Understanding the differences among “fiat money” and cryptocurrencies

Currently, there is some confusion between fiat money and cryptocurrencies. Despite the fact that both systems are recognized and accepted as monetary value and payment method for some businesses, there are still some who do not know all the characteristics and advantages of cryptocurrencies, so they do not recognize them as an equivalent of fiat money.

Money by decree, commonly called fiat money, is a form of monetary value backed by the government. One of the main characteristics of fiat money is that it is controlled by the government and central banks of each country. Some examples are the US dollar, the euro or the yen. Fiat money functions as an exchange currency in commerce. It has the following properties: It is a measure of value, an exchange instrument and a means of payment. But it does not comply with the wealth reserve property (such as gold or silver) that are precious and scarcer metals. Fiat money, like bills and coins, has a monetary value depending on the number that is printed, but it is not backed by anything since the value it has is a represented value. This value can be maintained or fluctuate depending on the country’s economy and government regulations.

Properties to be met by fiat money:

Measure of value: Money must preserve its value over time so that we can buy a similar amount of goods and services in the future (adjusting purchasing power for inflation).

Exchange instrument: In all commercial operations, when acquiring a good or service, there are costs to make the transaction. Fiat money acts as a medium of exchange in these operations. For example, with the money that a seller receives, he acquires income so that he can later acquire goods or services that he wants, making him a buyer. In barter situations, the interests of the offering person must coincide with the interests of the claimant.

Payment method: Fiat money can be used to acquire goods and services in any market.

As mentioned before, governments have absolute control over fiat money, so another important property of fiat money is that more bills or coins can be printed as needed by each state. In other words, there is not a limited number of bills or coins or a fixed number of units issued. It is for this reason that fiat money will always be affected by inflation. Inflation results in the following: That of which there is much has less value than that of which there is little. For example, printing more bills or coins increases the number of bills or coins in circulation. So, the value is reduced. This situation, mismanaged by governments, can lead to the fiat money of a country to an extreme devaluation and loss of purchasing power of the currency.

Over time, different solutions emerged to counteract the negative, centralized and dependent effects of fiat money. Cryptocurrencies, also known as digital currencies or digital assets, emerged. It can be said that cryptocurrencies give users more power over their own money. They are the owners, not the holders (as in the case of fiat money). These are some advantages of what is known as “digital money”:

• Users are the sole owners of their cryptocurrencies. It is they who decide how, where and how much money they send or receive.
• Most of them are decentralized, so they are not regulated by any entity or government.
• Users are the ones who decide the value for most of them, based on their real and free utility. It is for this reason that communities are so important.
• They have a limited amount of coins created. So, the value of this increases when there is more demand because there is less supply. There is no risk of inflation since you cannot issue more Bitcoin, for example, than currently exists.
• They are created on blockchain technology, which has the following characteristics:

º It is a faster technology.

º It is more secure since all the data is encrypted. It has the property of immutability.

º It is transparent and traceable, as it provides an online ledger that can be found on the network, where the transactions can be tracked in real-time.

º Transaction costs are lower than the traditional banking system.

These are the main characteristics and differences that fiat money and cryptocurrencies have. Despite the fact that there is still a little skepticism regarding the use of cryptocurrencies, they are used as a payment method with increasing frequency and in more merchants around the world. There are even communities that have the belief that cryptocurrencies will replace the economic system that fiat money provides. Clearly, technology and the use of the Internet are disruptive systems that have replaced many traditional systems. We live in a digital world that is revolutionizing more and more and that always surprises us with new technologies.