Cryptocurrency is giving regular fiat currency a run for its money at the moment. The value of crypto assets is rising all the time (especially when you take the long view), while the value of fiat is being slowly inflated away. While both fiat and cryptocurrency can be digital, it is a wholly different animal.
In this post, we put the two types of currency head to head. We run through the properties that money should ideally have and then ask whether each kind of money does.
So who wins in the battle of fiat vs. cryptocurrency?
Forms of money should always store value. A person with X amount of a currency in their wallets should feel safe knowing that they can convert it into goods and services of equivalent value at any time.
Both fiat currency and cryptocurrency perform this function to some degree. However, both have their drawbacks.
The supply of fiat currency, for instance, is at the whim of central banks. Suppose the government decides that they need to increase the amount of money in circulation to support the economy. In that case, nothing is stopping them from creating trillions of new dollars. When this happens, it dilutes the value of all existing dollars that people hold, making them poorer. Thus, fiat money doesn’t do a good job of storing value long-term.
Cryptocurrencies limit supply through design. Bitcoin’s creator, for instance, set hard upper limits on how much of the currency could ever be mined. So, in effect, he solved the fiat problem.
However, given how new cryptocurrencies are, investors are still trying to work out what they are worth in relation to everything else. So their actual value is highly volatile over time. Sometimes, they are worth a lot, and sometimes they are not. These fluctuations make it difficult for cryptocurrencies to perform regular money functions.
Both crypto and fiat currencies are mediums of exchange. You hand over units of the currency, and merchants provide you with goods and services that you want in return.
However, mediums of exchange need to be widely accepted to function properly. The US dollar (USD), for instance, is probably the world leader in this regard since you can spend it in virtually any country, and people will accept it.
Cryptocurrencies, by contrast, don’t perform as well. They are still relatively new (compared to cash), and only so many merchants may be unwilling to take them.
However, it is worth pointing out that fiat currencies aren’t intrinsically better mediums of exchange than cryptocurrencies. In fact, since they rely on the international banking system, carrying out transactions with them can sometimes be slow and cumbersome. Ultimately, crypto may be more efficient and involve less friction because it uses blockchain technology.
Lastly, money should have a system that allows users to denominate certain values. For instance, a fifty-dollar bill is worth fifty times as much as a one-dollar bill. This allows sellers to price goods relative to each other. A $50,000 car, for instance, is worth 100 times as much as a $500 mattress.
On this point, both cryptocurrencies and fiat money perform well. Both use the base ten system, and both are highly divisible.
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