Bitcoin and other cryptocurrencies are on the way to become a viable and commonly accepted alternative to traditional fiat money. They could take over as well. How is it possible? Why do people decide to store a substantial part of their savings in cryptocurrencies? Here are some reasons.

USD vs. Bitcoin Comparison

Cryptocurrencies Advantages over fiat money and gold

Cryptocurrencies are on the rise as thousands if not millions of people start using them every week. At the same time, fiat money is digging into an even deeper hole as governments all over the globe print additional dollars, euro, pounds, and yens 24/7 for the second decade in the row. First, they needed more money to save banks after the 2008 crash, now they need to rescue whole economies as businesses suffer from the pandemic and lockdown.

Many people wonder “should I choose cryptocurrency over fiat”. The answer is you shouldn’t go all into either one. Unfortunately, if you are reading this post, this means you probably have close to 100% of your savings and investments in fiat currencies. Time to change it.

USD vs. Bitcoin Comparison

Both cryptocurrencies and fiat money (paper or digital) have the role of enabling payments. They are used to price goods and services, buy and sell them, as well as store wealth. Here’s a short summary of the key similarities and differences.

There are some cryptocurrencies that may do better than BTC in some areas (provide faster and less expensive payments or less price volatility – stablecoins), and some fiat currencies with the lower inflation rate, but the advantages and disadvantages are common.

In the table below we compare how Bitcoin and the US dollar provide the main functions of money, as a means of payment for goods and services, store of value, and unit of account.

Payment for goods and services

Store of value

Unit of account

Cryptocurrencies Advantages over fiat money and gold

• Unlike fiat currency, cryptocurrency supply is limited, which eliminates inflation, and any risk of hyperinflation.
• Cryptocurrencies are accepted globally, but unlike cash, gold, or silver they are easy and safe to carry or transfer anywhere
• The system is transparent.
• Privacy and independence – anyone can send or receive money with cryptocurrencies and no authority can control it
• Transactions are fast and secure.
• The transaction fees are lower than in traditional banks, especially in comparison to international bank transfers;
• You can easily purchase cryptocurrencies anywhere, which is not always true for gold, silver or major fiat currencies.
• The number of places where you can purchase or spend cryptocurrencies directly is growing.

More about Cryptocurrencies and Fiat Money

What Is Fiat Money?

US dollar, British pound, euro, yen, yuan… all these are fiat currencies, that is state-issued currencies used on a territory as a legal tender. This is their only advantage over other assets. The price of fiat money is decided by supply and demand. Once people lose trust in the government and its institutions, their value will evaporate, just like it happened multiple times in history.

There’s no guarantee the fiat money value will be protected other than “inflation targets” by central banks. They are usually around 2% yearly. This means that if you keep $100 it will lose $2 of value over one year. That’s just wishful thinking. In fact, governments solve most of the economic problems by printing money.

Fiat money is not a fair deal

Fiat money is not a fair deal. Governments keep on adding money supply, this makes all the prices go up every year. Printing money for a state to spend is a hidden tax on all savings. This is the secret of the modern economy and how so many countries can afford spendings on the military, the welfare state, infrastructure, and more. This goes even further. Printing additional money is used to pump up stock exchanges despite the recession, or bailing out banks and other corporations, as it happened in 2008-2009.

The printing press speeds up

Some conspiracy theorists claimed that there must be a “secret world’s budget” that allows all the economies to keep on running despite the pandemic lockdowns of 2020-2021. The truth is much simpler. The governments manage to go on and even afford gargantuan stimulus packages despite lower tax income with… printing more money. The system is so big and inert that you don’t see the effect immediately. 

The prices of products and services are quietly going up, savings are being eaten by inflation. It all goes unnoticed as long as people have trust in the dollar, pound, and euro. Once they realize they are just being slowly robbed, they can turn away from fiat, and this would cause hyperinflation when everybody wants to get rid of the money as soon as possible, as it’s losing its value every day. Fiat money then turns into unwanted commodities. A stock of a company going bankrupt or a shitcoin being exposed.

Fiat money is not that old

Bitcoin is 12 years old. It was invented in 2009, just a year after the financial crash, which resulted in adding trillions of dollars to the system. Digital technology it’s quite mature.

Of course, fiat money has a long history, but it’s not as old as you might think. 

Over history money used to be backed by gold, silver, or other valuable commodities. For ages dollars, pounds, marks, lira banknotes represented gold and silver stored in banks. It all ended in 1944 in Bretton Woods, where the world’s superpowers decided that only USD will have a fixed value equal to $35 per troy ounce of gold. 

All other major currencies would calibrate with USD. However, this didn’t last long. The full fiat currency system began only in 1971 when US President Richard Nixon decided to cancel the convertibility of USD to gold. What has happened since then? The price of gold went up from $35 to $1850 today.

What is a cryptocurrency?

Bitcoin, ethereum, tether, cardano, polkadot, ripple, binance coin, litecoin – these are cryptocurrencies. They are peer-to-peer digital money based on blockchain technology, which allows the creation of a decentralized distributed ledger. Cryptocurrencies are stored in wallets. Transactions between them are transparent and anonymous. 

Thanks to blockchain and cryptography the supply of cryptocurrencies is stable. For example, the supply of bitcoin is growing but slower with time, as it is getting harder to mine the next coins. At the moment there are around 18.6 million bitcoins in circulation. The maximum supply is 21 million, and the last bitcoins will be mined around 2029-30.

All the computing power provided by miners and encryption effort of cryptocurrencies designers is put to prevent attacks at the network – make it impossible to change the ledger, add false money or transactions to the system. 

Satoshi Nakamoto, the mysterious individual or a group behind the creation of Bitcoin, intended to develop a currency but a peer-to-peer electronic cash system for transactions without any central oversight. However, with time the need for alternative currencies has taken over, and at the moment bitcoin’s main function is a store of value, while other cryptocurrencies aim to provide transactional functionality.

Risks and Disadvantages of Cryptocurrencies

Countries may ban cryptocurrencies. The true reason would be competition. States want to keep their monopoly on issuing money. Governments, like China, are working on their own cryptocurrencies, such as Digital Yuan. There are two possible official reasons that could be used to :

1. Cryptocurrencies can be used for money laundering, illegal transactions, and tax evasion. 
2. To be effective encryption needs huge computing power and therefore consumes substantial amounts of energy. With climate change as a growing global concern, this argument may become increasingly relevant.

These are the biggest threats to independent cryptocurrencies. Any campaign including one or more of these arguments could possibly shake the price of bitcoin, ethereum, and other altcoins, however, can it be an existential threat to cryptocurrencies?

No. It is impossible to impose a cryptocurrency ban in practice. There are also easier solutions to the problems above. Authorities can control the points of sale and exchange of cryptocurrencies. When tax evaders would like to spend their bitcoins, they can be easily traced. Just like with cash. Cryptography will run on clean energy, and some ecological costs can be justified to run the global monetary system. Minting coins, printing bills is not environmentally neutral, either.

Price volatility. High swings in the price of bitcoin and other cryptocurrencies can be annoying. Especially, when the price goes down. However recently the cryptocurrencies are experiencing a bull market caused by a boom in the adoption of bitcoin and altcoins with the steady growth of supply. If the governments weren’t financing their spendings by printing fiat money would have experienced a steady deflation (appreciation of money value) instead of inflation.

We are experiencing a cryptocurrency revolution. Once they become widespread, the value should be steady. On the other hand, there are so-called stablecoins available. Their price is pegged to leading fiat currencies. Tether and USD Coin are among the most popular. They have all the advantages of other cryptocurrencies, but their price is equal to $1. 

Legality

Fiat currencies are deemed legal tender by governments and regulated by the central bank. Both institutions usually run the monetary policy – controlling the supply aiming at “healthy inflation” targets.

Bitcoin is decentralized and run by a protocol and users, who have market incentives to use their CPUs to secure the network and enable transactions. Most cryptocurrencies are developed by the community (organizations and individuals) and available under an open-source license. Some cryptocurrencies are developed by private companies (Binance Coin) or governments (Digital Yuan). 

Some countries – like Nigeria – have banned cryptocurrencies on concerns that some of them are being used to fuel illegal activities such as terrorism and money laundering.

Supply

This is the most important difference between fiat money and cryptocurrencies. While fiat supply is not limited, and actually it is advisable to have a “healthy inflation” by increasing the amount of the money circulating all the time, cryptocurrencies supply is limited.

Cryptocurrency networks are relatively small and have to be competitive. Nobody would trust and buy a cryptocurrency with an inflation rate built into the protocol. Cryptocurrencies are usually mined as users providing CPU for adding a new block to the blockchain are rewarded with new coins.

Some cryptocurrencies have a hard cap on supply – like Bitcoin, which is 21 million – others have more complex systems like Ethereum. However, there’s no cryptocurrency network that would allow increasing the supply as the fiat systems do.

Storage and security

This is one of the main advantages of cryptocurrencies. They are made for safe storage. Cryptocurrencies are stored in digital wallets. Hot wallets are connected to the internet, so they are available all the time, and can be used for quick payments. Cold wallets are unplugged, so they are much safer and more comfortable. 

You can use mobile or desktop apps wallet apps. You can also use hardware wallets, where you can store your private keys. 

Cryptocurrencies are as portable as any other digital cash. However, unlike money stored in your bank account, the transfers and wallets are usually not insured, so you are responsible for potential theft or damages caused by a mistaken transaction or losing or forgetting the key.

There’s no physical cryptocurrency. So your digital wallet access can be easily backed-up, so you are protected in case of fire or other accidents. 

Conclusion

The global fiat currency system corrupted and overstretched as it is may not collapse any time soon. Notwithstanding, there are some obvious warning signs, and hyperinflation has always come as a surprise in history.

You don’t have (and shouldn’t) to go all-in on Bitcoin, Ethereum, or any other altcoins, but giving it a try sounds like a good idea. Apart from gaining on value, cryptocurrencies are proving they are useful as both cash and store of value. Get ready for the future of money, practice handling your cryptocurrency wallet, digital payments, and investments.