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Sunday, February 25, 2024

Will Cryptocurrency Ever Replace Fiat Currency?

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The blockchain-based cryptocurrencies show great potential in the business world. Research suggests that start-ups dealing with such tokens have successfully raised over $20 billion via Initial Coin Offering (ICO). Despite their popularity, exponential growth and benefits, they are still misunderstood by all. People confuse them with fiat money and have a preconceived notion that crypto investments are risky.

On the contrary, the EU and the US-based experts believe fiat currencies shall soon transform into digital ones. It is only a matter of time. Casinos like Vulkan Vegas are already accepting the latter. Even financial analysts are convinced about blockchain implementation as a baby step toward the creation of digitalised versions of Government-backed fiat currencies.

For the unversed, cryptocurrencies are digital currencies where a decentralised system maintains the records of transactions. Contrarily, fiat money refers to the currency we traditionally use to purchase goods and services. The Dollar, Yen, Euro and Indian Rupee are exemplary examples of fiat money.

Coming back to crypto, one thing is evident – it is advancing fast, but do you think its pace is quick enough to overtake fiat? Today, we shall investigate the matter. Read on to have your question answered.

The Pros and Cons of Cryptocurrency

Let us begin with the upsides of cryptocurrencies. Users of digital currencies are free from intermediaries. Even the processing time for a money transfer is short as it is independent of the value date mechanism that financial institutions like banks impose.

The risk of fraudulency is minimum as blockchain offers an effective defence against it. Do you know how? Once ledger entries are processed, nobody can alter them. It also comes along with a database that keeps records of exchanges made ever since it was opened. The same database is shareable, and members of the blockchain can view it without the interference of an intermediary.

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Transactions under blockchain are unalterable, and the same allows every member of the network to check the chain’s validity. Despite the advantages, it sure has its set of limitations. Hacking and fraudulent activities occur at times.

Ever heard of economic aberrations? It happens when a currency devalues as soon as it leaves its national borders. An ideal example is that of the Nigerian naira. Its value drops by 30% the moment it leaves Nigeria. Fortunately, digital currencies are not subject to such influences due to political and geographical changes!

How Are Crypto Payments Made?

Despite technological advancement, the role and use of digital currencies stay unchanged. If there is anything that improved was speed, security, confidence and traceability.

Another aspect that has worked in favour of all was computerisation. It has caused the scriptural form to develop through dematerialisation. Accounts no longer exist and have been replaced by databases. Check processing is no longer burdensome and expensive.

Payments with crypto are simple. Only the information regarding the transfer of purchasing power circulates. The traceability of funds is also better.

How is Crypto Similar and Dissimilar to Fiat Money?

Despite the vast disparities between fiat and cryptocurrency, there is one point where the two matches each other. Both are devoid of intrinsic value. Their values are determined by the trust placed by users in the State and Central Banks and the blockchain system, respectively.

Speaking of differences, fiat is issued and controlled by third parties like banks, whereas cryptocurrencies are decentralised. The transactions in the latter occur peer-to-peer.

Regarding quantities, fiat can be issued at will but not cryptocurrencies. For instance, there are only 21 million Bitcoins at present. From this statement, one thing is certain – cryptos are deflationary, but fiats are inflationary.

From a security perspective, cryptos fare well than fiat. Theft, robbery, virtual attacks and others make the latter system more vulnerable. Even the speed of transactions is disappointing with fiat currencies. While Bitcoins take at the most 10 minutes to transfer, fiat currencies take 2-3 days.

How Does the Future of Currency Look Like?

Cryptocurrency is already in use. Given its popularity or the gradual understanding that is growing among people, its exchange value is bound to escalate. The future is hard to visualise as any of the following scenarios could arise:

  • Society and the economy could grow so comfortable with digital currencies that these many outgrow the country’s fiat currencies and ultimately replace the latter. It may eventually compel the Government to recognise cryptocurrencies as legal tender.
  • Governments could accept both currencies, and the two may coexist with consumers and businesses using whichever deems fit. It is a scenario of hybridisation between fiat and digital assets.
  • Society may decline the idea of cryptocurrency due to its complexity and refuse to evolve. Fiat currency may continue to exist though chances are highly unlikely as advancements in blockchain are already guiding people towards a system where alteration of financial information is impossible.

No matter what happens, one thing is certain, and that is cryptocurrency can benefit people and their economies. However, what lies unclear is the fate of fiat currency.

So, Which One is Better – Fiat or Crypto?

Each has its set of upsides and downsides. From a stability point of view, fiat is one step ahead of cryptocurrency, but the use of the latter continues to accelerate, despite being in its nascent stage. Moreover, cash transactions have hit rock bottom for some time. Presently, credit and debit cards have replaced them, but the chances of crypto substituting them are promising. Evolution is an integral part of life. Cryptocurrency may be relatively new, but it will soon be adopted worldwide. Let us wait with bated breath and embrace whichever makes it to the top.

However, always bear in mind that cryptocurrency is extremely risky and speculative. Given the uniqueness of everyone’s situation, it is better to consult a qualified professional before making a financial decision. The rest, we leave to you.

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