Comparing Fiat and Cryptocurrencies in order to assess their future
There is a very thin line between a Cryptocurrency as well as a Fiat currency. It is well known that the cryptocurrencies are about to replace Fiat currencies completely, due to its innumerable dominance. Let’s understand the characteristic attributes of each one of them which differentiates them along with understanding their relative strength and weaknesses over each other.
- Fiat currency is nothing but the traditional currency which we use on a daily basis regulated by the Central Financial Authority of the respective country. On the other hand, the cryptocurrencies are not regulated by any Central Financial Authority but are distributed in nature.
- The Fiat currencies exist in physical form i.e physical denominations of the currency is available in the form of paper notes and coins. Cryptocurrencies, on the contrary, are completely digital and no physical denominations are available in any form of notes or coins.
- Due to this physical existence of the Fiat currencies a lot of paper (indirectly trees) along with metals (for coins) are required for its manufacturing, but the cryptocurrencies, since are available only on electronic devices need not require any such natural resources.
- The main characteristic feature of the cryptocurrencies is its way of creation. The cryptocurrencies are not manufactured in the way the Fiat currencies are done. Cryptocurrencies require complex computations to be done in order to obtain them, through a process called Mining. The Fiat currencies do not require that much amount of electricity. The amount of electricity needed is to print paper or mint coins.
- As crypto mining requires immense amounts of energy, it gives the currency generated, some intrinsic value. As a creation of Fiat currencies requires a fixed amount of energy, they do not provide that much intrinsic value to the currency as the cryptocurrencies do.
- Fiat currencies are regulated and distributed by the central financial authority of the respective countries and hence the amounts of Fiat currencies manufactured can be huge, which might lead to its Deflation. But as the cryptocurrencies require complex computations, the amount of cryptocurrencies mined is not under anybody’s control, it is Deflation proof.
- In the case of Fiat currencies, manufacturing is vested with a Centralised Authority but in the cryptocurrencies, even the creation or mining the cryptocurrencies is distributed among its participants.
- Nevertheless, both the currencies have similarities too. They both can be broken down into a number of denominations and can be considered as a store of value.
- Fiat currencies are regarded as legal tender by all the governments but the cryptocurrencies are not regarded as a legal tender in many of the countries around the world.
- One of the key upper hand that the cryptocurrencies hold is that they are globalized and can easily be transferred anywhere around the world. But as the Fiat currencies are regional, they are somewhat restricted towards a specific region and one is required to get it exchanged to use them in a different nation.
- The Governments can restrict the usage of the Fiat ( like setting the maximum withdrawal limits) for their users for a number of reasons, but there is no such restriction in case of a cryptocurrency.
- The market fluctuations in the case of a Fiat currency is relatively less when compared to that of cryptocurrencies since the cryptocurrency market is not mature enough yet.
- Both the currencies can be seen standing on the same grounds when it comes to estimating its actual asset value because no asset is used to back them up. However, earlier the Fiat currencies used to be backed up by Gold.
- Features of a currency like a Durability, Portability, Divisibility, and Uniformity seems to be applicable to both of them quite gracefully. But when it comes to Supply and Acceptability, they seem to be poles apart.
- Examples for Fiat currencies are Indian Rupee, American Dollar, European Euro, Japanese Yen, etc. Bitcoin, Ethereum, Ripple, Bitcoin Cash, Ethereum Classic, are some of the most popular examples of cryptocurrencies.
It can carefully be observed that cryptocurrencies, on a generalized basis, hold an upper hand when compared to the Fiat currencies and hence seems to have a bright future in the financial sector.