“I’m much more confident with crypto than with banks or fiat currency, because I can actually control it, the money supply is transparent, stated upfront, it is much easier to use, and I am a lot safer when shopping online and paying bills.”
– Erik Voorhees, CEO Shapeshift
For the purpose of this comparison, I will focus on Bitcoin as there are many different types of crypto out there, but $BTC is the most well-known and of course, the most successful. Cryptocurrencies share many similarities with conventional fiat money, but also offer some interesting advantages; for example:
- Both can be used for payments and as a store of value.
- Both rely on widespread consumer trust in order to function as a means of exchange.
- Fiat money is issued and controlled by (centralized, aka CeFi) banks and governments.
- Bitcoin (as the classic cryptocurrency example) is produced and distributed through a process called mining, and is not controlled by a centralized authority, and is therefore known as a decentralized process, or DeFi (vs. CeFi).
- Bitcoin can be trusted because it is tamper-proof without the need for a middle man or bureaucratic system.
A Bitcoin transaction cannot be reversed, cancelled, or charged back. Cryptocurrencies and conventional currencies have two essential features: they enable frictionless payments between two parties, and act as a store of value (e.g. savings and/or investments).
While trust vested in fiat currencies is ensured through the money supply issued by a central authority, the trust vested in cryptocurrencies is founded on the underlying technology: the blockchain consensus mechanism. (NOTE: There are other types of consensus mechanisms in crypto, but blockchains are by far the most widely used, as a means of efficiently enabling decentralization).
When you buy something with fiat currency, you need to rely on a trustworthy authority, such as your local bank or credit card servicer, to serve as an intermediary that vouches for the currency’s worth and transacted status. Either way, buyer, and seller trust that the currency will still sustain its value after a transaction.
What is Fiat money?
Commodity money gets its value from its own worth, like with precious metals (e.g. gold and silver). Fiat money has attributed value because a government declares it to be legal tender – albeit, it has no intrinsic value.
What are cryptocurrencies?
Cryptocurrencies are digital assets that are a medium of exchange between two parties. They allow direct transactions between individuals without the intervention of an intermediary, such as your everyday bank or credit union.
Whilst fiat money is subject to inflation and central banks can print more at any time, the leading cryptocurrency, Bitcoin, has a fixed supply of 21,000,000 coins or units, making it deflationary – and even more rare or scarce than gold!
Tip: Keep this in mind as Bitcoin will be going through a process known as halving during the next 12 months, where the coin will become even more rare, and guess what happens next, the price goes up by a whole lot.
Are cryptocurrencies and fiat money the same?
Well, yes and No. Cryptocurrencies are money in that they allow transactions between two parties and act as a store of value. However, they also offer features which the traditional money system is unable to offer right now: cryptocurrencies can be spent and received by anyone, anywhere, at any time throughout the world and without the need for a bank or a government to allow it. This fact, in my humble opinion, is the most revolutionary aspect of cryptocurrencies.
Furthermore, fiat money basically equates to debt: When a central bank issues banknotes, it is simultaneously issuing you, the consumer, a percentage of your government’s debt. How is this the case, you might ask?
Think about how the United States and other countries create money. As mentioned above, fiat money has attributed value because a government declares it legal tender – it has no intrinsic value. A little known fact in the world of finance, is the cost of the money a government creates when loans are taken out.
Banks create money when people borrow money (the government does not require banks to have a balance of currency on hand to backup the loans their customers take out. Therefore, whenever you pay interest on a loan or credit to a bank, you’re actually paying them interest in money they never had to begin with).
Take the case of the US dollar: If no loans were taken out, there likely wouldn’t be any dollars in circulation either, same goes for the UK pound, the EU Euro, and so on. In other words, without consumers taking out debt to banks, the US dollar/the UK pound/the EU Euro wouldn’t be out there in the world, and how crazy does that sound?
While fiat money seems to get a major part of its value from debt, this is not the case with Bitcoin:
- Bitcoin has intrinsic value beyond the trust of its community.
- Bitcoin doesn’t lean on a system of debts, as its value boils down to how effective it is as a medium of exchange.
- Cryptocurrencies can be spent and received by anyone, anywhere, and at any time without the need for a bank or a government.
- Blockchain technology eliminates the need for thousands of middlemen and intermediaries throughout dozens of industries, which is just another reason why cryptocurrencies (which reflect the practical utility of blockchains, and protocols and decentralized apps that are built on blockchains, so valuable)!
This right here is what makes crypto so revolutionary. Bitcoin has created a new form of trust for our future global monetary system, and more recent cryptocurrencies have innovated in newer and more diverse ways. The systems behind cryptocurrencies (i.e. blockchains) are completely transparent and based on mathematics as a digital currency, and the actual consensus of the everyday user, you and me!
Bearing all of this in mind, which is a better option for our future? Bitcoin and other powerful, trustworthy cryptocurrencies, or traditional fiat currency? For me that question is rhetorical, as I know which type of currency I trust to last for generations to come. How about you?