There are two major categories of currencies in the world: digital and physical currency. Physical currency, aka fiat, has been around for a long time. It is a government-issued currency used to initiate transactions, and it is often restricted to the issuing country. Digital currencies, on the other hand, only exist in electronic forms. Of course, a typical example of a digital currency is Bitcoin which is a cryptocurrency. Both fiat and crypto are good investment vehicles. But before you decide to invest in any, it makes sense to weigh their pros and cons.
One of the common advantages of crypto centers on its speed. As for fiat, its advantages centers on its stability. For disadvantages, crypto is volatile while fiat is prone to an economic meltdown.
Crypto is one of the biggest names in the investment realm. Many people are investing in cryptos like Bitcoin, Ethereum, BNB, and the likes. If you want to join the bandwagon, it makes sense to understand the pros and cons of crypto, including fiat, then make your decisions after weighing the pros and cons of both currencies. Below, I have provided helpful information about crypto and fiat to help you decide which is best for your investment goals.
Will Cryptocurrency Replace Fiat Currency?
Fiat Currency vs Cryptocurrency – Advantages and Disadvantages
If you have always wanted to understand the basics of cryptocurrency, here is your chance. Below, I have explained what crypto is and how it works. I have also highlighted the types of cryptocurrencies, the advantages and disadvantages of crypto (including fiat currency). Let’s begin by understanding what cryptocurrency is.
What Is Cryptocurrency?
With the rise in Bitcoin’s value (the most popular cryptocurrency) and popular cryptocurrencies like Ethereum, it is hard to surf the internet, read the newspaper, or watch the news without coming across information associated with these digital currencies.
For those who often come across the word “cryptocurrency” but know little or absolutely nothing of what the word entails, here is a little summary to augment your insight.
A cryptocurrency is a digital or virtual currency designed as a medium of exchange. It is almost similar to the money you spend every day, except that it doesn’t have any physical form, and it uses cryptography to work.
Because crypto is run independently and in a decentralized way, without any intermediary whatsoever, new units can be included only after certain conditions are met. For instance, with cryptocurrency like Bitcoin, only after a block has been added to the blockchain will the miner get his reward ( which is usually in Bitcoin), and this is the only way new bitcoin can be made. The limit for Bitcoins is 21 million. After this, the production of Bitcoin ends. However, this doesn’t apply to other cryptocurrencies.
Types of Cryptocurrency:
Crypto is intended to be utilized for payments, sending value (similar to digital money) across a decentralized network of users. Many altcoin (coins other than Bitcoin) are classified this way and may sometimes be regarded as value tokens.
There are also blockchain-based tokens designed to serve a different purpose from that of fiat. One example could be a token issued as part of an initial coin offering (ICO) representing a stake in a blockchain or decentralized finance (DeFi) project. If the token is associated with the value of the company or project, it can be regarded as security tokens (as in securities like stocks, not safety).
Other tokens have a specific use case or function. Examples include Storj tokens, which allow individuals to share files across a decentralized network, or Namecoin, which offers decentralized Domain Name System (DNS) service for internet addresses. These are regarded as utility tokens.
Today, while many cryptocurrency users understand and are thankful for these differences, traders and lay investors may not spot the difference, as all categories of token trade in the same way on crypto exchanges.
Major Types of Cryptocurrency and Their Market Cap (Subject to Change):
| Bitcoin (CRYPTO: BTC) | Market Cap: $826 billion |
| Ethereum (CRYPTO: ETH) | Market Cap: $390 billion |
| Binance Coin (CRYPTO: BNB) | Market Cap: $79.5 billion |
| Cardano (CRYPTO: ADA) | Market Cap: $66.3 billion |
| Dogecoin (CRYPTO: DOGE) | Market Cap: $63.4 billion |
| Tether (CRYPTO: USDT) | Market Cap: $58.2 billion |
| XRP (CRYPTO: XRP) | Market Cap: $51.8 billion |
| Polkadot (CRYPTO: DOT) | Market Cap: $30.5 billion |
| Internet Computer (CRYPTO: ICP) | Market Cap: $25.6 billion |
| Bitcoin Cash (CRYPTO: BCH) | Market Cap: $20.1 billion |
How Does Cryptocurrency Works?
Many of us know how fiat works. If you wish to purchase a product with fiat, all you have to do is tender the cash equivalent of the product. If you don’t have cash, you can use your debit or credit card to initiate the transaction. That is a brief explanation of how fiat works. But how does a digital currency like crypto work?
To initiate a crypto transaction, you need a digital wallet for the currency. A crypto wallet is not like your typical physical wallet that holds wads of cash. Instead, this wallet is digital, and it doesn’t hold any currency; it merely provides an address for your funds on the blockchain. A cryptocurrency wallet also includes private and public keys that help you finalize secure transactions.
You can purchase or sell cryptocurrencies using a crypto exchange. Exchanges, like digital bank apps, can hold deposits in fiat and cryptocurrencies, credit and debit the appropriate balances of buyers and sellers to complete crypto transactions. You can also use crypto to purchase a product (say from a retail company that accepts crypto payment) or service.
Each time you purchase cryptocurrency or use it to complete a purchase, you authorize the transfer of a certain amount of the cryptocurrency from your wallet address to the seller’s wallet address. The crypto transaction is often encrypted with your private key and pushed to the blockchain.
The cryptocurrency network’s miners access your public key to verify that your private key was used to encrypt the transaction. As soon as the block that adds your transaction is confirmed, the ledger is updated to display the new crypto balances for both your address and the seller’s address. The whole process is done by software.
Are Cryptocurrencies a Good Investment?
There are a lot of investment vehicles out there, including stocks, real estate, mutual funds, bonds, money market accounts, cryptocurrencies, etc. Cryptocurrency is a very popular investment vehicle endorsed by several prominent individuals who have some cryptos in their investment portfolios. Crypto isn’t just popular. It is a lucrative investment as well. Does this mean you should invest in crypto? Is it a good investment?
Cryptocurrency is an ideal investment if you want to gain direct exposure to the demand for digital currency, while a safer but potentially less lucrative option is to purchase the stocks of companies with exposure to cryptocurrencies. While the success of any cryptocurrency enterprise is not sure, if it meets its goals, early investors may be well rewarded in the long run. To be considered a long-term success, any cryptocurrency initiative must first achieve extensive adoption.
Cryptocurrencies like Bitcoin have traditionally had some price correlation with the stock market in the US, so having some in your portfolio is a good investment strategy. If you believe that crypto usage will skyrocket as the world undergoes monetary metamorphosis, it is probably a good idea to invest in cryptocurrency to have a balanced portfolio. Ensure you don’t invest what you can afford to lose. Also, do your research and have an effective strategy when buying or trading crypto.
How Many Cryptocurrencies Are There?
Bitcoin, Ethereum, BNB, Cardano, XRP, DogeCoin are some of the most common cryptocurrencies out there. But there are more. In fact, there are thousands of cryptocurrencies available, and with the way things are going, we should expect the introduction of more. According to CoinMarketCap, there were 13,669 cryptocurrencies as of late 2021. New tokens are being created faster than we even realize.
There are several cryptocurrencies in the market because it is too easy to create one. Ethereum’s blockchain allows users to write some code to the blockchain, thus letting anyone launch a new token that uses the Ethereum network. So instead of having to build the whole thing from the start, developers can leverage the pre-existing infrastructure.
Advantages of Cryptocurrency:
Crypto, like other commodities, has its advantages and disadvantages. Let’s look at some of the advantages of cryptocurrency.
Speed: Unlike a bank-to-bank transaction, a cryptocurrency transaction can take a few minutes to confirm. Once verified, the receiving party can spend the funds on whatever they like.
Lower fees: In many cases, the cost of using crypto is quite lower than using traditional financial institutions. For instance, there is no fee for storing cryptocurrency, whereas many financial institutions charge a monthly fee. The cost to transfer money to an individual internationally is very low compared to traditional international remittance services.
No barriers to entry: Unlike traditional finance, there is no need to have a valid ID or visit the bank to use bitcoin. There is no credit check. There is no know-your-customer info you need to provide. That can be very attractive for millions of unbanked individuals worldwide.
Security: Crypto is more secure than holding cash or using a debit card for transactions on the internet. A cyber hacker would require your private keys to siphon the bitcoin kept in your wallet. Furthermore, crypto transactions are often anonymous.
Disadvantages of Cryptocurrency:
No insurance: There are no insurance funds held in crypto. Funds deposited in a bank account in the United States are normally insured via the FDIC. If something bad happens, and the bank loses your precious money, you are insured up to $250,000 per account holder. There is no reimbursement if you or your custodian loses your crypto.
No way to dispute transactions: If you mistakenly send too much to an individual’s digital wallet or don’t get what you are supposed to in exchange, there is no way to dispute or alter the transaction. All transactions confirmed on the blockchain are finalized.
Easy to lose access to funds: If you displace your private key, you won’t access your funds. The private key is required to sign transactions and write them to the blockchain. Ensure that you store your private keys appropriately using secures means.
High volatility: The values of cryptos like Bitcoin, Ethereum, etc., are very volatile. This can make it hard to use as a means of paying for goods and services since retail prices would need to fluctuate to match the volatility of the currency. It can also make it hard to accept as an investor when the prices can plummet more than 20% at any given period.
When a Commercial Bank Has Excess Reserves?
What is Fiat?
Fiat currency is the opposite of crypto. It is a nation or government-issued currency that isn’t associated with the price of a commodity like gold or silver. The value of fiat money is based on the public’s belief in the currency’s issuer, which is often the country’s central bank or its government.
Advantages of Fiat:
Fiat currency has remained the legal tender in most countries in part as they are very stable and regulated. Unlike other forms of money, like cryptocurrencies and commodity-based currencies, fiat money is relatively stable. The stability allows regulators and government to guide the economy against recession and inflation.
Disadvantages of Fiat:
Though fiat money is seen as a stable currency, it can sometimes be prone to economic disturbances. Economic recession over the years has revealed some of the faults in fiat currency. The fact that a central bank’s greater control at times does little to prevent inflation or recession has led most individuals to believe that gold could be a stable currency given its unlimited supply.
