Difference Between Fiat Currency and Cryptocurrency

Updated: Monday, March 1, 2021, 19:20 [IST]

As the world is moving towards a cashless society, the payment system around us is transforming into a digital economy. Currently, only a small percentage of global money is expressed as physical forms of currency, with the majority of money being exchanged electronically through online payment apps, online, or using debit cards.

Despite the fact that society today is on the verge of becoming an advanced economy, only a small percentage of people understand how cryptocurrencies vary from fiat currencies.

These days we often hear the words like "Cryptocurrency and Bitcoins" as these words and news about them are buzzing in the finance world.

The word "fiat currency" refers to money issued by a country's government. It is a legal tender that is backed by the government that issues it rather than a tangible good or commodity. Cryptocurrency is a digital means of exchange that is fully secure due to the use of encryption techniques. Cryptocurrencies are radically different from traditional fiat currencies. However, you can still buy and sell them like any other commodity.

What is a Cryptocurrency?

Unlike conventional currencies, a cryptocurrency is a digitally encrypted, decentralized currency that is not linked to or regulated by any government or central bank. It is based on blockchain technology, which is a distributed ledger framework. Blockchain is a distributed ledger that is managed by a network of computers that maintains an exact copy of the database and updates its records by consensus based on pure mathematics.

Some of the popular cryptocurrencies are Bitcoin, Etherium. Litcoin, Ripple, and Dash. These are not backed by any government and we don't need any intermediator to buy or sell them.

They are handled by peer-to-peer networks of free, open-source computers. Bitcoin was the first decentralized cryptocurrency to record public creativity, launched in 2009 by Satoshi Nakamoto - an anonymous inventor.

Cryptocurrencies come under the umbrella of digital currencies, and virtual currencies. They were originally developed to provide an alternative mode of payment for online transactions. However, cryptocurrencies have not yet been generally adopted by companies and customers, and are actually too unreliable to be used as payment methods.

What is a Fiat Currency?

Fiat currency may be in the form of physical money or maybe represented electronically, e.g. by bank credit. The supply is controlled by the government, and you can use it to pay your taxes. Fiat currency includes paper currency, banknotes, coins, bills, etc., which has a store of value and is used as a means of trade to purchase goods and services.
The role of central banks in the economy has expanded since the introduction of fiat money, as they now regulate the printing of currency. The powers of consumer demand and supply decide the monetary value. Pound, the US Dollar, the Euro, the Yen, and the Rupees are some of the major global fiat currencies.

Major difference between Fiat Currency and Cryptocurrency:

COMPARISON	FIAT CURRENCY	CRYPTOCURRENCY
Meaning	Fiat currency is backed by the Government and can be in the form of physical money or maybe represented electronically.	A cryptocurrency is a digitally encrypted, decentralized currency that is not linked to or regulated by any government
Issued by	Issued by the central bank	Operates independently
Intermediaries	Required to make transfer	Not required
Unit	Dollar, Rupee, Euro, Pond	Bitcoin, Ethereum, Litecoin
Legal	Legal in all countries	Illegal in some countries
Supply	The supply of fiat currencies is unlimited.	The supply of cryptocurrencies is limited.
Exchange	Fiat money may be used to make digital or physical payments or transfers of funds.	Only a digital transfer of funds is possible with cryptocurrency.
Represented by	Coins, Notes and Bills	Private and Public pieces of code
Tangibility	Fiat currencies have a tangible appearance in the form of coins and notes.	Cryptocurrencies cannot be touched or sensed in any way.
Storage	Can be stored in bank accounts.	Can be stored in digital wallets

Tracking: The distinction between fiat currencies and cryptocurrencies is that fiat currency transactions can be easily monitored and recognized by the issuer and recipient.

The medium of Exchange: The distinction between fiat currency and cryptocurrency is that fiat currency is a tangible, or traditional, medium of exchange, whereas cryptocurrency is a digital medium of exchange.

Safety: Fiat currency is safer when compared to Cryptocurrency as they are backed by the Government and the transfer of money can be tracked. While transactions can happen anonymously in crypto.

Supply: Fiat money has a limitless supply, meaning that central banks have no limit to how much money they can print. Many cryptocurrencies have a supply limit, which ensures that only a limited number of coins will ever be accessible.

Legality: Governments regulate the supply of fiat money and issue policies that influence its value. Cryptocurrencies are digital assets that function as a medium of trade and are not regulated by governments.

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