Cryptocurrency vs Fiat Explained
The crypto industry is packed full of terms that can be easily miscommunicated, misunderstood, or simply create a point of confusion for many beginners. For those starting out, this can make the experience far more difficult than it needs to be. At BCB Group, we aim to give our clients all the information they need to operate in the crypto market with confidence.
Below we will explain the difference between cryptocurrency and fiat, which are two major terms you will encounter when buying, selling and trading any kind of digital asset.
Before starting out, it’s crucial to make sure you have a comprehensive understanding of cryptocurrency and the wider industry that surrounds it. To begin, let’s take a look at what cryptocurrency is and how you might look to use it in the digital world. In basic terms, cryptocurrency is a digital currency; a form of currency that does not exist physically but is instead maintained and monitored through a series of computer programmes. Much like fiat money, which we will cover shortly, crypto is another form of payment that can be used to pay for goods and services, sent as a gift, or saved up as a form of investment for the future. Cryptocurrency can be sent and received in many ways, but to do so, you’ll need access to an account that supports digital currency transactions.
Currently, the market is flooded with different forms of cryptocurrency, with some providing more stability and others running the risk of extreme volatility. Whilst nothing is certain, some of the most basic and settled forms of crypto currently on the market are Bitcoin and Ethereum. Each of these digital currencies is founded in blockchain technology, which ensures transparency with a record of each transaction kept and monitored on the blockchain.
How Does Fiat Differ from Crypto?
The next question you’re probably asking is “what is fiat money?” – this is much easier to understand as fiat money is essentially government-issued currencies that have no intrinsic value. This means that their value is not tied to a valuable commodity such as a precious metal like gold or silver. In general, the value of a fiat currency is determined by its acceptance across the globe and can usually be divisible by 100, which is the lowest amount of the currency that you are able to own. Examples of this are the penny, which is 1/100th of a Great British Pound, or one cent, which is 1/100th of the US Dollar.
The main difference between cryptocurrencies and fiat money is that cryptocurrencies tend to be decentralised, which means there is no single authority that controls their value by creating more of the currency and diluting the overall value. By operating in this decentralised manner, cryptocurrencies are able to remain highly resilient and can validate transactions without the input of a third party, such as a bank. Instead, the transactions will be validated by the blockchain technology that is present. In the blockchain, every transaction is permanently recorded on a block – this makes the transaction valid and irreversible. In this sense, cryptocurrencies are perhaps one of the most secure ways to make a payment for goods or services. You can find more information on blockchain and the role that it plays in cryptocurrency transactions by checking out our guide to blockchain technology here.
The Future of Fiat: Could Crypto Replace It?
There are many debates currently surrounding the future of fiat, with some stating that they expect it to be phased out in place of cryptocurrency in the coming years, whilst others disagree and believe that crypto and fiat will co-exist as we move forwards. For many, one of the biggest dangers with fiat money is the fact that it can be very susceptible to inflation, which can drastically change the overall wealth and value of institutions should a crash or surge occur. If needed, local governments can begin to increase the amount of money produced at any given time – this massively dilutes the value of the currency and can lead to instability within the economy in the form of hyperinflation. On the other hand, cryptocurrencies, such as Bitcoin, have a limited supply that will not change over time – this means the value of Bitcoin may increase as it becomes a more popular holding, but it will not be diluted by mass production. For this reason, you will find that many people are currently happy to hold onto their Bitcoin with a view to making a profit as the value rises.