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Fiat Money vs. Cryptocurrency: Can They Co-Exist?

2021-05-28

Inside the evolution of money and the rise of cryptocurrencies like Bitcoin. 

Main takeaways

  • Fiat money is the most commonly used and widely accepted type of money today.

  • Fiat currencies have no intrinsic value; instead, the value of fiat currencies is determined by the governments that issue them.

  • Cryptocurrencies are a digital form of money that’s powered by blockchain technology.

  • Like fiat currencies, you can send and receive, spend, save and gift. cryptocurrencies (Read more: Binance Research on Cryptocurrency Uses)

  • Unlike fiat currencies, many cryptocurrencies are decentralized, immutable, and trustless.

  • Ultimately, cryptocurrencies offer concrete advantages over fiat currencies, but mainstream adoption is still elusive.

What is fiat money? 

Cash. Greenbacks. Cheddar. Loot. No matter what you call the money that’s in your wallet or bank account, chances are your “money” is actually a specific type of currency called fiat money. 

In its most basic form, fiat money appears as coins or paper bills, which are widely used throughout the world. The world’s most commonly used currencies, like the US Dollar, Euro, Japanese Yen, or the pound sterling are fiat currencies. Though there are many fiat currencies, all of them are issued by governments and none of them are backed by commodities like gold or silver. As such, they have no intrinsic value.

However, this doesn’t mean fiat money has no value—rather, it gets its value from the governments that issue it. In fact, virtually anything that is widely accepted as a means of payment or exchange could be considered “money”, which brings us to cryptocurrencies like Bitcoin...

What is crypto? 

Digital currency. Magic internet money. Digital cash. Virtual currency. Like fiat money, there are many names for cryptocurrencies. Ultimately, cryptocurrencies are a digital form of money. Why digital? Well, you can send and receive crypto, use it to pay for goods and services, and gift or save it—but try doing so without an internet connection. 

There are thousands of different cryptocurrencies, from Bitcoin (BTC) and Ethereum (ETH) to BNB and Dogecoin (DOGE), and all of them are powered by blockchain technology, which allows cryptocurrency transactions to take place (among other use-cases we won’t cover here). 

How are fiat currencies and cryptocurrencies similar? 

Fiat currencies and cryptocurrencies share some similarities: both have no intrinsic value i.e. they’re not based on a commodity like gold or silver. Much of their value comes from their wide acceptance from people around the world. They are also divisible—just as a Euro can be divided into 100 cents, 1 Bitcoin (BTC) can be divided into as little as 0.00000001 BTC. 

As mentioned before, you can send and receive cryptocurrencies, use them to pay for goods and services, and gift or save them. 

How are fiat currencies and cryptocurrencies different? 

There are some important differences to note when it comes to cryptocurrencies, which in many ways improve upon fiat currencies. 

Unlike fiat currencies, cryptocurrencies are not issued by governments. Instead, many cryptocurrencies are decentralized, so no single authority can decide to issue more cryptocurrencies and thereby dilute its value (or otherwise change the rules). Decentralized cryptocurrencies are highly resilient and don’t require third parties to validate transactions (like a bank, for example). Because transactions are verified using blockchain technology, all transactions are permanently recorded and irreversible, making cryptocurrencies a particularly secure way to exchange value. 

Can they coexist? 

Though some wonder whether cryptocurrencies will eventually replace fiat currencies, the two do offer different advantages. One common criticism of fiat money is its susceptibility to inflation. Local governments can increase the supply of money at will, diluting its value over time. In worse case scenarios, economic instability can lead to hyper-inflation, which quickly reduces the value and perceived trustworthiness of fiat currencies. 

On the other hand, Bitcoin, the world’s most popular cryptocurrency, has a fixed supply of ~21 million coins. Because of its limited supply, many people prefer to hold Bitcoin in hopes that its value will go up, instead of using it as a medium of exchange.

Additionally, though cryptocurrencies are quickly gaining acceptance, adoption rates are still miniscule compared to fiat currencies, which are used all over the world. Its relative complexity limits its appeal, though successive generations of tech-savvy users will undoubtedly change this. 

Conclusion

Ultimately, cryptocurrencies are here to stay. They offer many advantages over today’s fiat currencies, but true mainstream adoption has yet to take root. As the technology continues to evolve, digital currencies may eventually prove to be the future of money. 

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Disclaimer: Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The opinions and statements made above should not be considered financial advice.

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