As the years rolled on, and as thousands of new cryptos were created, it became quite clear that the term ‘cryptocurrency’ was a contentious one at that; this is simply because not every crypto is designed to be used as a currency, just like fiat.
Cryptocurrency has started a debate regarding the future of fiat, with many believing that it could potentially replace regular money, or at least exert dominance over it in the coming years. It is, however, incredibly important to note that this is extremely unlikely due to the decentralized and often volatile nature of most cryptocurrencies.
What is Fiat?
As noted, fiat currency is the term given to money issued through a government and its central bank.
It’s the money you have been using all your life, and it is likely that we will be using it for the foreseeable future.
So, in order to establish a comparable difference between the fiat and crypto, let’s take a look at the different forms cryptocurrencies can take.
Types of Crypto and Uses
In order to understand how cryptocurrencies work, especially in relation to the financial system, let’s establish what types of digital assets there are in the world, as they tend to fall under one of three categories: coins, tokens, and Non-Fungible Tokens (NFTs).
Coins: This term describes a cryptocurrency that is native to its own blockchain network, for example, Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Ripple (XRP).
Tokens: These are digital assets built on top of a blockchain, for example, Binance Coin (BNB), Chainlink (LINK) and SushiToken (SUSHI) are built on the Ethereum blockchain
Non-Fungible Tokens: NFTs are unique digital assets that aren’t interchangeable like other cryptocurrencies. Instead, they represent items such as art, music, photos, and other types of digital file, usually on a 1:1 basis. They have broad use cases beyond being collectables and may be used for property deeds, birth certificates, and other real-world applications.
Under each of these types, cryptocurrencies can also fall into sub-categories depending on how they are intended to be used.
Transactional: Arguably this is the original category for cryptocurrencies. These are digital assets designed to be used as regular money for purchasing goods and services. Bitcoin and Litecoin serve as good examples of that.
Platform: This sub-category of crypto are usually found within decentralized finance (DeFi) products. For example, they are cryptos designed to facilitate the creation of new cryptocurrencies or pay for transactions fees, Ethereum is a prime example of this type of coin.
Utility: These cryptocurrencies are designed with a very specific function in mind. As an example, Ripple (XRP) is a coin that was created as a settlement layer for financial institutions such as banks, it allows for more efficient and cheaper transactions. (Banks such as Santander and American Express are adopting this technology).
Fiat Vs. Crypto Transactions
Our interconnected globalised economies rely heavily on international trade, whether making trade deals, purchasing goods, or simply sending remittance payments to loved ones, cross-border payments are a fact of life for many, yet the practice remains slow and expensive despite the advances in technology.
As well as the usual middlemen profiting from each and every transaction, there is also the exchange rate, and payments processors are allowed to set and change their own rates for a service that can take more than three days to process. If you wish to speed up that process, you can pay a premium.
Cryptocurrencies are inherently borderless, they are beholden to no government or central bank, and their value, rate of exchange, and speed of transaction are significantly better. At present, the average Bitcoin transaction costs under $5 all-in, with only the miners on the blockchain present to take a fee, and it typically takes around an hour to complete.
There are many cryptocurrencies (notably stablecoins) that have near-zero transaction costs, and this is a huge benefit for the world.
Economics, Inflation & Deflation
Every economy in the world is subject to inflation, where the value of goods and services rises whilst the value of a currency reduces.
There are some positives to it, but only if inflation levels are optimal. In a perfect period of inflation, the rising prices are matched by companies offering higher wages, which in turn increases spending power and reduces overall debt costs. It’s for this reason that most governments favour slow inflation, as they too are in debt and inflation can boost tax revenues.
Unfortunately for the majority of nations, inflation is hard to tame and often leads to high inflation or hyperinflation as a result of poor monetary policy and economics. This results in poor growth, unemployment, and social distress as a nation’s central bank prints excessive amounts of money.
Venezuela’s current crisis is an unfortunate but perfect example of this. After a period of unrestrained spending by the newly appointed President Maduro (2013), Venezuela’s economy began to spiral and soon food, basic goods, and medicine became scarce. The nation officially entered into hyperinflation in 2017 and is yet to recover.
To put this into perspective, in August of 2018, a cup of coffee cost more than 2,000,000 bolivars, which in April of that year was 190,000 bolivars, a 3-month inflation rate of over 1,200,000%. Any cash savings held became useless piles of paper overnight, and this resulted in the Venezuelan government introducing a new national cryptocurrency, the Petro, which failed, and then another currency, the Sovereign Bolivar, which also failed.
In late 2021, Venezuela rebranded the Bolivar once more, by stripping six zeros from the currency and circulating new notes with one new bolivar being worth 1,000,000 old ones. It’s a complex and terribly mismanaged issue, one that cryptocurrency can circumvent.
Cryptocurrencies can be built from their inception to be deflationary, meaning that their total circulating supply will slowly reduce, making each coin or token more valuable. With a fixed supply cap that cannot change, banks, businesses, and the everyday user can find some peace in knowing that their cryptos are free from poor economics and manipulation.
In fact, Venezuelans have increasingly turned to dollar-backed stablecoins, Bitcoin, and other cryptocurrencies to circumvent their economic woes to great success, proving their worth in times of need.
Placing all of your eggs into one basket is usually ill-advised, but in the instance of finance and banking, we as a society are left with little choice, and the banks know it.
They control the access, and whether or not have any. Banks control the money and they can remove your access to it in a heartbeat. This can be due to a court order, suspected illicit activity, a financial crisis, or any other reason, you can be locked out and left stranded.
With crypto, you truly own your assets and no government nor financial institution can take them away from you. So long as you have an internet connection and a device capable of connecting to it, you’ll be able to buy, sell, send, and store your assets away from the institutions.
As you can see, cryptocurrencies have many different forms and applications, and whilst they may never totally replace fiat, they will co-exist for the foreseeable future.
Access to cryptocurrency technologies has never been easier, and with a phone and an internet connection, anyone on Earth can explore a wealth of opportunities in the cryptocurrency space.
Cryptocurrencies have a long way to go before they are truly viable as ‘currencies’, the problem with crypto is that it is a very volatile and unpredictable space, and although stablecoins are stable in value, the technology has quite some way to go before it is trusted by a majority of people.