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Jul 13, 2020
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Fiat money vs Cryptocurrencies

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By Alpha Roc on The Capital

Photo by Bermix Studio on Unsplash

Deutsche Bank boldly declared cryptocurrencies will replace fiat by 2030. Cryptocurrencies are global, decentralized currencies, there are no geographical or political boundaries for them. Cryptocurrencies are not currently legal tender. Moreover, the regulators of most countries are still wondering which side to approach them and how to consider them: currency, securities, or goods. What is Fiat money then?

Fiat money

Fiat Money is a kind of currency, issued by the government and regulated by a central authority such as a central bank. Such currencies act like legal tender and are not necessarily backed by a physical commodity. Instead, it is based on the credit of the economy. Fiat currencies such as the US Dollar, Pound, or Euro derive their value from the forces of supply and demand in the market. Such currencies are always at risk of becoming worthless due to hyperinflation as they are not linked to any physical reserves such as commodities.

Advantages of Fiat money

Fiat Money has remained legal tender in most countries in part because they are highly stable and controlled. The stability allows regulators and governments to navigate the economy against recession and inflation. Stability also allows fiat money to act as a means of storing value and facilitating exchange. It can also be used to provide a numerical account. Greater control also allows central banks to manage various economic variables such as liquidity, interest rates, and credit supply key to ensuring a robust, stable economy.

Disadvantages of Fiat money

Though Fiat Money is considered a stable currency, yet that is not always the case. Economic recessions over the years have highlighted some of the deficiencies associated with Fiat money. The fact that a central bank’s greater control at times does little to stop inflation or recession has led most people to believe that gold could be a much stable currency given its unlimited supply. The notion of central banks’ control over the economy and the constant increase in global prices creates the need for cryptocurrencies.

Advantages of Cryptocurrencies

Cryptocurrencies have been not restricted by geographical boundaries, anyone around the world can make an online transfer with a touch of a button. Although the process is still complicated, in the future, it will be easier to transact and own cryptocurrencies.

Fast settlement times are another attribute that continues to accelerate the widespread adoption of virtual currencies. Unlike other electronic cash settlement systems that take days to process transactions, cryptocurrencies enable instant settlements.

Lower transaction fees have seen cryptocurrencies emerge as a preferred means of sending money across borders. Transferring money using other bank gateways can be quite expensive given the number of fees charged along the way.

Privacy is another aspect that has made cryptocurrency desirable as users don’t have to share their identity to be able to complete transactions. There are altcoins in which the main functions are to maintain the privacy of people behind transactions.

Disadvantages of cryptocurrencies

Cryptocurrencies transactions are not reversible, if a wrong transaction is made the only thing one can do is ask for a reversal from the recipient. There is nothing one can do on recipients of a wrong transaction turning down a request for a refund

Volatility is by far the biggest disadvantage that has clobbered cryptocurrencies sentiments. Volatility goes a long way in affecting the value of a coin, which can be difficult to comprehend or contend with, however with stablecoins this problem is now less of an issue.

Differences

As Fiat money is issued by the central bank of the local government, it is deemed legal tender, while cryptocurrencies are merely digital assets that act as a medium of exchange in which governments have no control over. The decentralization aspect means no central body can control or influence their value. Some countries have banned the use of cryptocurrencies due to the very same reason. Another major difference between fiat money and cryptocurrency has to do with supply. Fiat money has an unlimited supply which means central authorities have no cap to the extent to which they can produce money. Most cryptocurrencies have a cap when it comes to supply, which means there is a set amount of coins that will ever be in supply. For example, the total number of Bitcoin coins that will ever be in supply is capped at 21 million. With fiat money, it is impossible to tell the amount of money in circulation at any given time, but with cryptocurrencies, it is possible.

Support for Cryptocurrencies over Fiat Money

Robert Kiyosaki, author of the best selling book Rich Dad, Poor Dad has long proclaimed his bullish position on Bitcoin. In a tweet, Kiyosaki states that his fear of a dying economy has led him to purchase more of three assets, namely Gold, Silver, and Bitcoin. Mr. Kiyosaki criticized fiat money, stating: “There’s so much fake money. In 1971 Nixon took the dollar off the gold standard and the US dollar became fake money.” Mr. Kiyosaki added that “The problem is it also became invisible, so they could print as much as they wanted. That’s why savers got wiped out.” For the average person, “Mr. Kikyosaki asserts, the easiest way to hedge against the oncoming crisis is to “just buy some Aussie gold or silver coins from the Perth Mint. When the dollar goes down, gold goes up.” In an interview, Mr. Kiyosaki recently praised cryptocurrencies, expressing his expectation that virtual currencies will supersede fiat currencies within the near future. During the podcast, Mr. Kiyosaki describes three forms of money: “government money […] which is fiat currency,” “God’s money, which is gold and silver, [which] will be here after the cockroaches go extinct,” and people’s money, which is [virtual] currency. “I think the dollar is toast because gold and silver and cyber currency are going to take it out […] The US dollar is a scam,” Mr. Kiyosaki stated, adding, “I think we’re watching the end of the dollar.”

Other prominent figures, such as the head of twitter Jack Dorsey, as well as co-founder of Apple Steve Wozniak, had previously expressed the hope that in the next decade, Bitcoin has every chance of becoming, if not the only global payment instrument, then the native currency of the Internet for sure.

Conclusion

Cryptocurrencies and fiat money come with attributes that make them stand out as a means of legal tender regardless of jurisdiction. However, they also come with cons that have seen them continue to divide opinions around the world. While there are many advantages of cryptocurrencies over fiat money, it seems that cryptocurrencies are not yet mature to replace the current standard payment method. It is a matter of time. The crypto market will most likely continue to evolve and create a big change to the current money system.

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Fiat money vs Cryptocurrencies was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

Article Categories:
Bitcoin · cryptocurrency · fiat-money · finance · money
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