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Fiat Currency Versus Cryptocurrency: Meaning, Differences, Future Prospects

Confused between fiat currency and cryptocurrency? Read this blog to understand why fiat currencies and cryptocurrencies exist and how they compare with one another.
February 5, 2022

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Throughout history, “currency” was anything that could be used as a medium of exchange while being a store of value* and serving as a unit of account**. 

Both fiat currencies and cryptocurrencies fit the bill (pun intended). That’s why there’s been a raging debate of whether cryptocurrencies could eventually replace fiat currencies. 

To add fuel to the fire, El Salvador recently declared Bitcoin as legal tender and cryptocurrencies are accepted as payment by brands like Microsoft, Starbucks, and more.  

So, does this mean cryptocurrencies are giving fiat currencies a run for their money? Let’s find out with this blog that’ll examine fiat and crypto in greater detail. First things first, definitions.

What Is The Meaning Of Fiat Currency?

Fiat currency is typically issued by the government and distributed by a central bank. Think of the US Dollar or the Indian Rupee. The typical forms of fiat currency were notes and coins for the longest time. 

But as the world goes digital, so have fiat currencies in the form of net banking and online payments. Furthermore, the value of a fiat currency is tied to the confidence in the government that’s issuing it. 

If the US government issues a $100 note, you know it’ll still be worth $100 at the end of the month. The reason? The US government is known to be strong, which trickles down to their efficient and stable economy. 

That’s why most top fiat currencies are generally reliable. Even so, fiat currencies run the risk of losing value and reliability due to factors like inflation or inefficient monetary policy. 

For example, the Venezuelan Bolívar effectively has no value due to hyperinflation. Back to the most important point to note about fiat currencies - centralised control. 

Take any fiat currency and you’ll notice that it’s controlled by the government, right from printing to distribution. The government has absolute control over money. 

This has benefits. If a country’s economy is dwindling due to an event like the pandemic, the government can simply print more money and hand it out to its citizens to provide temporary relief. 

The flipside of this or the drawbacks of centralized money could include inflation, inefficiency, wealth inequality, and many other problems. These are the reasons why cryptocurrencies are gaining steam. 

What Are Cryptocurrencies?

Cryptocurrencies are digital assets that are created and distributed using blockchain technology. The pillar of blockchain and by association cryptocurrencies is decentralization. 

This means that no single entity has total control. This is the main differentiating factor between fiat currency and crypto. The first popular cryptocurrency to enter the world was Bitcoin back in 2009.  

BTC laid the foundation for a decentralized future. Other cryptocurrencies like Litecoin soon followed suit and in the process, exposed the glaring inefficiencies of traditional money. 

For example, fiat-based transactions generally require gatekeepers and intermediaries, the most popular ones being banks. Transactions on the blockchain can be independently verified. 

No middlemen mean less fees and faster transactions. Moreover, blockchain-based transactions are known to be safe because of the distributed ledger technology and a lack of a single point of failure.

Can Cryptocurrency Replace Fiat Currency?

Take a look at these qualities of cryptocurrencies: 

  • Borderless
  • Store of value
  • Lucrative returns
  • No currency conversion charges
  • Accepted as payment

As you can tell, the qualities mentioned above make cryptocurrencies disruptive. That said, cryptocurrencies have flaws. BTC started out as an alternative to digital gold but never a replacement for fiat currencies. 

Why? Because there are too many variables, according to experts. First off, making a cryptocurrency legal tender would require a massive education drive and a digitization marathon like never before. 

The world may be richer than it was 50 years ago. But technology hasn’t really touched every corner of the globe. A majority of citizens from developing and underdeveloped countries still rely on cash. 

Furthermore, the rampant volatility of crypto doesn’t help either and it isn’t really backed by a figure of authority or trust. 1 BTC was worth $46,000 a month ago. As of writing this blog, it is $36,882.54.

That’s a change of approximately 19.8%. In the same period, the Dollar Index has gone down by a little over 1%. If you expand the time, the results will be even more surprising. 

Thus, cryptocurrencies have a long way to go before they can replace fiat currencies in the current scheme of things. Events like El Salvador making BTC legal tender are indeed a milestone.  

However, cryptocurrencies are currently viewed as lucrative assets by experts as opposed to legal tender because of the issues mentioned above in detail. 

Future Of Fiat And Cryptocurrency

When markets crash, investors are known to turn to government-backed investments. This is because the government is seen as a reliable and trustworthy figure when it comes to money. 

After all, you still need fiat currencies to buy cryptocurrencies at the first level. That’s why it’ll take a lot of effort, price discovery, and eventually, stability for crypto to go head to head with fiat currencies.  

In the mean time, crypto investors and enthusiasts can see it evolve and become a mainstay for projects, funding, and eventually the metaverse if it were to become a reality. 

Note: Facts & figures are true as of 03-02-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in unregulated assets like cryptocurrency.

Priya Bansal
Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.

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