MONEY is a term we hear about in our daily lives. Before any object can be considered money, you must be able to use it as a medium of exchange. Before the emergence of Bitcoin in 2009, the most widely accepted and used medium of exchange is the fiat currency.
The invention of Bitcoin and blockchain technology brought about the world of cryptocurrency and one of the aims of cryptocurrency is to be globally accepted as a medium of exchange and if possible, replace the use of fiat currency.
Before we compare the two currencies, let’s have a quick look at the meaning of fiat currency and cryptocurrency.
What Is Fiat Currency?
Fiat currency or money is any currency that is accepted and in most cases issued by the government as a form of payment of paying taxes or debt. It is a legal tender that lacks intrinsic value and is usually issued by a central authority like a central bank. Examples of fiat currency include the Nigerian naira, US Dollar, Pounds sterling, Euros, etc.
What Is Cryptocurrency?
Cryptocurrency is also known as digital money and uses cryptography technology to process, approve, and secure transactions. They are also decentralized in nature and unregulated by a central bank.
Now that we have an idea of fiat and cryptocurrency’s meaning let’s compare the two of them and see the similarities and differences between them.
Similarities Between Cryptocurrency And Fiat Currency
The similarities include the following:
- They are both used as a mode of payment of goods and services.
- They serve as a store of value for goods and services.
- They both depend on consumers’ trust to be accepted and used as a mode of exchange.
- Some fiat currencies and cryptocurrencies get their value from the law of demand and supply in the market.
Differences Between Cryptocurrency And Fiat Currency
- LEGALITY: fiat currencies are usually backed and issued by the government and regulated by the central bank. In summary, they are centralized, unlike cryptocurrency. Cryptocurrencies are digital currencies and are not regulated by any central body or financial institution. Since the cryptocurrency is relatively new compared to fiat currency, some countries are still struggling to come to terms with it while it is even banned in some countries.
- STABILITY: fiat currency has more stability than cryptocurrency. This stability allows the regulators and government to be able to protect the economy against recession and inflation. Cryptocurrency is very volatile, and it is hard to predict when its value will increase or decrease.
- SUPPLY: The amount of cryptocurrency that can be produced is limited in supply, making it more scarce and adding more value to the cryptocurrency. For example, Bitcoin has a limited supply of 21 million BTC. The fiat currency is not limited in supply, and the quantity that is printed and added into circulation by the federal reserve can always be increased.
- TRANSACTION TRANSPARENCY: Transactions made with cryptocurrencies are transparent i.e., it can be viewed by anyone and can be traced back to the original source, unlike transactions made with fiat currencies which are not transparent and can be tampered with by people in control or the financial institution in charge.
Some other differences include the fact the cryptocurrencies have no physical form and are purely digital coins as they are traded and transacted entirely online. At the same time, fiat currency exists in both digital and physical forms. Fiat currencies are printed and regulated by the central bank, while cryptocurrency is created through a process known as mining that serves as a form of payment to the miners who perform different activities to regulate and preserve the system.