Cryptocurrency vs. Fiat Money: All you need to know
Crypto coins, crypto tokens, digital currencies, cryptocurrencies, and fiat currencies. The financial world is full of fancy terms for everything. And it can all get confusing at times. Even though cryptocurrencies have seen a huge growth in the past year alone, many people still wonder what the point of cryptocurrencies is and how they differ from our traditional fiat and digital currencies.
As technical as it may sound, the world of cryptocurrencies is not that difficult to understand. You need a bit of effort, but everything soon beautifully falls into place. One common term that you will often hear in your cryptocurrency reading is crypto tokens or simply tokens.
This might have left you wondering what tokens are and what their function is in the realm of cryptocurrency. In this article, we will dive into what crypto tokens are. We will then use that knowledge to enlighten you about the differences between digital coins and fiat currency.
Let’s start from the top!
In This Blog
What is Crypto Token?
The term token technically just means crypto-asset or cryptocurrency. Some people even refer to Bitcoin as a crypto token. This is accurate because any crypto asset can be described as a token.
More recently, though, this word has taken on multiple meanings.
- A token can mean any cryptocurrency besides Bitcoin and Ethereum. These are also known as altcoins. This is because Bitcoin and Ethereum are the two biggest crypto coins (or cryptocurrencies). So, these two often have their specific place in the world of crypto.
- The other meaning of token is much more specific. The token is also used to describe crypto assets that function on top of another cryptocurrency’s blockchain. For example, Bitcoin has its dedicated blockchain. However, decentralized finance (Defi) tokens, such as Chainlink, run on top of an existing blockchain. For instance, many of them use Ethereum’s blockchain.
Remember that you can also hold or trade your tokens just like you would with any cryptocurrency. Other examples of tokens include governance tokens, non-fungible tokens (NFTs), and security tokens.
What is the Difference Between a Crypto Coin and a Crypto Token?
A lot of people use the terms cryptocurrencies and crypto tokens interchangeably. But there are a few differences between the two.
- Cryptocurrencies are the native asset of a certain blockchain protocol. Meanwhile, tokens are created by platforms, and they build on top of those blockchains.
- Tokens are also used to keep the cryptocurrency’s network secure.
- It is cheaper to create a token than a coin because a token lives in an existing blockchain.
- When they migrate to their blockchain, tokens can be transformed into coins. Successful cases of token migration to coins include Binance Coin (BNB) and Zilliqa (ZIL), both of which were originally tokens on the Ethereum blockchain.
- Crypto coins allow us to make payments. Crypto tokens, though, are useful for a lot more than just making payments.
Example of tokens
There are several different classifications of tokens including:
- Security Tokens – These types of tokens are digital assets that represent securities, such as a company’s shares or bonds.
- NFTs –These are tokens that exist on the Ethereum blockchain. Users can mint them for almost anything, including collectibles, moments, artwork, and much more.
- Asset-backed Tokens – These tokens represent real-world assets, such as a piece of real estate.
Further reading: Cryptocurrency for Beginners: Key Concepts You Need to Know
What is the Difference Between Fiat Currency, Digital Currency, and Crypto Tokens/Cryptocurrencies?
The world around us is constantly changing. Whereas decades ago, the only mode of payment was fiat currency, we now have digital currencies and cryptocurrencies, too.
As we become more and more digital, it is important to know the difference between these different variations of money.
Here are a few key differences between the primary modes of financial exchange:
| Cryptocurrency | Fiat Currency | Digital Currency |
|---|---|---|
|
The virtual currency uses cryptography to allow secure transactions. |
Regulated by the government and holds no intrinsic value. |
Embrace both cryptocurrencies and the electronic form of fiat currency. |
|
A decentralized network that is controlled by the people who participate in the network, allowing full real-time access and transparency to the users. of a central authority like banks. |
Issued by a central bank. |
Issued by the central bank unless it’s cryptocurrency. |
|
No third parties/intermediaries are required. |
Third parties/ Intermediaries are required. |
Intermediaries are required, depending on the type of currency. |
|
Limited supply. |
Unlimited supply. |
Unlimited supply in terms of fiat money. |
|
Stored in a personal digital wallet. |
Stored in a person’s bank account. |
Can be stored both in an online bank account and the blockchain, depending on the type of digital currency. |
|
Exchanged digitally with no physical aspect. |
Exchanged physically. |
Can be exchanged both physically and digitally. |
Cryptocurrencies vs Digital Currencies vs Fiat Currencies: Pros and Cons
Issuing Authority and Regulations
The biggest difference between cryptocurrency, other forms of digital currencies, and fiat currency is the issuing authority.
Fiat currency is issued by the government. No physical commodity (like gold or silver) determines its value. It has no intrinsic value except that the government backs it. That means that both the government and banks can manipulate the price of fiat currencies as they please. Fiat currencies can be stored and used as digital currencies. In that form, digital currencies can also be manipulated by the government and banks.
Conversely, there is no central authority that backs cryptocurrency – a form of digital currency. Cryptocurrencies work on a decentralized medium of exchange. They exist on a computerized database that no one can manipulate and that can be stored in a blockchain.
Legality
As mentioned above, governments issue fiat currencies. Because the government and banks regulate fiat currency in its physical and digital form, they have full control over it. They oversee its supply and issue policies that affect its value. This means that one central authority controls the price of these currencies.
No one controls digital coins. There is no central authoritative figure, like the government, that can influence a cryptocurrency’s price. It is a global form of digital currency that the public controls.
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Tangibility
Fiat currency is tangible. It is real and physical as it exists in the form of coins or cash. Cryptocurrencies are intangible because they are electronic and exist online. It is not possible to “feel” a digital coin in your hand in real life.
Digital currencies, on the other hand, are both tangible and non-tangible; however, the price is controlled by a central authority.
Cryptocurrencies are much more secure due to the very fact that they are not physical. They are stored online in the blockchain, keeping them safe from intruders.
Medium of Exchange
You can exchange fiat money through both physical and digital modes of exchange. Electronic payment systems allow people to transfer money online. Additionally, you can carry out transactions with fiat money, physically exchanging it with someone else.
Conversely, you can only find cryptocurrencies digitally. You can only transfer cryptocurrency funds digitally or electronically.
Supply
As we move toward a much more modern world, transactions are becoming automated. We are relying less and less on traditional physical forms of money. Instead, we are choosing to use digital forms of payments and transfers as they give us more benefits, such as little to no transaction fees and faster global money transfers. They also provide exponentially secure transactions, thanks to blockchain technology, which is extremely difficult to hack and interfere in.
Conclusion
As a beginner, you can feel a little lost when it comes to digital currencies, cryptocurrencies, and fiat money. While all of these currencies have many similarities, some fundamental differences between them are important to understand. Hopefully, after reading this article, you can now understand what crypto tokens are and how the world of digital currencies differs from that of physical money.
My goal is to make everyone aware of the advantages and disadvantages of all forms of financial mediums. Whether it is the forex exchange, cryptocurrencies, fiat currencies, or simply learning how to save better, I guide all.
Further reading: What is Bitcoin and Why is it so Popular?
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