Fiat money is a government issued currency that is not backed by a physical commodity but rather by the government that issued it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the Euro, Naira and other global currencies.
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Fiat currency came about when governments would print paper money that could be redeemed for a set amount of a physical commodity.
Cryptocurrency is a new form of exchange, secured by Cryptography. It is entered on a distributed online ledger and it is not regulated by central authorities.
The wide acceptance and rise of cryptocurrency has started a debate on the future of fiat money. Many financial analysts think the blockchain technology behind currencies like Bitcoin will be useful for the rollout of existing government-backed currencies.
Crypto electronic form of encryption makes it nearly impossible to counterfeit. They are less vulnerable to fraud.
Cryptocurrency doesn’t require an intermediary to validate a transaction, like a bank in the case of fiat money.
Some fans of cryptocurrency argue that one day digital currencies will take over fiat money as a store of value and medium of exchange, because of their ability to deliver instantaneous transactions.
The crypto transactions are verified using the blockchain technology, where all trading activities are recorded permanently enhancing the security of every exchange. Bitcoin is beginning to look like a better store of value than fiat money.
The value of fiat money is dependent on economic policy and the strength of a country’s economy. Fiat money gives central banks greater control over the economy, because they can control the supply and how much money is printed.
The bigger risk is that governments print too much of it and make it become worthless which can lead to economic devastation.
Furthermore, if people lose faith in a nation’s currency, the money will no longer hold value.
Cryptocurrencies are private and operate independently of governments. Bitcoin, the most famous cryptocurrency, emerged in 2009 during the financial crisis amid concern about the stability of the global financial system.
It quickly gained traction due to fears of political instability and governments taking on too much debt. Bitcoin rose from $0.0008 to $0.008 in its first few days after launch and has since skyrocketed as high as nearly $65,000.
Trust vested in a fiat money is in the government backing it while trust vested in crypto is in the blockchain technology. In serious economic problems, the country’s Central Bank begins to print money at a staggering price, this results in hyper inflation.
Cryptocurrencies such as Bitcoin have emerged over the past decade as a challenge to the inflationary nature of fiat currency. Like fiat money, cryptocurrencies can be used to buy goods and pay for services.
According to CoinMarketcap.com, a research website, there are more than 10,000 different cryptocurrencies in circulation today. Cryptocurrency is also much more volatile than fiat money. The volatility is primarily driven by the speculative nature of the trade.
Bitcoin is limited in nature, while all other fiat currencies are produced periodically by the government. This means bitcoin has an increased scarcity and hence is of high value. Cryptocurrency is expected to become a more widely accepted financial system in the near future. Hence, the countries are finding it tough to regulate this cryptocurrency market that works in the shadows.
With countries adopting Cryptocurrency, El Salvador became the first country in the world to accept Bitcoin as legal tender. According to research by Chainalysis, the number of individuals using peer-to-peer P2P Cryptocurrency exchange in Kenya, Nigeria, Vietnam and Venezuela has doubled in the last year.
Many citizens use Cryptocurrencies to protect their funds from currency depreciation. Additionally, the industry grows by the day, with new coins and technology being introduced frequently.
Cryptocurrency has a high chance to influence the current financial systems. Both business and public sectors are warming to the concept of using Cryptocurrencies in their financial transactions.
Use of fiat money which now rely on a trusted third party to check, verify and authorize transactions may be disrupted by blockchain technology. More industries are beginning to recognize and accept Bitcoin as a legitimate financial system.
In the future, cryptocurrency may replace fiat currency. There is nothing stopping Bitcoin from bringing about a whole new era of finance.