Cryptocurrency’s explosion since the launch of Bitcoin (BTC) in 2009 set off a heated ongoing debate: fiat currency versus cryptocurrency. What makes them different, and which is better? With the crypto market growing from $20 billion at the beginning of 2017 to around $2 trillion at the time of writing, there’s no denying that digital assets are a powerful new challenger.
In this guide, we’ll review what fiat currencies and crypto are, how they compare, and the pros and cons of each.
First things first: Is cryptocurrency a fiat currency?
Simple answer: No, crypto isn’t a fiat currency.
Fiat currency is legal tender whose supply and circulation are managed by national central banks. Examples include the U.S. dollar, euro, and yen.
Cryptocurrencies, conversely, are digital assets with issuance and management governed not by nations but by decentralized networks that use cryptography to secure and verify transactions. Examples include Bitcoin, Ethereum (ETH), and Solana (SOL).
So what is fiat currency in crypto, specifically?
In the context of crypto, fiat is often thought of as a competitor to decentralized cryptocurrencies. Both currencies are valid forms of money. Shells, beads, precious metals, and even huge eight-ton rocks called Rai stones have all been used as money at some point in history. In fact, anything can be used as money as long as it satisfies three fundamental requirements:
- Medium of exchange: This is any object widely accepted as payment for goods and services. Properties that make an object a good medium of exchange include fungibility—meaning each unit is similar enough to every other unit to be interchangeable—divisibility, portability, and durability.
- Store of value: It’s an asset that resists value depreciation over time. Common examples include gold and real estate.
- Unit of account: This is a numerical unit for measuring the market value of goods, services, and assets. Using a universal unit as a common denominator simplifies trade and accounting better than barter and other non-monetary economic systems. Fiat currencies are the standard unit of account in most modern economies.
Overall, while both fiat and crypto satisfy or can meet all three required attributes, they aren’t the same. Each type of money has distinctive properties with unique advantages and disadvantages.
Fiat versus crypto: What’s the difference?
Despite their core similarities as valid forms of money, fiat and crypto have significant differences. Here are a few:
Issuance
National governments mint and distribute fiat currencies. However, anyone can create cryptocurrencies, with decentralized networks managing issuance and distribution without any intermediaries.
Governance
The supply of fiat currencies is managed by the national governments that issue them. Central banks use monetary tools like interest rates to manipulate the inflation rate and maintain price stability.
Cryptocurrencies, on the other hand, can implement different monetary policies, but all share the property of being governed by code and large-scale consensus decision-making rather than centralized governing bodies.
Value
The value of fiat currencies is linked to economic factors like interest rates and government policies, while cryptocurrencies’ value is determined primarily by supply and demand.
Pros and cons of fiat currencies and cryptocurrencies
Both fiat and crypto come with their own set of advantages and disadvantages, influencing how they are used in the global economy. Here are a few of the pros and cons associated with each:
Fiat currencies
Fiat currencies are backed by governments, lending them a degree of stability and trust in the eyes of the public. This stability is crucial for everyday transactions, savings, and business operations.
The central banks and financial authorities that issue fiat currencies also regulate them. This regulatory oversight helps prevent fraud, ensure the financial system’s stability, and protect consumers.
Fiat currencies are universally accepted for transactions within their respective countries and often beyond. This wide acceptance makes them highly liquid, facilitating both domestic and international trade.
Fiat currencies are susceptible to inflation, which can erode purchasing power over time. Central banks can print more money, leading to devaluation and reduced buying power.
Fiat currencies’ central control means governments can make decisions that impact the economy, for better or worse. This includes manipulating currency values or implementing monetary policies that may not always favor the public.
Cryptocurrency
Unlike fiat, digital currencies operate on decentralized networks. This reduces any single entity’s control over the currency, potentially lowering the risk of censorship or manipulation.
Virtual assets leverage blockchain technology, offering secure and transparent transactions. This innovation can revolutionize both the financial sector and many aspects of online interactions and contracts.
For international transfers, cryptocurrencies can offer lower transaction fees than traditional banking systems and remittance services.
Cryptocurrencies offer a universal and borderless means of exchange, allowing for low-cost transactions worldwide without international exchange rates or extra fees. Thanks to their predictable issuance schedules, they’re also valuable hedges against inflation. These features make crypto especially useful in economically unstable regions.
Cryptocurrencies are known for their significant price swings, which can lead to significant losses or gains in a short period. This unpredictability makes them risky for investment and everyday use as a currency.
One of the most formidable barriers to cryptocurrency’s wider adoption is its steep learning curve. Many crypto skeptics view the requirement for users to manage their own funds as too risky and complicated for most people.
Despite growing popularity, digital assets aren’t yet widely accepted as a payment method for most goods and services, limiting their practical use.
Choose crypto with dYdX
Fiat isn’t going away any time soon, but that doesn’t mean traders can’t benefit from the many advantages of crypto in the meantime. dYdX’s premier decentralized exchange offers eligible traders low fees, deep liquidity, and up to 20x buying power for trading dozens of cryptocurrencies. Learn more about our platform on our official blog.
Eligible traders looking for more guides on key crypto topics, head to our in-house educational resource library, dYdX Academy, and start trading on dYdX today.
Disclosures
The content of this article (the “Article”) is provided for general informational purposes only. Reference to any specific strategy, technique, product, service, or entity does not constitute an endorsement or recommendation by dYdX Trading Inc., or any affiliate, agent, or representative thereof (“dYdX”). Use of strategies, techniques, products or services referenced in this Article may involve material risks, including the risk of financial losses arising from the volatility, operational loss, or nonconsensual liquidation of digital assets. The content of this Article does not constitute, and should not be considered, construed, or relied upon as, financial advice, legal advice, tax advice, investment advice, or advice of any other nature; and the content of this Article is not an offer, solicitation or call to action to make any investment, or purchase any crypto asset, of any kind. dYdX makes no representation, assurance or guarantee as to the accuracy, completeness, timeliness, suitability, or validity of any information in this Article or any third-party website that may be linked to it. You are solely responsible for conducting independent research, performing due diligence, and/or seeking advice from a professional advisor prior to taking any financial, tax, legal, or investment action.
You may only use the dYdX Services in compliance with the dYdX Terms of Use available here, including the geographic restrictions therein.
Any applicable sponsorship in connection with this Article will be disclosed, and any reference to a sponsor in this Article is for disclosure purposes, or informational in nature, and in any event is not a call to action to make an investment, acquire a service or product, or purchase crypto assets. This Article does not offer the purchase or sale of any financial instruments or related services.
By accessing this Article and taking any action in connection with the information contained in this Article, you agree that dYdX is not responsible, directly or indirectly, for any errors, omissions, or delays related to this Article, or any damage, injury, or loss incurred in connection with use of or reliance on the content of this Article, including any specific strategy, technique, product, service, or entity that may be referenced in the Article.