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Nov 05

2019

Cryptocurrency Vs Fiat currencies.

The concept of money is something that has been part of the human history. Money has existed throughout the ages in various forms. And while money I'm each of these forms is in itself nothing, it is the concept of value which people attach to the various forms of money that makes it useful. Money derives its value by being a medium of exchange. That is, people can use it to trade goods and services.

Archaic human societies used trade by barter as a primary medium of exchange. When this system is closely scrutinized, one can see that the concept of value is inherent in human nature. In bartering, something valuable is given in exchange for something equally valuable, or for performing a valuable service. The earliest forms of barter included cattle, sheep, as well as vegetables and grain.

Traditional forms of money which are well known today, including coins and fiat, were first created around 600 and 700 bc respectively. They have stood the test of time because they possess qualities which make money acceptable:

  • They are a medium of exchange
  • They are ano accepted store of value

The concept of money has evolved through the ages. A large bulk of money is now transacted in digital form through debit/credit cards, payment applications and internet banking, hence we seem to be progressing towards a cashless economy. Digital currencies have gained immense popularity in recent years. The creation of bitcoin in 2009 sparked a revolution in payment systems around the world, generating a system which is transparent, decentralized and independent of third party organizations like banks and the government. These days, there is a big debate on cryptocurrency vs fiat money. There are a  lot speculatione as to whether cryptocurrency will wipe out fiat money completely. Let's start by comparing these two types of money.

Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value , and has value only because a government maintains its value, or because parties engaging in exchange agree on its value. While paper money was traditionally valued by a physical commodity such as gold or silver, nowadays, fiat money is supported by a faith-based system that depends on supply and demand.  

Cryptocurrency on the other hand,  is a digital form of currency that is not backed by the government, and is based on a crypto-algorithm. It is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability. A digital asset, it uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.

Cryptocurrency provides a better payment system than traditional fiat currency for the following reasons:

  • Cryptocurrencies like bitcoin are  immune to the possibility of the stark inflation that has been known to plague fiat currency. Due to a 21-million-dollar spending cap placed on Bitcoin, there is only a limited supply of how much of this currency can be produced, making inflation impossible. This contrasts to Fiat money, which can be limitlessly printed at the user’s expense, leading to inflated rates and an overdose of production of paper bills that have little value.
  • Cryptocurrency provides a better remittance option for transferring money across borders without incurring heavy fees. The transaction fees of many cryptocurrencies are low considering you may be transferring millions of dollars worth of cryptocurrencies. There has been recorded a transaction where cryptocurrencies worth nearly $5 million dollars was transferred at a cost of only a couple of hundred dollars. This has made many investors and users keen about the applications of cryptocurrencies.
  • Cryptocurrency offers much faster speeds than, say, a wire transfer. These days, many cryptocurrencies offer instant or near instant transactions, which are far superior to 24–48 hours it can usually take with fiat.

Apart from the above, there is no intrinsic difference. Both fiat currency and cryptocurrency can be called money or currency, both are mediums of exchange that are used to store and transfer value, both can be used to purchases goods and services, both have their value governed by supply, demand, work, scarcity, and other economic factors, both have their value affected by the quality of the system surrounding it, both can be traded on exchanges

 

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