The main difference between fiat currency and cryptocurrency is that cryptocurrencies don't require government support, while fiat currencies rely on it. Any effective form of money must act as a medium of exchange, store of value and unit of account. Both fiat money and cryptocurrencies offer this utility, but they are different in several key ways. Fiat money is legal tender whose value is linked to a government-issued currency, such as the US dollar, while cryptocurrency is a digital asset that derives its value from its native blockchain.
The issuance and governance of fiat currency are dictated by central banks, while blockchain protocols, code, and communities govern cryptocurrencies. The distribution of fiat currencies requires intermediaries, while cryptocurrencies rely on distributed, decentralized networks to allow for “trust-free transactions”. Fiat is issued by the government and is considered legal tender for financial transitions. Cryptocurrency is decentralized, so there is no governing body that controls its value.
In addition, it is not a legal practice in all countries either. For Oriol Caudevilla, director of the board of directors of the Global Impact FinTech Forum (GIFT) and financial technology advisor, the rise of DeFi never meant that fiat currencies lost it to cryptocurrencies, since they have different purposes. Let's say you have one million of the imaginary XYZ cryptocurrency out of the billion XYZ that will exist. With the fall in cryptocurrency prices, trust is eroding and the debate between cryptocurrencies and fiat currencies may be taking a new direction.
Meanwhile, speculators and investors have invested money in the cryptocurrency market in the hope that their currencies will maintain their value or, ideally, increase in value significantly. The general public seems to confuse cryptocurrencies with payment systems and has the perception that cryptocurrency investments are extremely risky. It's like comparing apples and oranges, says Sidharth Sogani, CEO of CREBACO Global, a cryptocurrency and blockchain market research firm. While fiat currency remains the dominant medium of exchange, cryptocurrencies are gaining ground as more and more people begin to realize the value of digital assets.
The opinions and views expressed in any Cryptopedia article are those of the authors only and do not reflect the opinions of Gemini or its management. Market volatility has also led some investors to believe that digital currencies are not a good store of value, although many investors have faith that cryptocurrencies will grow. A stablecoin is a cryptocurrency that is linked (“linked” in cryptographic terminology) to the value of a real-world asset. While cryptocurrencies often don't have a fiscal policy, it's important to remember that their monetary policies are subject to the protocol's own governance and consensus mechanisms, rather than to a single central authority.
There will only be a limited number of “coins” of each cryptocurrency on the market (be it Bitcoin, Ethereum, or any other currency), meaning that their value will increase as demand for that cryptocurrency increases. However, transactions using cryptocurrencies are made through the blockchain without the need for a centralized intermediary, instantly providing more freedom to users of the system.