What are the characteristics of fiat currencies, i.e., classical currencies? What are cryptocurrencies, such as Bitcoin (BTC)? And what are the e-currencies that governments put into circulation?
Cryptocurrencies are gaining ground in the global financial industry; they are becoming more widespread as a payment option and investors have become increasingly interested in cryptocurrencies as part of their overall investment fund portfolio.
A growing number of countries are working to adopt and regulate cryptocurrencies and issue their own electronic currencies. Many people agree that cryptocurrencies will soon surpass the use of fiat money and soon we will all have our own wallets.
Until the 1930s, the issue of money was backed by 100% gold for countries. This meant that a country could issue as many banknotes as it had gold reserves. In 1933, the US government stopped the conversion of currency into gold, which was later followed by many countries. Currently, there is no country, that still applies the “gold standard”, i.e. fiat money is not linked to underlying assets and has no intrinsic value.
Governments control how much money is printed and put into circulation. The supply of fiat money is potentially unlimited as governments can decide how much money to print. Paper money, such as the US dollar, the euro, and the forint, is also fiat money. The value of paper money depends partly on the supply and demand relationship and partly on people’s faith in their government. Politically highly unstable countries often experience massive inflation or hyperinflation, i.e., currency depreciation.
Cryptocurrencies, such as Bitcoin, unlike fiat money, are not issued by a central authority, are not controlled by a government or institution, and therefore represent a unique financial system because of their decentralised structure. As with fiat money, the value of cryptocurrencies depends on people’s trust, as they are not linked to underlying assets and have no intrinsic value. However, trust should be directed towards the blockchain technology and the proof-of-work mechanism that can be verified by all, rather than towards a central government.
Small and large borderless transactions can be carried out quickly, securely, and easily. The decentralised and open-source nature of the cryptocurrencies makes it a very secure system, as no single node (member) of the network can make a decision.
All transactions require the approval and consensus of the entire network. The more people contribute to the network, the more secure the system becomes. In addition, for example, another feature of Bitcoin that makes it valuable and protects it from inflation is its absolute scarcity, guaranteed by the limit of 21 million minable coins.
Electronic currencies are digital currencies issued by central banks in response to the growing digitalisation and proliferation of cryptocurrencies over which they have no control. The supply of e-currencies is potentially unlimited and they have all the characteristics of fiat money, except that e-currencies are intangible and therefore allow faster transfers.
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