While cryptocurrencies provide a safeguard against high inflation in some countries, fiat money still reigns supreme as the more widely accepted form of currency.
Fiat money and cryptocurrency are both forms of currency, but they have some distinct features.
An introduction to Fiat Currency and its History
Fiat money refers to currency that is backed by a government's declaration of value, rather than a physical commodity such as gold or silver. The term "fiat" comes from Latin and is translated as "it shall be".x
The use of fiat money can be traced back to when governments would create coins from valuable commodities or print paper money that could be redeemed for a fixed amount of a physical commodity. Today, fiat money is not linked to physical reserves and is only valuable because the government says it is.
However, this also means that fiat money is vulnerable to inflation and can even become worthless in the case of hyperinflation. An extreme example is when Zimbabwe's currency experienced 79,600,000,000% inflation in November 2008. People's trust in the currency is crucial to its value; if people lose trust in a currency, it will no longer hold value.
In the United States, the dollar is considered both a fiat currency and legal tender. The U.S. government has declared the dollar to be the standard for debt repayment and is accepted for private and public debts. The U.S. dollar was once backed by gold and silver, but since the 1970s it has been backed by the "full faith and credit" of the U.S. government. The U.S. dollar is now considered "legal tender" rather than "lawful money," which can be redeemed for physical commodities.
An Introduction to Cryptocurrency and its History
Cryptocurrency is a digital or virtual form of currency that utilises advanced cryptography to secure transactions and prevent counterfeiting or double-spending. This decentralised currency operates on blockchain technology, a distributed ledger enforced by a network of computers. The origins of cryptocurrency can be traced back to the 1980s, but it was not until the early 1990s that the development of cryptographic protocols and software made a decentralized digital currency possible.
The birth of cryptocurrency is widely attributed to Satoshi Nakamoto, who in 2008 published a paper outlining a system for a trustless digital currency. This paper paved the way for the creation of Bitcoin, the first decentralised cryptocurrency, which was released as open-source software in 2009. Bitcoin quickly gained popularity for its ability to allow individuals to send money across borders without interference from banks or governments.
In 2010, Bitcoin was the only cryptocurrency in the market and had a value of only a few cents. As more cryptocurrencies entered the market over the next several years, the crypto market experienced fluctuations in value, including a crash in January 2018. Despite this, the crypto market has continued to see growth and reached a total market cap of $820 billion in January 2018.
2017 was a significant year for cryptocurrency, as the value of Bitcoin and other cryptocurrencies skyrocketed, leading to an increase in investment schemes and scams targeting crypto investors. While cryptocurrencies offer decentralisation, security, and transparency, they are also subject to high volatility and are not yet widely accepted for everyday transactions.
Pros of Money:
Widespread acceptance: Money, in the form of physical cash or bank deposits, is accepted by almost all merchants and businesses. This makes it easy to use for everyday transactions and purchases.
Stability: The value of money is generally stable and predictable, making it a reliable store of value.
Legal tender: Money is recognized and accepted as legal tender by governments and financial institutions.
Physicality: Physical cash can be useful in situations where digital transactions are not possible or practical, such as in remote or underdeveloped areas.
Cons of Money:
Inflation: The value of money can be eroded over time due to inflation, which occurs when the supply of money increases faster than the rate of economic growth.
Physical limitations: Physical cash can be easily lost, stolen or damaged.
Control: Governments and financial institutions have the power to control the supply of money and can print more money whenever they want, which can lead to inflation
Pros of Cryptocurrency:
Decentralisation: Cryptocurrency operates on a decentralised network, which means that no single entity controls the supply or flow of the currency.
Security: Cryptocurrency transactions are secured through cryptography and are less vulnerable to fraud and hacking.
Transparency: Cryptocurrency transactions are recorded on a public ledger, which allows for greater transparency and traceability.
Borderless: Cryptocurrency can be used to make transactions anywhere in the world, regardless of the local currency or regulations.
Cons of Cryptocurrency:
Volatility: The value of cryptocurrency can be highly volatile, making it a risky investment.
Lack of acceptance: Cryptocurrency is not yet widely accepted by merchants and businesses, making it difficult to use for everyday transactions.
Legal issues: Cryptocurrency is not recognized as legal tender in many countries and regulations can vary widely, making it difficult to navigate and use.
Technical knowledge: Cryptocurrency can be difficult to understand and use for people who are not familiar with technology and digital currencies.
When it comes to deciding between money and cryptocurrency, it's important to consider your specific needs and what you are willing to risk. Money offers stability and widespread acceptance, but it is subject to inflation and can be controlled by governments. Cryptocurrency offers decentralisation, security, and transparency, but it is highly volatile and not yet widely accepted. It's important to keep in mind that cryptocurrency is still a relatively new technology and it is constantly evolving, so it is important to stay informed about the latest developments in the field.
In short, it's important to weigh the pros and cons of both money and cryptocurrency and consider which one is better for you depending on your needs and goals.