What is Fiat Currency and How is it Different From Cryptocurrency

Tue Jul 11 2023

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In the early days, way before cryptocurrency trading bots, people used barter to exchange goods and services. Later, coins made of precious metals replaced the barter system, followed by paper notes. Fiat currencies emerged as legal tender not backed by any valuable commodity. They are regulated by governments that issue them and are backed by trust. In contrast, cryptocurrencies are decentralized, many with limited supply and are not backed by any physical asset with the exception of stablecoins which some are backed by fiat or other cryptocurrency reserves.

Fiat Currencies: Pros and Cons

Fiat currencies are the only legal form of money accepted in a country. They are regulated by central authorities, and no individual can replicate national currency. Governments control the issuance and circulation of money, and transactions can be tracked. However, centralization can lead to restrictions, such as banks blocking transactions and accounts.

Unlimited creation is possible with fiat currencies, as central banks can issue an infinite amount of currency units. They are more stable compared to cryptocurrencies, making them a preferred choice for merchants. However, fiat currencies are prone to inflation, and their value depends on government policy. Because there are no limitations on how much fiat a Government can print, their value can often be diluted by inflation.

Cryptocurrencies: Pros and Cons

Many cryptocurrencies are decentralized, offering more privacy and are censorship resistent. Users have full control of their funds through private keys, but this also means that if they lose their password, private key, or seed phrase, they lose access to their funds.

Limited supply and controlled emission add value to cryptocurrencies. However, they are highly volatile, and it is not uncommon to see swings of 50% or more in a single day sometimes. Few people use cryptocurrencies as a means of payment due to counterparty risks.

However, in spite of their volatility towards fiat, cryptocurrencies are a more efficient, fairer, and more transparent money. Because many of them have a limited supply, they are intrinsically valuable due to scarcity. Furthermore, if we move away from comparing cryptocurrency to fiat, the problem of Volatility goes away. You may have come across the phrase: “One Bitcoin is one Bitcoin”. This implies that in a market where Bitcoin is the standard currency for buying and selling, there is not volatility, and no inflation. Quite the opposite, as years go by, the value of Bitcoin is expected to keep going up, increasing your purchase power in time.

On Algorithmic Cryptocurrency Trading

The current financial system is unstable and imperfect, leading to the emergence of cryptocurrencies as an alternative to fiat currencies. However, the cryptocurrency market is still very young and needs to solve many issues before gaining mass adoption. Algorithmic cryptocurrency trading platforms and cryptocurrency trading bots can help traders navigate the volatile market and maximize profits. On a macro level, these automated tools that allow people to buy sell and trade cryptocurrency can help stabilize the cryptocurrency market by quickly and efficiently filling orders in an order book.

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