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What Is The Difference Between Bitcoin And Fiat Currencies?

Victor AmadalaBy 5 Mins Read
What Is The Difference Between Bitcoin And Fiat Currencies

Key Takeaways:

  • Traits Of Money
  • What Is Fiat Currency?
  • What Are Cryptocurrencies?
  • What Are The Main Differences Between Bitcoin And Fiat Currencies?

As we all are aware, the relationship between Bitcoin and fiat currencies is a rather complex one. Cryptocurrencies such as Bitcoin seek to undermine the traditional method of using money. 

While trust vested in fiat currencies is ensured through the money supply controlled by a centralized authority, such as the government or central bank, the trust vested in Bitcoin and other cryptocurrencies is based on its underlying blockchain architecture. 

In this article, we will be discussing how Bitcoin is different from traditional fiat currencies. But before we continue down the line, we need to understand the concept of money and its traits.

Traits Of Money

Throughout human history, money has taken various forms. Starting from the barter system of exchanging items based on their need and value, then moving on to precious metals like gold and silver, bank notes, paper bills, digital cash, and finally cryptocurrencies. 

Traits Of Money

But how is a paper bill, precious metal, or Bitcoin denoted its value? For this purpose, there are certain traits that money should have and they are the following:

  • Divisible – Money should be turned into smaller pieces for paying a specific amount or micro-payments.
  • Non-consumable – Money cannot be used for purposes other than the exchange of value.
  • Portable – Money is supposed to be carried around easily. 
  • Durable – The value of money does not depreciate over time.
  • Secure – Money cannot be counterfeited.
  • Transferable –  Money should be easily transferable to the other person.
  • Scarce – Money should have a limited supply to pertain value.
  • Fungible – Every piece of money should hold the same value as its equivalent.
  • Recognizable – Money should recognized and accepted as a means of transaction.

What Is Fiat Currency?

While gold and silver are recognized as commodity money due to the value of their underlying worth, fiat currencies have no intrinsic value. Fiat money is a government-issued currency that is not backed by a commodity and its value is solely based on the government declaring it as legal tender. 

Fiat money gives central banks, which issue them, greater control over the economy because these entities also control the money supply. 

However, this level of centralized control means fiat money is subject to inflation as more money can be injected into the economy whenever required. 

What Are Cryptocurrencies?

Cryptocurrencies like Bitcoin are digital tokens that allow people to make peer-to-peer (P2P) payments over a highly secure, cryptographic, and distributed network known as the blockchain. 

Unlike fiat money, Bitcoin has no legislated or intrinsic value, as they are simply worth what people are willing to pay. Cryptocurrencies allow direct exchange of value between individuals without the intervention of intermediaries such as banks. 

While fiat currencies are subject to inflation, Bitcoin has a limited supply of 21 million tokens, making it even scarcer than gold. 

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What Are The Main Differences Between Bitcoin And Fiat Currencies?

  • While cash is issued, backed, and maintained by the government, Bitcoin is handled by a decentralized network where the transactions cannot be changed, manipulated, or deleted
  • Fiat currencies can be counterfeited and the only way to store them securely is by depositing the money in a bank or other financial institution. When it comes to Bitcoin, you can either self-custody them in a crypto wallet, in which case you will be fully responsible, or trust a third party with your tokens. 
  • For example, US dollar deposits of up to $250,000 are insured by the government. However, when it comes to Bitcoin, there is no organization to protect against your losses. There is no way to recover lost crypto. 
  • A major part of the fiat currency’s value is created from debt. If no loans are taken out by consumers, then there wouldn’t be any cash in circulation. On the other hand, Bitcoin doesn’t rely on a system of debt as its value boils down to how effective it is as a medium of exchange and the trust of its community. 
  • There are clear and well-established rules and regulations surrounding fiat currencies. Whereas, the regulations for Bitcoin and cryptocurrencies are yet to be concrete. Crypto regulations also vary based on your location.
  • To transfer cash to a person in another country, you will need to exchange it for their local fiat currency, which can affect its value and the recipient will need a bank account or government ID to receive the payment. Meanwhile, Bitcoin can be received by anyone, anywhere, and at any time without the need for a bank account or ID. 

Bottom Line

Bitcoin has surely revolutionized the monetary system but cash remains king as the global economy continues to be run under the traditional financial system controlled by the government and central banks. 

Although cryptocurrencies can be used to purchase items, they are not considered legal tender but rather a store of value or an investment in most countries. While Bitcoin has its perks over debt-based fiat currencies, without adequate rules and regulations, its usage as money remains a hotly debated topic. 

Most importantly, Bitcoin and cash have intrinsically different properties but are not substitutes for each other. 

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Award-winning business journalist with 500+ published stories. Business Writer for The Star newspaper, covering governance, economics, and more. Diverse contributions to prestigious media outlets in Kenya and abroad. Committed to developmental journalism and transforming socio-economic fabric. Thomson Reuters New Age Media Fellow. Diploma in Journalism from Kenya Institute of Mass Communication.

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