The world is beginning to question the country’s reliance on fiat currencies. For many, this is because of uncertainty about the future, and others are hesitant to invest in traditional currencies because of their volatility. This has led to an increasing interest in Bitcoin, a decentralized cryptocurrency that people can exchange for goods and services without using banks or any other financial institution.
The term fiat currency has been used in economics to refer to any form of money that is not backed by a physical commodity. This type of currency is often printed, which leads to inflation. On the other hand, bitcoin wallet can be thought of as a digital form of traditional fiat currencies. However, most governments don’t regulate it, and there is no central banker for this cryptocurrency that controls its supply.
For decades, the fiat currency system has been in place, yet it is still not immune to corruption and manipulation. Governmental debasement may be the norm, but with its inception in 2008, Bitcoin has surpassed the potential of state-controlled currencies. The limited circulation of bitcoins prevents the money supply from diluting by newer units, while democratic verification ensures that each coin has a verifiable history to avoid fraud.
Similarities and differences between fiat currencies and Bitcoin
Fiat currencies are money backed by governments. They are created by printing physical bills and coins or similar ones; they can be made digitally electronically. This process not only establishes the currency but also increases its value.
Similarly, Bitcoin is an electronic form of currency with no intrinsic value. Bitcoins are mined through computing power in a process called “mining.” Mining Bitcoins requires more computing power than fiat currencies require to be created.
Why should one choose to use bitcoin over fiat currency?
The U.S. Dollar, Euro, British Pound, and other fiat currencies are based on physical commodities such as gold, silver, oil, etc. This means that these currencies’ purchasing power can vary greatly depending on supply and demand, inflation levels in goods or services, or even geopolitical events. On the other hand, Bitcoin is a cryptocurrency that has no physical backing at all, and it has a fixed supply of 21 million (that will ever exist). Therefore, unlike fiat currencies, whose purchasing power fluctuates due to changing price of goods, Bitcoin’s purchasing power remains the same regardless of whether you buy 1 BTC now or 10 years later.
Compared to fiat currency, Bitcoin has many advantages:
Bitcoin offers many advantages over fiat currencies, namely the lack of transaction fees. Bitcoin transactions are also irreversible, whereas banks can reverse many credit card transactions. The easy-to-use wallet system also makes bitcoin an attractive option for people who don’t want to go through the process of opening a traditional bank account. With cryptocurrency, there is no need to have a centralized third-party authority to issue and monitor currency, as with conventional fiat currencies. This means that with Bitcoin, there is no longer the need to rely on banks to keep records of transactions.
Critical disadvantages of using bitcoin as payment include the lack of regulatory oversight and volatile exchange rates.
With the growing number of people adopting it as a viable form of currency, there is an increasing debate on whether or not it can replace fiat currencies. However, Bitcoin has disadvantages when compared to other forms of currency.
Some of the disadvantages are as follow:
- Transaction Fees: As mentioned earlier, the transaction fee is one of the significant disadvantages of using bitcoin as a medium of exchange. Transactions involving Bitcoin involve a certain amount of computational work which needs to be done by miners before the transaction gets confirmed. Due to this reason, the time taken to complete a transaction increases substantially if the user is sending large amounts of money. Moreover, all users are paying these transaction fees irrespective of their use of Bitcoin.
- Consumes a lot of power to mine Bitcoins:The Bitcoin system works using ‘miners’ spread across the globe with high-powered computers. They consume a lot of electricity. The miners use special software and hardware to verify bitcoin transfers, creating a growing blockchain repository of records. These are used to validate new transactions as they occur.
Conclusion: Which would you pick, bitcoin or fiat currency?
Fiat currency is when a government has declared legal tender, but a physical commodity does not back it. Bitcoin (BTC), on the other hand, is a digital currency that people can use for payments without having an intermediary. At the moment, the supply of both currencies is limited and finite. However, in the case of fiat currency, central banks can increase or decrease their supply, whereas, in the case of Bitcoin, all BTCs have been mined into existence.