Cryptocurrencies are digital assets developed to work like money, powered by blockchain technology, and can never be available in physical form. Fiat is the money that is available in physical form. These types of money have come up as innovative improvements from the past modes of exchange. It all started with batter trade to coins to paper money, and the digital age came along with other forms like credit cards, mobile money, and now cryptocurrency. But how do these assets work?
What Is Money?
This question seems all too common, but it isn’t. Money is an asset that has the power to facilitate the exchange of value. For any society’s financial system to work, everyone must agree that money has a certain value that will be used to judge the worth of other things.
Money can exist in different ways in the present. It can be digital or physical. Starting with physical money, it exists in either paper or coin forms. These kinds of money are known as Fiat money. Fiat is issued by the Central Bank of a ruling government, and the Central Bank has complete control over how the money is printed and circulated in the country in question. That means the government is in charge of distributing and managing its fiat currency.
Fiat currency can also take other forms, such as digital currency. In its digital form, it can be transferred electronically through either wire transfers, mobile money, or bank card processing systems.
When the internet was coming of age in the 1990s, several cryptographers began visualizing a world where money was under the control of people rather than Central Banks and governments. They did projects that never came to fruition but served as benchmarks and inspiration to other innovators like Satoshi Nakamoto.
As the early cryptographers had predicted the failure of the fiat-led economic systems, it came to pass in 2007. A global economic recession struck, leading to a huge loss of jobs and a devaluing of fiat. Almost every country is suffering from record-high inflation rates. This recession was a bit hard even on the stock market. Satoshi Nakamoto began working on Bitcoin at the time and debuted it in 2009.
Since the currency’s debut, other developers have followed in his footsteps to build crypto projects. And now the question lies in whether crypto will fully overrule fiat or if they will co-exist. Below is more about how the two types of currencies function and compare.
How Does Fiat Money Work?
Fiat money has been around for quite some time now. People earn fiat money through business deals or wages. People work for money in these economic models. That means you must give people a service or product to earn fiat money. If you do not have any tangible service or product to offer, then you will not be getting any fiat as compensation.
Some examples of how people work for money are: earning salaries, making business sales, earning wages, earning bonuses, and trading offers. All of them involve either a product or a service. Many experts have used this type of fiat money to oppose cryptocurrencies. For instance, Bill Gates and Warren Buffet do not believe in Bitcoin because it does not involve any product or service.
According to them, the economic nature of Bitcoin (BTC) is unorthodox as it does not align with the known traditional markets. However, they forget that in cryptocurrency, money works for people instead of people working for it. Here is more elaboration on how cryptocurrencies work.
How Does Crypto Work?
Cryptocurrencies are powered by blockchain technology. Some have their own blockchains, while others are hosted as smart contracts on native blockchains of other coins. Smart contracts are software that is pre-coded and designed to work in specific ways that do not require human input once they are online.
They do not require human interaction once activated on a blockchain. However, they must be designed to conform to the rules and requirements of the blockchains in use. For instance, if a smart contract runs on the Ethereum network, it must conform to ERC20 or other specified standards. Also, if it is meant to run on the Binance Smart Chain network, it must conform to BEP20 standards.
Also, blockchains are of two types. Public blockchains like the one that powers Bitcoin allow the public to track all the transactions that it records. There are also private blockchains like the one in use at JP Morgan Chase to facilitate confidential transactions within the company. Private blockchains don’t let anyone look at their records of transactions because they need permission to access some information about how they work.
Now, the question is, how do cryptos work? Many people get into the crypto space after learning that they could get rich within a short period of time. While this thought is true, it is also not true. To make good profits in the crypto space, one must start learning about crypto from the basics to the advanced levels.
There are several ways of earning in crypto, and 90% of them involve letting money work for you. This method of earning is what creates wealth in the quickest ways. However, it needs someone to be actively researching to become very knowledgeable. Some of the ways to earn with crypto include:
- Day trading
- Yield farming
- Compound farming
- Liquidity mining, among other things
Let’s discuss these first. We start with hodling as it is the most common and easiest. Holding involves:
- Researching different coins.
- Earmarking the best ones.
- Buying and holding them safely in crypto wallets until they increase their value with time.
This method is the simplest in terms of technicality, but it is also the hardest as it comes with emotions. Cryptos could be dumped during dips, major FUDs, or bear markets. Such events usually discourage those who buy the peaks and force some of them out of the markets. Through hodling, your money works for you in the way that cryptos gain value as time passes by. Whether you add to your stash or not, the coins’ value will increase over the years that you hold them as new people enter the markets.
The other method is day trading. This is the most technical one, as an investor must learn how to do a market analysis to determine whether assets will dump or increase in value. However, it works best through compounding. If an investor is sure of making 50% in profits every day and keeps compounding the money that they use to enter market positions, they could make very significant returns in the long run.
Staking, compound farming, liquidity mining, and yield farming are other earning methods in the crypto space. They are common in the DeFi sector, but other crypto projects have also adopted them. They are a means of earning passively from cryptocurrencies. These passive earning methods give APYs in multiples of what the best high-yield savings bank accounts give to their users.
Just by mentioning passive earning, one can see that they do not need to do anything once they have committed their funds to the protocols with these functionalities. That is a perfect example of money working for you in crypto. It is also a better way to build wealth than in fiat economies, where you have to work under a schedule to earn a certain amount.
Do Cryptos Need Fiat for Smooth Running?
Cryptos and fiat are very close. The question is whether they can co-exist. It’s true; crypto and fiat have shown that they can co-exist. Also, do cryptos need fiat to survive?
No, they do not; cryptocurrencies were made to be a solution to the limitations of fiat money. They are there to reduce human monitoring in the financial space, thus ensuring that transactions are more bias-proof. It also protects its users from bad financial policies because it is decentralised and can only be changed through a consensus mechanism.
As an illustration, if you look at the Bitcoin network, you will see that it can run with or without fiat. The reason is that its network does not in any way rely on fiat to operate smoothly. That means the core processes of the network are not tied to fiat money in any way, be it mining of the coins, verification and completion of transactions, or any other processes.
That shows that although cryptocurrencies and fiat are creating some harmonic dynamics where they are used as alternatives, they are meant to run individually. Now that things are digital, many wonder whether crypto will fully replace fiat in the coming months. I would say, like Vitalik Buterin, that cryptos will not fully “take over the world” but will be used as alternatives to fiat.
Currently, every crypto coin is tagged with a certain value of fiat currency, allowing users to track its market history. This dynamic is used to depict how the value of crypto space varies with time. Therefore, that dynamic supports the claim that crypto might not replace fiat fully in the next few decades, but they will find a way to co-exist.
The only way that crypto might change the financial landscape completely is not by replacing fiat but by assimilating it via the introduction of CBDCs. That way, the crypto space will be free to continue comparing cryptos with state-issued digital currencies (CBDCs) but with the freedom to continue investing in assets of their choice.
Investing in crypto assets is one of the wisest ways to predict the future at the moment. Although it is full of risks, there is enough evidence that cryptos will survive and acquire greater use cases in the future. They were introduced in the early 2010s and have survived for over a decade, making people wealthy.
Apart from just making people wealthy, they have also received the regulatory nod from governments worldwide. Even harsh critics like China, the UK, and the US have given cryptos a fighting chance. While one could argue that China banned all cryptos from use, it introduced a digital Yuan, showing that it believes in the advantages that digital currencies will bring.
Large institutions have also invested in and adopted cryptocurrencies. This signals that it is on the right track, as such investors do not gamble on where to put their money. They choose the most viable options because the majority are public and do not want to waste other people’s money.
These signals show that crypto has a future and is already past the hype stage. However, it is best to be cautious since it is still young. So, you should not expect all current projects to succeed and prosper in the future. So, it’s important to learn how to DYOR and only invest what you can afford to lose in the crypto space.