Are you becoming more interested in investing and trading? The number of active traders in Australia jumped by 34.8% in 2020 as conditions such as having more free time, market volatility, and low-interest rates prompted more people to enter the market.
The use of forex trading platforms to trade currencies has long been popular, but cryptocurrencies have taken the world by storm in recent years. Some people even believe they will take over from traditional currencies in the future
For those still unsure on the topic, below we define what fiat money and cryptocurrency are and explain the key differences.
What is fiat money?
Fiat money is currency as most people know it. It can come in the form of physical money such as banknotes and coins or be represented electronically. Fiat money is issued by a nation’s government and regulated by an authority such as a central bank.
Well-known fiat currencies include the US dollar, the Pound, and the Euro. Their value is based on supply and demand and is not linked to physical reserves such as gold.
Fiat money tends to be highly stable and controlled, allowing governments to protect economies against recession and inflation. Many fiat currencies have still proven vulnerable to market shifts, however.
What is cryptocurrency?
A cryptocurrency on the other hand is a digital or virtual currency that uses technology for processing and verifying transactions.
They’re not controlled by central authorities such as national banks, but rather are entries in a decentralized database that can’t be changed without certain conditions being met. Popular cryptocurrencies include Bitcoin, Ethereum, and Ripple.
Their key advantages include their instant worldwide availability, fast settlement, lower transaction fees, and enhanced privacy. Drawbacks range from their sheer complexity, which has so far led many countries to ban them, to their often extreme volatility, which understandably deters more cautious investors.
The key differences explained
Both fiat money and cryptocurrency can be used for payments, but there are several factors that set them apart.
- Fiat money is deemed legal tender as it’s controlled by governments, whereas the decentralization of cryptocurrencies means that no major body can control their value.
- Fiat money is tangible, but cryptocurrencies are entirely virtual. The significance of this tangibility for exchange and storage is likely to reduce as we move closer to a cashless society.
- Fiat money is limitless in supply – governments can simply produce more money. Cryptocurrencies are usually capped at a certain volume of virtual coins.
- Fiat money can be stored in various forms including physical money in banks and digital money with electronic payment providers. Cryptocurrencies can only be stored in digital wallets.
If you’re considering trading in either fiat money or cryptocurrency, reading up on their characteristics will provide more confidence in your investments.