Daniel is a crypto currency enthusias and has been testing and learning about mining and faucet apps for more than 2 years.
There is so much hype surrounding crypto currencies and the benefits they have over existing fiat currencies. In this article we will review and compare crypto against fiat.
Firstly, it is worth mentioning that most transactions conducted in any market today are digital transactions. That’s right, very few transactions are actual cash exchange whereas the bulk are done via bank or financial credit cards and bank wire transfers. In addition, all interbank transactions are done digitally.
Secondly, fiat currencies have no actual intrinsic value. They are merely given value by government policy; monetary and fiscal policies to be exact. Crypto currencies on the other hand are given value by the work done to create a new crypto coin.
Finally, both types of currencies are subject to supply and demand which determines the price or worth of these currencies in trade.
So, let us look at the benefits and disadvantages of these two classes of currencies.
Regulation: Centralization vs Decentralization
When it comes to ownership and control it becomes clear that a fiat currency is government property. That is, it is printed by government directives, circulated under government regulation and traded according to government determination of domestic and international prices. Individuals do not own the national currency but rather translate the value of individual assets into the approved currency value plus markup. In other words, an asset can be valued in fiat currency plus tax. This is why every trade using fiat currency incurs tax.
With crypto currency the ownership remains with the individual and the control is done via protocols independent of external control. This algorithmic regulation removes human interference of the production and value of crypto coins. Since crypto coins have intrinsic value and is owned by an individual, it does not incur tax and can be traded at value on markets that accept crypto coins.
The only common additional cost typical in both currencies when transactions are made would be the service fees charged by the service provider whose platform or network is used to facilitate the trade.
The above is one demonstration of how fiat currencies are controlled by a third party whereas crypto currencies are not.
Immutability: Direct Transactions vs Indirect Transactions
Physical fiat currency (notes or coins) exchanges are direct when trade is done between a buyer and a seller. However, with digital payments, bank approval is often needed to complete such a transaction. In such instances, trust is no longer established by the buyer or seller but is determined by the bank. That is, a bank can stop a buyer from making payments or a seller from receiving payments.
Crypto currency exchanges are direct trade transactions. Unfortunately, this means there is no protection against false trades. Therefore, trust must be established with each party being satisfied with the trade and with each other’s credibility. The transaction cannot be stopped once initiated.
Portability: Acceptance, Transferability and Convertibility
Both forms of currencies require acceptance. If a currency is not accepted by another party then it is not money.
Most fiat currencies are legal tender within the country of its origin and are easily exchanged for another currency of another country. This is facilitated via foreign trade and loans and is made possible because the global economic standard for fiat currencies is the US dollar. Therefore, transfer of value is done using the dollar as a bench mark.
This is a problem for crypto currencies as there is no global standard used to set a bench mark for all crypto currencies. In reality, crypto currencies depend on stable coins which are representations of a fiat currency, often the US dollar.
Even though crypto currencies can be transferred far more efficiently and cheaply from one country to another, very few countries actually use crypto currencies to conduct trade. This means that crypto currencies need to be converted into the local fiat currency of a country in order to make purchases, which most countries cannot do.
Recently, crypto currency exchanges have been established to make crypto to fiat conversion possible but only a few major fiat currencies can be exchanged for crypto.
Scalability: Supply vs Demand
As mentioned prior, both fiat and crypto currencies are valued by market supply and demand influences. A high demand for a particular currency of limited supply drives up its value and vice versa.
With fiat currency, this poses a dilemma. Limited money supply against rising demand usually causes economic inflation. The most common response by governments towards shortages in money supply is to print more money; which in turn leads to the devaluation of the currency. Due to the drop in value of the currency, the prices of goods and services then rise. Unfortunately, the logical assumption that increasing the supply will reduce demand is false. All that is achieved is that the supply of money in circulation has increased but the demand to use money to make purchases does not decrease. In fact, citizens now need to pay a bit more for the same items they would have paid for before the currency was devaluated. Thus, demand actually increases.
Considering crypto currencies, supply varies depending on the technology behind them. Bitcoin, for example, has a fixed maximum supply. This means that once it reaches its full capacity then no more new coins can be created. Though, this may not be true with other crypto currencies. So, how would the problem of supply and demand be addressed? Well, unlike fiat currencies; which a divisible to a hundredth of a coin, crypto currencies are divisible up to a millionth of a coin. Hence, it would take a very very very long time before supply becomes an issue. The best part about it then is that crypto currencies will not lose their original value.
Just to clarify. If the US dollar devaluates by 1% then $1 would be worth $0.99 in actual value and will continue to lose its value with each progressive devaluation. However, 1BTC will always be worth 1BTC.
Sustainability: Convenience vs Durability
The global financial system is based on facilitating national and international trade. However, since moving away from a value based currency to fiat currency, this system was bound to collapse under unsustainable global debt and unrestricted money printing. Thus, it is only natural for the global economy to seek to return to a value based currency system. The question then becomes, what item of value would currencies be based on? This would preferably be gold.
However, gold is a finite resource which means that once all the gold reserves are accounted for then no more physical currency can be produced. Thus, notes and coins are inadequate for representing gold and world would need to shift purely into digital money.
In many ways, crypto currencies are already where the new global financial system will eventually be. Digital transactions are already common place and preferred compared to cash transactions and such a convenience of transferability is to be expected. Central Banks are already exploring the technology behind crypto currencies to transform their own currency offerings but as a centralized system. The only difference in the future of digital currency exchanges would then be who is in control of the transactions.
Predictions: Digital Gold vs Crypto Coins
There are two opposing facts. Money is determined by acceptance and recognition. Value is determined by importance and work done.
Money is anything that two parties accept and recognize as a form of payment for trade. However, the value of an item considered to be money depends on the amount of work done to produce the item in its refined/pure state. Just like a gold coin of a certain weight is more valuable than a gold nugget of the same weight.
Digital currencies based on the value of gold reserves presents an issue. Though it may be considered money, there is no way to be certain on what state of refinement the gold it represents is. That is, we cannot account for the work done to produce the gold held in reserve. We cannot determine immediately if an ounce of gold is 99% pure or only 89%.
With crypto currencies such as Bitcoin, the value is certain due to proof-of-work. That is, in order for a new Bitcoin to be produced, a Bitcoin miner must solve a complex algorithmic problem using a lot of computing and electrical power.
No doubt we will see both types of digital currencies compete for market share with a lot of biased government regulations in favor of established banking systems. However, the true indicator for success will be determined by which one is adopted and supported by the people, independent of government policies. In which case, crypto currencies have a huge lead in the race.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2021 Daniel Sakumai