeared in 2009. Since its development, thousands of other altcoins and token cryptocurrencies have been created for various purposes.

Photo by Thought Catalog on Unsplash

Pros:

• Cryptocurrencies are created with a set number, which keeps the amount of new tender low, preventing inflation. Central banks or governments have the ability to print or mint as much currency as they want, which can lead to hyperinflation.
• Global access. Because cryptocurrencies are decentralized, they are accessible everywhere in the world and are not limited to those with access to a bank.
• Transparent transactions. One of the major benefits of cryptocurrency is that once a transaction takes place, thanks to the open ledger, blockchain, the transaction is recorded, verified, irreversible and impossible to change.
• Not easily taxable.
• Easily transferable. The amount of currency one can transfer in an instant is unlimited and happens almost instantly.
• Impossible to forge. Because of its decentralized nature, tokens and digital coins are verified within the blockchain and cannot be counterfeited.
• No banking fees. Banks charge varying fees for different reasons such as; transfer fees, monthly maintenance; withdrawal fees; international banking fees and overdraft charges. Cryptocurrencies are sometimes subject to low fees on transactions for network costs.

Cons:

• The worth of a cryptocurrency is directly dependent on its demand and cannot be controlled.
• Not yet popular. Because many people still don’t understand how cryptocurrencies can be used, there are currently not many people who use cryptocurrencies and not many businesses that accept them as a form of payment, so use is still limited.
• Subject to criminal activity. With cryptocurrency being so new, laws and regulations are still being developed to prevent criminal activity within the crypto market. Before KYC (know your customer) regulations were added to many crypto exchanges, it was easy for criminals and fraudsters to avoid detection because transactions could not be traced or linked to a real identity.
• Speculative value. Cryptocurrencies, because they are not controlled by a central bank or government tend to be highly volatile and can fluctuate in value rapidly. Some people like this aspect of cryptocurrency because it allows for high-risk, high-reward trading, while others would prefer more stable assets.
• Subject to market manipulation. Pump and dump schemes and insider trading has been hard to track because of the private nature of cryptocurrency transactions.

How can cryptocurrency be used?

Outside of crypto-trading and wealth accumulation, cryptocurrencies can be used in a surprising number of ways, and new channels for use are being created daily.

• Invest. Investing in early-stage startups has become much easier through cryptocurrency, allowing a lower barrier to entry for new investors.
• Send money globally without banking or international fees. New developments are being made daily which allows millions of people to access assets even if they don’t have access to a bank. This has become an important solution for many poor, and marginalized populations around the world.
• Plan a trip. The travel industry has seen one of the biggest integrations with the cryptocurrency market thanks to its global decentralized nature. More and more traveler dependent companies are accepting cryptocurrencies such as CheapAir, Destina and Crytocribs, which allows travelers to book accommodation. You can even plan a trip to space!
• Marketing opportunities. With so many new companies, the content creation and marketing industry has been thriving within the cryptocurrency market. Participating in Airdrop or Bounty programs gives people a chance to profit from shared marketing efforts.
• Shop. Online marketplaces are beginning to adopt cryptocurrencies as a form of payment, and some blockchain-based marketplaces only accept crypto in exchange for goods and services.
• Play a game. Online games that use cryptocurrency are on the rise, some even enable players to transfer in-game cash to fiat or other assets.
• Buy a house. Real estate is another one of the fastest growing industries to jump into the cryptocurrency marketplace. Land-sharing and development options are also in the works for several token-based companies.

Takeaway:

Both fiat and cryptocurrency are essentially the same when it comes to their use. Both can be used as a medium for exchange, for the purchase of goods and services, credit, stored, or transferred. They are both dependent on economic factors and can subsequently increase or decrease depending on these factors. Neither are backed by a physical commodity, but rather their worth is dependent on a given value and upheld by supply and demand. Neither has been around for very long.

Just as it took fiat some time to stabilize and become the global norm, cryptocurrencies are still at an infant stage and are going to become increasingly common as people learn how to interact with them.

While there are pros and cons to each, the overwhelming amount of possibilities created by using a decentralized currency system is nothing short of exciting. Digital currency may not be the revolution the world is ready for, but it may be the one the world needs.

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