What is fiat currency. Its difference from cryptocurrency
When reading articles on cryptocurrencies, the term “fiat” or “fiat money” periodically slips through, which seems to be clear to everyone, but we consider it necessary that it is necessary to understand this concept in more detail.
Table of contents
What is fiat currency
Fiat currency (aka “fiat”) is a legal tender whose value is set and issued by the government, not backed by a physical good or product. Government authority is key in determining the value of a fiat currency. Most countries use the fiat currency system to buy goods and services, invest and save. Fiat currency has replaced the gold standard and other commodity-based systems in determining the value of legal tender.
Let's take a look at the related topic:
History of creation
The first fiat currency originated in the XI century in China, Sichuan province. It was there that the first paper money began to be issued. Initially, they could be exchanged for gold, silver and silk, but after Kublai Khan came to power in the XNUMXth century, the first fiat currency system was established.
Historians argue that this money played an important role in the fall of the Mongol Empire: excessive spending and hyperinflation caused its decline.
In Europe, fiat money began to be used in the XNUMXth century. Spain, Sweden and the Netherlands were the first to adopt them.
A similar system proved unsuccessful in Sweden and the government was forced to abandon it in favor of a silver standard.
The full-scale use of fiat around the world was led by the fact that in the USA in the 1933th century they returned to the use of a commodity currency with some restrictions. In 1972, the government ended the practice of exchanging paper money for gold. In XNUMX, under President Nixon, the US completely abandoned the gold standard, completing its international abolition by moving to a fiat currency system.
The difference between fiat and cryptocurrency: advantages and disadvantages
The main goal of creating a cryptocurrency was to eliminate intermediaries that are involved in money transfers between people, even if they live in different parts of the world. In the case of using cryptocurrency, payment becomes much more profitable and faster.
The key difference between cryptocurrency and fiat is that it is not physically expressed in any way. The probability of forgery is reduced to zero due to carefully encrypted information. The user's balance is calculated on the basis of sent and received transactions. Legislation in many countries is skeptical and wary of this type of payment.
While fiat money is absolutely legal and allowed in all countries of the world. Their cost is determined depending on the state policy and guarantees given by the authorities themselves.
Let's move on to the advantages and disadvantages of both types of money.
Let's start with the advantages of fiat money:
- Stability and lack of volatility. Despite the growing popularity of cryptocurrencies, fiat money is still the most in demand both in life and on currency exchanges. They are traded by a huge number of people, which makes exchange rate fluctuations more predictable;
- Wide use. Fiat money is accepted when paying in shops, restaurants, taxis and so on. Cryptocurrencies are still not so widespread;
- Recovery of a bank card in case of loss. If you lose your plastic card or forget your pin code, this does not mean that you have lost money. You can come to the bank taking your passport with you, withdraw money or order a new card with lost money;
- Banking transactions - returnable. In the case of transferring money to a fraudster, you can prove the fact of fraud and the money will be returned to you.
Next, we turn to the disadvantages of fiat money:
- Centralization. Most projects that work with fiat use a central server, if hacked, hackers can get all user account data. Such cases are becoming more and more regular;
- Inflation. The state is forced to regularly print new money, which leads to their gradual depreciation;
- Lack of anonymity. In order to get a bank card, you must provide personal data, starting from the last name, first name, passport, and ending with the place of work.
Now let's look at the advantages of cryptocurrency:
- Decentralization. The central server, hacking which could lead to the loss of money for millions of people, is simply missing. Copies of the blockchain are located on many computers around the world, due to which a change in the blockchain will require the consent of the majority;
- Transparency of transactions. Information about all payments is forever stored in the blockchain and is available for everyone to view;
- No fakes. This possibility is not technically available;
- Inflation resistance. Due to the fact that the emission of cryptocurrencies is limited, the probability of inflation is extremely small or absent at all;
- Lack of government and banking regulation. It is far from a secret that cryptocurrencies are not subject to government and banking regulation, the absence of which will protect the position of the cryptocurrency even in a global default;
- Anonymity. Despite the fact that the addresses and transactions are in the public domain, it is impossible to know who exactly owns the wallet. To use cryptocurrencies, there is no need to provide your personal data and passport.
Actually, let's move on to the disadvantages of cryptocurrencies:
- Cancellation of the transaction is not possible. Yes exactly. In case of an error when sending, you will not be able to cancel the transaction and will lose money;
- Value depends on supply and demand. From here and high volatility, sharp fluctuations in the rate, difficulty in forecasting. Although, on the other hand, volatility often plays into the hands of traders to get a good profit;
- It's easy to lose access to your wallet. Forget your password, don't save your seed phrase or private key for recovery? Congratulations! You have lost access to your account forever.
As you can see, both payment methods have their own set of advantages and disadvantages. At the moment they complement each other. Cryptocurrency cannot exist without fiat.
Despite all the advantages over fiat currencies, cryptocurrency remains too new, incomprehensible and inconvenient for the world. In addition, the transition to cryptocurrencies will not be beneficial for the leading financial authorities.
Fiat has been entrenched in use for a long time and perhaps soon it will be able to fully replace the use of cryptocurrencies, but for now, fiat is the undisputed favorite in use around the world.
The future of both fiat and cryptocurrencies is uncertain. Cryptocurrency has a long way to go, many challenges to face. Fiat currency, on the other hand, has demonstrated vulnerability to its form of money.
Likely Bitcoin was not created to fully replace fiat, but to offer an alternative economic network that can create a better financial system for society.
We hope that the article was useful to you. Leave comments with your thoughts on this topic. Successful and profitable investment!
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