Fiat Currency and Cryptocurrencies: What's the Difference?

Picture: Belajar Ekonomi

Techspace - The techniques of spending money change as time passes. The world is developing into a computerized economy, where a small part of global money is represented as a physical form of currency. At the same time, the remaining proportion of cash is exchanged electronically or with Master cards and e-money. This shows that Cryptocurrencies are gaining attention worldwide and may even take over fiat currencies in the future. However, even though society is approaching a developed economy, only a limited number of individuals have a clear idea of ​​whether Cryptocurrencies are different from fiat currencies or not.

Read also: Fast and Easy, Here's How to Convert Bitcoin to Fiat Currency

What is Fiat Currency?

Fiat currency is the official currency approved and printed in paper form that plays an important socio-economic role by acting as legal tender. In addition, flat money is not supported by solid goods/objects. So if there is inflation, it will decrease its value or even be worthless if there is hyperinflation. The issuer and recipient of fiat currency transactions can also be easily tracked. 

Fiat currency is a currency supplied by the government and directed by a central jurisdiction. Fiat money, such as the Rupiah, achieves its monetary value from market demand and supply forces. Although this form of currency has inflation risks, it also has benefits.

The government and central authorities provide fiat currencies because they are more stable than other currencies, such as Cryptocurrencies. Therefore, fiat money helps facilitate exchange. Additional security and assistance are provided for fiat currencies. In addition, fiat currencies are also centralized and have flexible changes in demand for money. However, economic recessions have consistently had an impact on fiat currencies. Fiat currency may not be an efficient store of value due to inflation. The central bank is the only one that can control fiat currency.

What is Cryptocurrency?

Forms of digital currency such as cryptocurrencies are alternatives to conventional payment methods such as money, master cards, and bank checks. Governments do not back up cryptocurrencies and are not regulated by a centralized authority.  Cryptocurrencies also operate as a medium of circulation and are founded to help make stable and certified transactions. However, Cryptocurrencies are entries in a database that cannot be changed or manipulated. In addition, inflation has no impact on cryptocurrencies.

Cryptocurrencies are beneficial because they can be efficiently accessed globally, so anyone can own digital coins by making online transfers. Cryptocurrencies can create instant settlements, unlike other digital or virtual money forms. Cryptocurrencies have low transaction fees, making it easier for people to transfer funds globally or domestically. You don't need to go to the bank to complete the transaction because they can control their finances. In addition, in Cryptocurrencies, the identification of the issuer and recipient of the money remains anonymous.

However, Cryptocurrencies face the risk of volatility as there are high fluctuations in cryptocurrencies which can attract and benefit traders but pose a threat to investors as it can result in changes in their funds. Cryptocurrencies are risky because if a programmer tries to hack into the network, he can steal all the funds, and there is no way to get the funds back. Since banks do not operate cryptocurrencies, banks will not assist. While cryptocurrencies may sound like a quick way to earn money, they can also lower your credit rating/credibility in the market.

Differences Between Fiat Currencies and Cryptocurrencies

  1. Fiat currencies have no intrinsic value and are controlled by governments and banks. A cryptocurrency is a form of digital currency that is not restricted by banks and is a computerized database that cannot be manipulated.
  2. Centralized authority can influence market demand and supply of fiat currency. Meanwhile, Cryptocurrencies have no impact on prices because a central authority does not control them.
  3. Fiat currency can have a physical form. Cryptocurrencies are intangible because they are digital currencies.
  4. Fiat currency can be accessed and stored in many forms. Cryptocurrencies can be accessed and stored digitally in cryptocurrency wallets.
  5. Fiat money can exchange funds both digitally and physically. Cryptocurrencies can exchange funds only digitally with the help of codes.
  6. Fiat currency has an unlimited supply of currency because a centralized authority can make money. Cryptocurrencies have a limited currency supply because a fixed amount of money will be supplied.

These two forms of currency, however, share some similar characteristics. Such as being a legal tender and having trade value, helping consumers buy various types of goods and services to transact on the exchange. Although digital currencies have a more critical preference in modern society than fiat money, they are not yet mature enough to take control of today's conventional payment methods.

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