What if I asked you to differentiate between cryptocurrency and fiat money, do you think you would give me the correct answer? Well, I'm sure you may not give the best answer and that's why I want to tell you how the two differ. In this article, I'm going to tell you more than just the definitions of fiat currency and cryptocurrency.
By reading this piece, you're going to learn the meanings of the two, their examples, how they operate, their advantages & disadvantages, and most importantly, what the future holds for each of the two options. Also, I'm going to use as many examples as possible to ensure that you understand all the underlying concepts of fiat money and cryptocurrency.
Once you've understood the differences between cryptocurrency and fiat money, I believe it will be a lot easier for you to select the best option to invest in. Most importantly, your better understanding of the concepts will make me a very excited person because that's my primary goal of writing this educational piece. Now let's jump into the details and see what each of the two options offers.
How Cryptocurrency Works
According to a Forbes publication, Crypto is a very special kind of currency that only exists in electronic(virtual) form. So, unlike conventional money which takes various physical forms such as a solid coin or banknote, cryptocurrency is available as electronic files. These files are stored on computers and other storage devices, and you can transfer them from one device to another over a network.
You need some specialized pieces of software and hardware to hold cryptocurrencies such as Bitcoin, Ethereum, and others. For example, you must have a hot or cold wallet if you want to own and use cryptocurrency. A digital wallet is not something unique but just an application that enables you to securely store your virtual money or spend it whenever necessary.
No single authority or individual manages cryptocurrency networks because the technology implements a decentralized operational architecture. The core software of the given crypto runs on multiple computers situated in various locations.
A group of people referred to as a community always takes care of all the technical needs of the network. For example, the Bitcoin community proposes and works on any Bitcoin improvement proposals.
How Fiat Money Works
Fiat money such as the USD, Eur, UK Pound, Japanese Yen, Chinese Yuan and others, are without any doubt one of the most robust transaction means available to us today. I'm sure that even today alone, you have used fiat money in one way or another, and I'm certain you still will, tomorrow.
The truth is that we cannot wake up one morning and cut off the use of conventional money just like that. Replacing conventional money with cryptocurrency requires a carefully crafted plan. Also, the implementation of cryptocurrency is a considerably gradual process. This tells you that It will take some time for cryptocurrencies to completely take over, and no one really knows precisely how long it would take for that to happen.
Fiat money differs from cryptocurrency in many aspects. For example, you can physically hold your notes or coins and even put them in your pockets or normal wallets. All these aren't possible with virtual money. The other major difference is management and control. Unlike crypto, a central financial institution or authority oversees fiat money usage and operations, a BIS article explains. In many countries, the government plays the oversight role with the help of policies created and implemented by the central bank.
Pros & Cons of Cryptocurrency
By adopting the use of cryptocurrency, we can enjoy several benefits as users or investors. For example, most cryptocurrency networks are efficient and secure, which makes transactions impressively fast and affordable. Moreover, cryptocurrency technology makes financial services available to you at all times regardless of where you are.
Your social status also doesn't matter, which means that people have equal investment opportunities in the cryptocurrency ecosystem. The other thing I like a lot about cryptocurrency is the amount of flexibility and freedom the technology offers. You don't have to worry about your region or country of residence because cross border payments are more seamless, quicker, and more affordable when using cryptocurrency.
On the negative side, I can say that cryptocurrencies still have a long journey ahead to become over 95% favorable. Some of the drawbacks of cryptocurrency include unstable market prices, slow rate of adoption in some countries & regions, and multiple incidences of theft. However, I want to assure that things will get better with cryptocurrency once governments shall have introduced policies that address the above challenges.
Pros & Cons of Fiat Money
Fiat money just like I have explained above is a little more stable both in terms of price and operations. Everything is near perfect because governments have full control over all fiat money systems and the related financial services.
The presence of government regulations means that the prices of traditional assets that are associated with fiat money such as stocks are generally more stable and predictable. You basically have more than enough data for market research because conventional currencies have been around for decades.
During my 2-decade career as a financial markets analyst and consultant, I can say that conventional money systems also have some limitations. For example, the transaction costs are always relatively on the higher side. Besides, fiat money transactions are slower and face numerous cross-border restrictions.
In the investment sense, the access to opportunities in the traditional financial markets is a lot more limited than in the crypto sector. For example, you must meet certain requirements for a bank to offer you a loan. Additionally, opening a bank account needs more legal documents and such services are not readily available everywhere. Here are some of the requirements according to the US bank.
Final Verdict!
Both cryptocurrency and fiat money have pros and cons depending on your status, region, and skills. However, getting started as a crypto investor seems to be a lot faster and less hectic. Moreover, cryptocurrency prices are extremely volatile thus requiring substantial market knowledge for you to make the right investment decisions.
On the other hand, fiat currencies have been in use for many years, and are therefore, more advanced and stable. The governments' direct involvement also makes fiat money markets to be relatively more secure and predictable. As a financial expert, I want to tell you that anyone can succeed either as a fiat money or crypto investor. All that matters is having prior market knowledge and choosing your investment assets carefully.
Thanks for reading,
Much Love ❤️.
Sourced images: 1, 2 ,3 ,4
Posted Using InLeo Alpha