Once seen as a niche technology, cryptocurrency has grown to become a popular vehicle for investment and speculation. A rise in blockchain-based software projects offering decentralized financial applications has seen increased adoption of cryptocurrencies in the business and financial sectors. But what is cryptocurrency actually good for? And what makes it different from established currencies such as the dollar?
Main Differences between Fiat Currency vs Cryptocurrency
When looking at the differences between fiat vs crypto, it’s easy to understand why crypto is becoming so popular and why some people believe that cryptocurrency is superior to fiat.
What is Fiat Currency?Fiat money refers to any currency that is issued by a government and is therefore controlled and backed by a central bank. Fiat currencies include the US dollar, and other national currencies such as the Euro, Ruble, Yuan, or the Yen, among others. Historically, these currencies were backed by a valuable commodity, such as gold. In modern times, they are backed only by the credit of national governments. Fiat currency typically requires intermediaries, such as banks, credit card companies, or government agencies, to carry out transactions.
What is Cryptocurrency meaning?Cryptocurrency refers to digital currencies created by mining/decentralized computing. Cryptocurrency is not tied to a commodity, such as gold, but certain cryptocurrencies, such as Bitcoin, have a hard limitation on the amount that can ever be created, creating a scarcity similar to that of precious metals. Cryptocurrency is not regulated by central authorities and it does not require intermediaries for transactions. It is more volatile than fiat money, meaning that the market value of any given cryptocurrency can be subject to sudden, large fluctuations.
Benefits of Cryptocurrency
Bitcoin, the original cryptocurrency, was invented as a kind of digital cash for anonymous peer-to-peer transactions directly between users without any intermediaries. As such, crypto has several advantages over fiat money that make it desirable for anyone looking to build decentralized, peer-to-peer software solutions.
- Protection from fraud and scams. Fraud is always a risk when there is an entity that can hide or falsify transaction records. Every cryptocurrency transaction is recorded on a publicly accessible blockchain ledger, verified by a majority of independent computers on a peer-to-peer network. This makes it almost impossible for anyone to change the record or falsify transactions.
- Secure transactions. Fiat money transfers must pass through an intermediary which may redirect, hold, or freeze the transaction. Crypto transactions proceed directly from sender to recipient.
- Privacy and independence. Cryptocurrency holders can send and receive money without having to enter any personal details such as identity or address to a third party, making it ideal for the privacy-conscious.
- Fast and cost-effective cross-border transactions. Sending money to foreign countries is usually slow and costly due to conversion and transaction fees from the intermediary. Cryptocurrencies are not restricted by borders and transfers are fast and low-cost.
- Stable coin market. Stable coins are a subset of cryptocurrency designed to hold a stable value–unlike their fellow volatile coins, like Bitcoin and Ether. Stable coins derive their value from an asset, such as precious metals or even fiat currency. Tether and USDC (USD coin) are examples of stable coins.
Drawbacks of Cryptocurrency
Cryptocurrency is still an emerging technology and as such presents some difficulties that users should be aware of.
- Cryptocurrency is unregulated. Due to a lack of laws and industry regulations governing cryptocurrency transactions, there is no legal protection. If you lose your wallet passcode or send money to the wrong address, you’ve lost your money for good.
- Highly volatile. The price of any cryptocurrency on an exchange can fluctuate wildly, with the potential for a huge loss if the market trend does not go your way. However, the same volatility makes cryptocurrency attractive to speculators seeking large profits.
- Limited public acceptance. Few businesses currently accept cryptocurrency as payment.
- Mining activity is at risk. Russia, China, and soon India are forbidding crypto mining. The energy costs of crypto mining are getting higher worldwide, which jeopardizes the proof of work paradigm. Many new blockchain platforms, including Ethereum, are moving to a new proof of stake paradigm, which completely eliminates the need to mine. But in the meantime, new regulations have caused crypto prices to drop drastically at the beginning of 2022.
- Prone to fraud. Typically, blockchains (crypto’s underlying technology) are rock solid and immune to fraud and theft. However, there are a few ways in which crypto can be stolen, such as security breaches in exchanges or scam exits.
Benefits of Fiat Money
As an intrinsic part of the global economic system, fiat money comes with many conveniences.
- Relatively stable in value. So long as the issuing government remains stable, the value of fiat money changes only slowly and slightly, making it predictable for investment and spending.
- Widely accepted and can be used for legal transactions. Not only will almost all businesses accept fiat money for services, but regulations in place offer legal protections in the case of fraud or error.
Drawbacks of Fiat Money
Although widely used, fiat money does have some flaws that newer inventions, such as cryptocurrency, attempt to address.
- Potential for inflation. Fiat money is not intrinsically valuable, and its value depends on the economic and monetary policy of governments. Over-printing of money can lead to inflation, devaluing the currency.
- Tied to national governments. Political events in a country can affect the value of its fiat currency, disastrously so in the case of political instability or conflict. Only fiat from a few superpower governments (i.e. the US, the UK, China, Russia, and India) are broadly accepted worldwide.
Cryptocurrency-Based Software Solutions
At AccelOne, we’re experienced in developing software that enables companies to integrate blockchain and crypto-assets into their business. Our developers and QA engineers have a proven track record in creating cryptocurrency & blockchain software for leading cryptocurrency exchange and trading platforms.
To learn more about how we can help you achieve your goals for crypto integrations with our nearshore software development team or to schedule a consultation, contact us online or call 800.863.6814.
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AccelOne is an industry leader in custom software development services across the entire software product development lifecycle. AccelOne uses a hybrid approach with experienced onshore/nearshore professionals located in the Americas.