What Is The Difference Between Fiat And Cryptocurrency?

What Is The Difference Between Fiat And Cryptocurrency?

written by John Murphy | March 30, 2023

The main difference between fiat currency and cryptocurrency is that the latter does not require backing, while fiat currencies depend on governments. 

Although both currencies enable frictionless payments between two parties and are means of storing value, they differ significantly from each other. 

While the underlying issuing government vets trust in fiat money, the trust vested in cryptocurrencies is based on underlying blockchain technology. When we buy something using fiat currency, we rely on a trustworthy authority like European Central Bank (ECB). At the same time, this trust shifted to technology (blockchain) like Ethereum when we buy something with cryptocurrency.

Though both currencies serve the same purpose on the face, their back-end value functionalities contradict each other. So, let us answer the “what is the difference between fiat and cryptocurrency” through this article.

What is fiat money?

The word “fiat” is an official decree or order. Thus the currency issued in the order of government is known as fiat money. Moreover, it derives value from its backing of precious metals (like gold or silver), salt or shells.

Examples of fiat currency include US Dollars, Pound Sterling, Euros etc.

What is cryptocurrency?

Cryptocurrencies are digital assets used as a medium of exchange between two parties. They operate without the intervention of an intermediary like a bank. 

Examples of cryptocurrencies include Bitcoin, Ethereum, and Litecoin. Dogecoin etc.

Difference Between Fiat and Cryptocurrency

So let’s move forward to answer the question – what is the difference between fiat and cryptocurrency?

The following are major distinguishing points that set both currencies apart.

  • Governance

One of the most significant distinguishing factors between fiat currency and cryptocurrency is governance; government authorities govern fiat money while cryptocurrencies are ungoverned. Moreover, fiat money’s intrinsic value attached to the decisions of central authorities. Likewise, the issuance of the new currency depends on the fiscal policy designed by these controlling authorities.

Alternatively, cryptocurrencies do not have any centrally controlling authority. Likewise, it draws value from its native blockchain technology, where policies are fully transparent and stored on the protocol’s codebase. Since cryptos do not have fiscal policies, their policies are subject to the consensus mechanism of the protocol.

Moreover, most blockchains rely on a proof-of-work or proof-of-stake consensus mechanism for issuing new cryptocurrencies, commonly known as minting. 

  • Exchange of Value

Except for cash transactions, all other fiat money transactions done through the traditional banking system. in most cases, and an intermediary is mandatory to complete a transaction. Moreover, payment through debit or credit cards also goes through banking systems. Likewise, if you use financial apps like PayPal or Visa, they have to follow the same procedure as the controlling authority requires.

Transactions done with cryptocurrency routed directly through the blockchain without involving any intermediary. Thus, offering users freedom of control over transactions. Validators, a decentralized network of participants on the blockchain, approve all transactions made through cryptocurrency. 

  • Supply

Based on the control, the supply of fiat money is in the hands of governments. The measure of the collection of fiat money is known as inflation. To keep value and inflation in check, governments only allow a certain quantity of supply of new currency. By increasing demand government was users to spend fiat currency for making transactions.

Cryptocurrencies like Bitcoin, on the other hand, are mined by users by solving mathematical problems. Moreover, crypto tokens have an upper limit; thus, it has a controlled supply. Likewise, cryptos supply controlled by crypto algorithms. Therefore, it is more structured, transparent and mathematical during supply.

In short, cryptocurrencies have a finite supply, while fiat currency has an unlimited supply. 

  • Monetary Policy

Monetary policies regulate the overall performance of fiat money that governments pen. These policies cover inflation, deflation, and rates at which prices fluctuate in an economy.

On the contrary, algorithms control cryptocurrencies; hence, blockchains have the final say regarding the monetary policy of crypto tokens. 

So, fiat money’s monetary policy controlled by humans, while crypto’s economic policy governed by blockchain technology.

  • Tangibility

Fiat money is tangible and measured in physical currency notes of paper, digits, and coins. Contrarily, cryptocurrency does not have a physical form; instead, it is in digital form on the computer screen. 

Moreover, you cannot touch cryptocurrencies as they encrypted digital codes. Cryptocurrencies are neither tangible nor backed by any real asset, while fiat currencies are tangible.

  • Storage

People can physically store fiat currency in banks, homes, or wallets. Cryptocurrencies cannot be stored physically but are held on the blockchain. In contrast, blockchain data stored across multiple computers in different locations.

Fiat currencies have a security risk as they are prone to theft or destruction. In comparison, cryptocurrency is less prone to destruction since it has no physical form.

Likewise, users store cryptocurrencies in e-wallets equipped with security protocols and encryption technologies, thus preventing them from falling into unwanted hands.

Frequently Asked Questions

Is fiat money better than cryptocurrency?

Both sets of currencies have pros and cons; it depends on the user’s thoughts on which currency he wants to use. However, fiat money is more stable than cryptocurrency and widely used.

Are fiat and crypto the same?

Although both fiat and crypto carry and deliver utility value, they differ primarily from each other. For instance, fiat money governed by governments like crypto controlled by decentralized blockchain technology.

What are examples of fiat currency and cryptocurrency?

US dollar, Euro, Canadian Dollar etc., are examples of fiat currency, while Bitcoin, Ethereum, Dogecoin, Litecoin etc., are examples of cryptocurrency.

Parting Thoughts

Well, that concludes our detailed answer to the question – what is the difference between fiat and cryptocurrency?

Although both are used as a means of exchange for delivering services or purchasing goods, they differ significantly. 

The central point of difference in control, fiat currency centrally controlled by government authorities, while cryptocurrency does not have a centrally controlled unit. Moreover, fiat currency is physically present, while cryptocurrency is intangible.

Likewise, people can store fiat money in their houses or banks in paper notes or coins; however, cryptocurrency stored in digital wallets on the computer.

In short, although offering similar utilities, fiat and cryptocurrency differ. 

We leave you with anticipation of hearing back from you in the comments section.