Differences between cryptocurrency and fiat currency

Posted by jessica on April 17th, 2021

It is the digital world where technology is replacing every conventional system. The financial world is not far from this advancement. Societies are moving towards digital and cashless transactions. If we look into the current money system, we will see that only a small part of the total global capital is in the form of physical currency. The rest is being exchanged through electronic payment methods such as debit card, online or payment apps. 

The monetary method is on the verge of transformation. It sounds sad that only a few people know the difference between cryptocurrency and fiat currency. People even don't know that time is not far when the cryptocurrency will completely replace fiat currency. 

The term fiat money reflects the currency issued by a country's bank or government. There is no commodity or tangible good, which backs this legal tender. Then the question is, What are fiat currencies backed by? The government backs them. On the other hand, the term cryptocurrency stands for the digital exchange of money, secured through various encryption techniques. Cryptocurrency and fiat currency are entirely different from each other. However, traders can still sell and purchase them like other goods

What is Cryptocurrency?

Cryptocurrency is an online or digital medium of exchange that employs cryptography to proceed with the financial transitions. The complete transaction mechanism takes place through a popular technique known as blockchain technology. It is the blockchain that makes this monetary system decentralised, immutable and transparent. 

There is no central authority to control cryptocurrency, unlike fiat currency or the conventional money system. The blockchain decentralised natures make these digital coins theoretically resistant to traditional methods of government interference and control. Moreover, people can send these virtual coins from one point to another using a public and private key. Thus, this system eliminates the steep fees associated with conventional financial institutions. You just have to provide minimal processing charges. 

Some of the well-known cryptocurrency includes Etherium, Bitcoin, Ripple, Litecoin and Bitcoin Cash. Satoshi Nakamoto (an anonymous inventor) launched Bitcoin in 2009. It is the first and still most famous digital coin. You can trade all popular cryptocurrencies with 101investing. Visit the site to know more. 

The major reason to develop these virtual coins was to give an alternate method for digital transactions. However, the fact is that though being a popular and secure method, companies and people have not adopted it yet. They consider it unreliable for transactions. 

What is fiat currency? 

Fiat currency is in the form of physical capital, or it can also be represented electronically, for example, bank credit. The government has full control over its supply, and people can use it for paying their taxes. Fiat money includes banknotes, paper currency, bills, coins and several others. They also act as a store of value and used for buying and selling goods and services. 

The functions of central banking institutions in the financial world or economy have surged since the invention of fiat currency, as they now manage and control the printing of notes. The supply and demand and powers of customers determine the monetary value of the dollar, Pound, the Yen, the Euro and several other significant global fiat currencies.

What are the similarities between cryptocurrency and fiat currency? 

Cryptocurrency and fiat currency have some similarities. Also, both these monetary systems have their own interesting benefits. 

1. People can use both these monetary methods for payments, and they act as a store of value. 

2. Both these mediums depend on the customer trust to work as a medium of exchange. 

Differences between cryptocurrency and fiat currency

The major difference between cryptocurrency and fiat currency include: 

1) Definition: 

Cryptocurrency: Crypto coins are a decentralised and digitally encrypted medium of exchange that do not require government or central authority involvement. 

Fiat currency: Fiat money is similar to legal tender. It is backed by the central body, such as the government or bank. This can take various forms, either in the form of a physical dollar or represented digitally, for example, bank credit. Government controls the supply of fiat money, and people can use it to pay for their taxes.  

2) Issuing authority: 

Cryptocurrency: It works independently. 

Fiat currency: The issuing body in the case of fiat is the central banks. 

3) Intermediaries: 

Cryptocurrency: Digital coins do not require any intermediaries to proceed with transactions. 

Fiat currency: Fiat requires intermediates to proceed with transactions.  

4) Unit 

Cryptocurrency: The unit of cryptocurrency includes Litecoin, Bitcoin, Ethereum, Ripple and several others. 

Fiat currency: The unit of fiat currency include Rupee, Dollar, Pound, Euro and several others. 

5) Legal:

Cryptocurrency: Cryptocurrency is illegal and banned in some countries, including India, Egypt, Algeria, Canada and several others. 

Fiat currency: Fiat money is legal in all countries. 

6) Supply 

Cryptocurrency: The supply of Virtual coins is limited. It assures that only a fixed number of digital coins will ever be available. 

Fiat currency: The supply of fiat currency is unlimited. It means that the central banks or authorities do not have any fixed limit to how much notes or coins they can print.

7) Exchange

Cryptocurrency: With cryptocurrency, people can only make digital payments or transactions. 

Fiat currency: People can employ fiat currency to make physical or digital transactions or payments for services. 

8) Represented by

Cryptocurrency: It is represented by public and private pieces of code 

Fiat currency: Bills, notes and coins represent it. 

9) Tangibility

Cryptocurrency: Digital currency cannot be sensed or touched in any way. 

Fiat currency: Fiat money has a physical appearance or body in the form of notes and coins.  

10) Storage 

Cryptocurrency: You require a digital wallet to store cryptocurrency 

Fiat currency: You require a bank account to store fiat money. 

11) Tracking: 

Cryptocurrency: The recipient or issuer cannot easily monitor or recognise digital transactions. 

Fiat currency: If we talk about fiat here, the recipient or issuer can easily monitor or recognise all transactions. 

12) Medium of exchange: 

Cryptocurrency: Digital currency is a digital medium of exchange

Fiat currency: On the other hand, fiat currency is a traditional or tangible medium of exchange

13) Safety:

Cryptocurrency: In cryptocurrency, transactions or payments can happen anonymously.  

Fiat currency: When you look into cryptocurrency and fiat currency safety, you will find that fiat money is far safer compared to cryptocurrency as the government backs them. Moreover, you can track the transfer of money. 

14 Legality: 

Cryptocurrency: No government policies affect the value of virtual coins. 

Fiat currency: The value of fiat currency is influenced by the policies of the government. 

The Bottom Line 

Cryptocurrency and fiat currency both are a popular financial tool for payments and transactions. However, they also have several setbacks. It is the reason behind the mixed option about their usage across the world. Some find fiat advantageous, while others argue over the benefits of using digital coins. 

Cryptocurrencies have several benefits over fiat, but it looks like they have not yet matured to replace the conventional monetary system entirely. Once they reach an expected height, no one can stop them from ruling the future financial world. Cryptocurrency trading is gaining widespread popularity these days. Many investors and traders are spending on bitcoin and earning massive profit. If you wish to start bitcoin trading, you can opt for 101investing. It is a trusted firm offering ultra-modern trading platforms at affordable prices

Frequently asked questions

1) What is cryptocurrency?

Cryptocurrency is an online or digital medium of exchange that employs cryptography to proceed with the financial transitions. The complete transaction mechanism takes place through a popular technique known as blockchain technology. 

2) Who issues cryptocurrency and fiat currency?

Cryptocurrency: It works independently. 

Fiat currency: The issuing body in the case of fiat is the central banks. 

3) Do cryptocurrency and fiat currency have anything common? 

1. People can use both these monetary methods for payments, and they act as a store of value. 

2. Both these mediums depend on the customer trust to work as a medium of exchange. 

4) Where can I trade cryptocurrency? 

You can trade cryptocurrency with 101investing. It is a legit financial service provider regulated by the Cyprus Securities and Exchange Commission. The minimum charge to start trade with the broker is just 0. 

5) What is the fiat currency? 

Fiat currency is in the form of physical capital, or it can also be represented electronically, for example, bank credit. The government has full control over its supply, and people can use it for paying their taxes.