Cryptocurrencies vs Local Currencies: Pros And Cons
Professionals in the finance industry are divided when it comes to cryptocurrencies; some of them believe that they have a bright future and will completely replace the local (fiat) currencies.
Others are not so optimistic about this. One thing is certain, though — it’s still very early to talk about any type of “replacement”, as cryptocurrencies have a long road to travel before they are used instead of fiat money.
Cryptocurrencies have introduced changes to the world of finance, but they are not a viable alternative to fiat money yet. In fact, fiat money is still dominant in every country and has a couple of advantages over crypto coins.
Let’s compare the two types of currencies and make an overview of their major benefits and shortcomings. Read on!
In order to understand their differences, we first must see what makes these two types of money similar.
Obviously, both are money (currencies), and both are used for storing and transferring value. In other words, we can buy goods and services using crypto coins and fiat currencies.
They are both subject to scarcity, supply, and demand. Both types of currency have a value that can be affected by the system around it, and both can be converted.
While fiat money can be converted in any bank, crypto coins exist in the digital form only and are thus, traded at special web-based cryptocurrency exchanges.
However, here are some differences between the two.
Major Advantages of Fiat Money
Fiat money goes back a long way. It was introduced more than two millennia ago, and its properties haven’t changed ever since. Countries adapted their law to control fiat money, making it very stable compared to cryptocurrencies.
Their stability is actually the main reason why countries are able to use recession and inflation in order to keep track and navigate the economy.
Being controlled by the government and central banks, fiat currencies are highly centralized, which may or may not be a good thing, depending on your point of view. We will explore this issue later when we talk about cryptocurrency advantages and disadvantages.
The biggest advantage of fiat money is its worldwide acceptance. Unlike cryptocurrencies, which still struggle with adoption, fiat money can be used to buy and sell anything, making it the most liquid asset out there.
The Disadvantages of Fiat Currencies
Still, fiat currencies are subject to inflation. They can devalue significantly if the situation in a country is not stable. When countries experience hyperinflation, they tend to overprint money, meaning that the value of the currency goes down with every printed paper.
Some economists believe that the fact that fiat money is centralized and controlled by the government can lead to corruption. Simply put, having the power to control money is a huge responsibility. All it takes is one corrupt government and all hell can break loose. That’s actually one of the main reasons why cryptocurrencies appeared.
There’s another reason why fiat money is considered inefficient — too many middlemen. When you want to transfer money, there are banks and similar services that allow you to do so. But, they all charge fees. The fees are very high sometimes, especially if you want to send and receive money cross-border.
That said, let’s take a look at some of the major advantages and disadvantages of cryptocurrencies.
Most cryptocurrencies are built using the decentralized technology known as blockchain. Being a part of the blockchain network, the information about transactions is stored in a distributed ledger, which exists in every node on the chain.
Nodes are basically individual computers scattered throughout the world that provide computing power to the network.
To cut a long story short, decentralized currencies do not have one body that dictates the rules. So, there’s less room for things such as corruption.
Moreover, crypto coins exclude all in-between services; for example, if you want to send Bitcoin to someone anywhere on the planet, you don’t have to use banks, payment processors, e-wallets, or something else. All it takes is to know your recipient’s Bitcoin wallet address and make the transaction.
Finally, cryptocurrency transactions are anonymous and private. For some, this is not necessarily an advantage, as crypto coins are still not regulated in many parts of the world. Thus, they are prone to activities such as money laundering.
However, cryptocurrency transactions are generally much safer compared to fiat money transactions.
Cryptocurrencies have several disadvantages. But one significant drawback definitely stands out — price volatility. The price changes every moment, and this is the main reason why cryptocurrencies are not considered stable.
In fact, many people end up losing more money than they have invested if the price starts dropping at the time the coin is bought. On the other hand, this could be a good thing if you manage to buy when the price is low and sell when it’s high.
What many consider another major disadvantage is the lack of regulations. Although crypto coins are decentralized and not controlled by the government or central banks, they still must be regulated in some way in order to minimize the potential misuse of this technology.
On a more positive note, many regulators around the globe are doing their best in order to regulate the sphere.
Conclusion: Which is better?
At this point, choosing between cryptocurrency and fiat is really a matter of personal preference.
However, fiat currencies are still pretty much the default type of payment, so you are bound to use them wherever you are. This may or may not change in the future as it is still difficult to predict.
One thing is certain, though — the technology powering cryptocurrencies is still new and being explored. So, there’s a lot of room for its improvement which may lead to cryptocurrencies becoming as popular and widespread as fiat money.