There are lots of people who are getting interested in the cryptocurrency market but may not be sure exactly what it is. Of course, before deciding to invest in anything, it is important to know exactly where the money is going. If you are someone who has thought about investing in cryptocurrency but aren’t sure if this is for you, there are a few key topics to cover. One of them is the difference between fiat currency and cryptocurrency. What is this difference and why is it so important? How is this going to impact your investment decisions? To learn more click here.
What Is Fiat Currency?
First, let’s take a closer look at what fiat currency is. The word fiat means “let it be done.” Fiat money is traditional money. This is a currency that is backed by a federal government and has been declared legal tender. For example, the fiat currency of the United States is the dollar.
Because this currency is backed by the government, it has value and can be used as a medium of exchange for goods and services. In addition, fiat currency can be a digital currency as well. For example, you don’t have to buy everything using cash. You can use digital exchanges as well. This includes wire transfers and bank credit cards. Of course, you can also pay your taxes with fiat currency. Fiat currency is a centralized currency because it is monitored and regulated by the federal government.
What Is Cryptocurrency?
In contrast, cryptocurrency is not legal tender. It is not backed by any government or bank. Because cryptocurrency is global and decentralized, it is a form of bank credit yet does not have a bank. In this manner, an algorithm is used to supply cryptocurrency to the public, and it cannot be used to pay taxes. On the other hand, you actually have to pay taxes on cryptocurrency and the profit you make on it.
How Are Fiat Currency and Cryptocurrency Similar?
Now that a few of the surface-level differences have been highlighted, it is time to take a closer look at a few of the similarities as well. Both fiat currency and cryptocurrency can be referred to as currency or money. Both fiat currency and cryptocurrency can also be used as a medium of exchange for goods and services. Of course, fiat currency is more readily accepted as a medium of exchange than cryptocurrency.
In addition, both fiat currency and cryptocurrency are subject to market forces to some extent. For example, fiat currency and cryptocurrency are governed by supply and demand. They are also used as a way to compensate someone for their work. Scarcity can also drive up the value of fiat currency and cryptocurrency.
Essentially, cryptocurrency, gold, cash, and a bundle of wool are all ways to store value. They all have a value when they are exchanged. Some store value and some have “use value.” It is these forces that play a role in how fiat currency and cryptocurrency are used. Now, it is time to take a look at a few specific market forces.
Inflation: The Role of Fiat Currency and Cryptocurrency
For example, one of the most important differences has to do with inflation. Fiat currency is subject to inflationary forces. Inflation means that the intrinsic value of a single unit of the currency goes down, meaning that more of that currency is required to purchase a product or service. Because fiat currency is controlled by the government, it is possible to print more of it. When there are more dollars in the system, the demand for each individual dollar drops, leading to inflation.
In contrast, cryptocurrency is not subject to inflation. There is a set limit to the number of “Bitcoins” that can ever be produced. Because of this, Bitcoin and other types of cryptocurrency are not subject to the same inflationary forces. Without a central regulator, cryptocurrency could hold its value better.
It Takes Longer To Carry Out a Transaction with Cryptocurrency
On the other hand, it takes longer to carry out a single transaction using cryptocurrency. When someone makes a transaction using cash or a credit card, it usually happens instantly. The cash changes hands. The credit card is swapped. The check is written and cashed. That is one of the reasons why fiat currency has worked so well as a medium of exchange for goods and services.
On the other hand, if someone wants to carry out a transaction using cryptocurrency, the transaction has to be verified by the blockchain. This means that miners have to solve a complicated series of equations to complete a new block. Then, the block has to be accepted by the rest of the chain. As a result, it takes longer to finish the transaction. Even though this process is getting easier, it is still standing in the way of the wider adoption of cryptocurrency as a whole.
Cryptocurrency Is Harder To Track
Finally, unlike credit cards, cryptocurrency is also much harder to track. There is a unique address that people have when they complete a transaction using cryptocurrency. This makes them virtually anonymous online. In contrast, it is easier to track digital transactions. Whether this means an IP address, a credit card number, an account number, or a routing number, it is easier to track the flow of money when fiat currency is used. Even cash notes have numbers on them.
Looking at the Future of Cryptocurrency
Ultimately, those who believed that cryptocurrency was a fad were wrong. It is clear that cryptocurrency is here to stay. The only question is whether cryptocurrency is going to be used as a medium of exchange at brick and mortar locations in the future. Only time will tell. For now, cryptocurrency provides an effective way for people to diversify their investments. If you are interested in using cryptocurrency as a way to build your portfolio, you need to know what makes cryptocurrency different from traditional fiat currencies.
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