There is an increasing dilemma with regard to the issue of choosing between cryptocurrency and fiat currency. Also, the fact that the Bitcoin 2.0 can now be used to exchange stocks, commodities, property and in some cases state-backed money has made the line between the two fuzzier with time. So, what are these two and what makes each of them unique?
Cryptocurrencies, the most renowned of which is the Bitcoin created by Satoshi Nakamoto in 2009 is a digital currency which is used in performing internet transactions. Others currently available in the market include DOGECOIN, RIPPLE, LITECOIN and ETHEREUM.
Because of its digital and secure nature, cryptocurrency has become a very renowned and widely used form of money. Cryptocurrencies are usually associated with the part of the internet using cryptography – the process wherein legible information is converted into a very secure and extremely difficult to crack code in order to track transfers and purchases.
This is especially because its use of cryptography for security purposes makes it extremely difficult to counterfeit. Also, because they are independent and are not issued by any government or central authority, cryptocurrencies are generally non-susceptible to government interference or manipulation meaning they can’t be frozen or blocked. This makes them an ideal means of transferring funds. It is created using computers meaning its value is not determined by the forces of demand and supply.
Cryptocurrencies use a system of decentralized technology which gives users the ability to store money and use the money to make secure payments without any need to use their names or use a bank. They are run on a public ledger known as a blockchain, which carries a record of all transactions. This blockchain is updated and held by currency holders. The process of creating cryptocurrency which involves the use of computers to solve complicated math problems in order to generate coins is known as Mining even though users can also buy these currencies from brokers and store them in cryptographic wallets from which they can spend them to carry out transactions.
Fiat currencies on the other hand is currency which is declared as legal tender by a government, but which is not backed by a physical commodity. Its value is based on the interaction and relationship between the forces of demand and supply instead of the value of the material used to make the money. In the past, currencies were based on commodities such as silver and gold. Fiat money however relies solely on the credit and faith of the economy.
This explains why most paper currencies nowadays are considered fiat currencies as they are intrinsically valueless and can be used only as a mode of payment. Because fiat money is not printed based on a set amount of a particular commodity such as silver or gold, it can’t be redeemed and as such is considered inconvertible.
The origin of fiat money dates back to the collapse of the Bretton Woods system in 1971 when the conversion of dollar into gold by the United States was stopped. Nevertheless, fiat currency is a good monetary unit especially when it is able to handle the economic needs of a country such as facilitating exchange, storing value and acting as a standard for deferred payments.
Given that fiat money is not as scarce a resource like silver or gold, central banks have the power to use it to manipulate economic variables such as liquidity, interest rates, money supply and velocity in an attempt to solve problems such as inflation and unemployment.
However, because Fiat currency is controlled and can be manipulated by government, there are a lot of people who prefer cryptocurrencies to fiat money especially because it is not as secure as cryptocurrency and also not easy and convenient to transact as cryptocurrency. However, both are used in the transaction of goods and services online and can each be converted to the other.