While numerous cryptocurrencies continue to grow in popularity, they have yet to reach the mainstream levels of fame that their fiat counterparts hold. In other words, it will be quite a while before Bitcoin, Ethereum, and similar assets can compare to the old-fashioned Dollar, Euro, Pound, and many others. And rightly so. After all, given the countless legal issues that cryptocurrencies still must work through, it seems fitting that fiat currency has remained in charge. So, what are some of the basic differences between the two?
Security and Privacy
While cryptocurrency currently lacks what is necessary to become the default payment method for the entire world, it has a lot of advantages as well. According to a former Wall Street investor Jon Horvath, security and privacy would be the perfect examples. In translation, paying with digital coins is by far the superior alternative. This is because most cryptocurrencies, and specifically Bitcoin do give the user a level of pseudonymity. While many believe Bitcoin transactions are perfectly anonymous, they are not unless they are put through a tumbler that obscures the address. Addresses on the Bitcoin blockchain are transparent and viewable by everyone however no explicit identity is attached to each address. There are however companies that have been analyzing the the blockchain and strive to figure out whom they belong to. There are some addresses for example that are blacklisted, for example addresses that belong to terrorist organizations that have been used for fundraising. So, the blockchain actually keeps track of all funds ever sent and it’s transparent and it’s time consuming but not impossible to figure out where the funds came from. There are however a set of crypto currencies called privacy coins that do give you full anonymity. These include Monero, Dash, and Zcash.
Similarly, security with blockchain is on a completely different level than the security of fiat currency. Bitcoin has never been hacked. There has been hacking issues, but it’s exchanges that have been hacked similar to how banks get robbed or hacked.
Cryptocurrencies have only been around 10 years but there are no instances where a cryptocurrency completely collapsed in the way that many historical currencies did. A great example would be Germany’s Papiermark that hyperinflated soon after World War I. Of course, the currency itself was not at fault here. Instead, the events that were happening led to its downfall. Regardless, it is hard to say that a cryptocurrency protected by online safeguarding mechanisms could have been abused in the way in which France and Belgium abused the Papiermark. How was this done? Well, these two countries essentially forced Germany to print as much money as necessary to pay for the expenses of the war.
Inflation Versus Market Valuations
Of course, however, cryptocurrency does have its own issues in the area of valuation. Although it is not exactly close to hyperinflation, it can seem that way sometimes. A great example would be Bitcoin’s recent fall that took it from nearly $20,000 down to just $3,000 in a little over a year. Though much of that value has begun to return, such a dramatic change cost many investors millions of dollars. Fiat currency, on the other hand, has not really had any major inflation issues over the past few years. Thus, there are certain trade-offs that have to be taken into account as both digital and actual coins can be victims of rapidly falling values.
Another advantage of Bitcoin over fiat is its outstanding ability to serve as store-of-value over time like gold. This is determined by the change in supply of the currency over time. Right now, 4-5% incremental Bitcoins are given to miners each year which of course dilutes the supply of Bitcoins but is somewhat offset by lost Bitcoins. Next year this half and eventually it will go to zero when we reach the maximum supply of 21 million bitcoins. Being early days Bitcoin sees a lot of volatility which Jon Horvath expects to decline with time. There are other coins like XRP for example that have almost unlimited supply that are not necessarily good stores of value.
Finally, it would be unfair to parallel digital assets with actual paper and metal money without bringing up technology. Before getting into this, one should understand that fiat currency further includes methods of payment like debit and credit cards as well. After all, these still rely on generally accepted currencies from around the world. Nevertheless, even with the use of credit and debit cards, the technology that surrounds fiat currencies is nowhere near as advanced as the technology pertaining to cryptocurrencies. Simply glancing over how the entire decentralized method operates would be enough to showcase why this statement is true.
For example, when Satoshi Nakamoto allegedly came up with Bitcoin, they singlehandedly figured out a way to anonymize end-users and completely cover all of their transactions for a low fee. Banking institutions, on the other hand, still charge hefty fees for account services while constantly keeping track of every single expenditure that someone may have. In fact, the IRS has been known to reach out to banks when they want to verify certain information about the taxpayers who hold those accounts. Thus, the innovation in the digital spheres of crypto assets is light years ahead of anything seen in the fiat currency market. Therefore, it would not be surprising to see more and more people slowly transition from the traditional Dollar and Euro to Bitcoin, Ether, and Ripple soon.