Cryptocurrencies share many similarities with conventional fiat money, but also offer some interesting advantages.
Even as the world moves towards a cashless society, very few people have an idea of how different cryptocurrencies are from fiat currencies.
Fiat money is a form of currency that is declared legal tender. This includes money in circulation such as paper money or coins.
Fiat money is backed by a country’s government instead of a physical commodity or financial instrument. This means most coin and paper currencies that are used throughout the world are fiat money. This includes the U.S. dollar, the British pound, the Indian rupee, and the euro.
Fiat money became the norm after U.S. President Richard Nixon decided to abandon the gold standard in 1971. By doing so, he announced that the dollar was no longer convertible into gold.
On the hand, a cryptocurrency is a form of digital or virtual currency that can work as a medium of exchange. Being virtual in nature, they use cryptography technology to process, secure and verify transactions.
Unlike Fiat currencies, cryptocurrencies are not controlled by any central authority such as a central bank. Instead, they are limited entries in a database such as a blockchain that no one can change or manipulate, unless certain conditions are met.
Pros and cons of a fiat currency
Pros of a fiat currency
Since fiat money is not a scarce or fixed resource – like gold – a country’s central bank has greater control over its supply and value. This means that governments can manage the credit supply, liquidity and interest rates more reliably.
Unlike commodity currencies, which could be affected by the discovery of a new gold mine, the supply of fiat currencies is regulated and controlled by the respective currency’s government.
There is less risk of an unexpected devaluation caused by the supply of fiat currencies, as any increase in supply is a pre-empted decision made by a fiat currency’s government.
Cons of a fiat currency
Since it is not tied to a tangible asset, the value of fiat money is dependent on responsible fiscal policy and regulation by the government. Irresponsible monetary policy can lead to inflation and even hyperinflation of a fiat currency.
Adding to this, there is greater opportunity for bubbles with fiat currency – an economic cycle in which there is a rapid increase in price before an equally rapid decline in price.
The increased prevalence of bubbles is because fiat currencies have a virtually unlimited supply, which means that quantitative easing is an option for governments.
Money is an essential need for every person in their daily lives as they depend upon it for many purposes. Therefore, money is mainly differentiated into three types and here, we have discussed two of them with examples. The values, importance, usages, etc everything differs from each other.
Simply saying both types of money is essential according to one’s requirements and job. Fiat money is easily acceptable anywhere and everywhere whereas, commodity money is only acceptable in certain places that have been categorized.