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 in with other forms like credit cards, mobile money, and now cryptocurrency. But how do these assets work?
What Is Money?
This question seems too common, but it isn’t. Money is an asset determined to have the power to facilitate the exchange of value. For money to power the financial sector of any civilization, it has to be accepted through a consensus that it has a certain value upon which other assets will be gauged.
Money can exist in different ways in the present. It can be digital or physical. Starting with the physical money, it exists in either paper or coin forms. These kinds of money are known as Fiat money. Fiat is issued by a central bank of a ruling government, and the central bank has complete control over how the money is printed and circulated in the country. That means the government is in charge of distributing and managing its fiat currency.
Fiat currency can also exist in other forms like the digital form. In the 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 which never came to effect 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 devaluing of fiat. Almost every country was suffering record-high inflation rates. This recession 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 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. In these economic models, people work for money. 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 people working for money are salaries, business sales, wages, bonuses, and trading offers. All of them involve either a product or a service. Many specialists have used this nature of fiat exchange to challenge 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 fiat currencies. However, they forget that in cryptocurrency, money work for people instead of people working for money. Here is more elaboration on how cryptocurrencies work.
How Does Crypto Work?
Cryptocurrencies are powered by blockchain technology. Some have their blockchains, while others are hosted as smart contracts on native blockchains of other coins. Smart contracts are digital softwares that are pre-coded and designed to work in specific ways.
They do not require human interaction once activated on a blockchain. However, they must be designed to conform to the rules/ 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 Bitcoin allow the public to track all the transactions that pass on it. There is also a private blockchain like one in use at JP Morgan Chase to transact between private investors in the company. Private blockchains do not allow everyone to view their transaction records as they require authorization to access certain information regarding them.
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. 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 basic to the advanced levels.
There are several ways of earning in cryptos, 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 how to earn with crypto include:
- Day trading
- Yield farming
- Compound farming
- Liquidity mining
- And many more
Let’s discuss these first. We start with hodling as it is the most common and easiest. Holding involves:
- Researching for 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 is also hard in terms of emotions. Cryptos could dump 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. Here your money works for you in the way that cryptos gain value as time passes by. Whether you buy new 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 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 make significant returns.
Staking, compound farming, liquidity mining, and yield farming are other cryptos’ earning methods. They are common in the DeFi sector, but other crypto projects have also adopted them. They are means of earning passively from cryptocurrencies. These passive earning methods give APYs 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 capabilities. That is a perfect example of money working for you in crypto. It is also a better way to build wealth than 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 safeguards its users from bad financial policies as its working can only be changed through a consensus mechanism due to being decentralized.
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 dynamic 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 to a certain value of the fiat currency, allowing users to track its market history. This dynamic is used to depict how the value of crypto space variates with time. Therefore, it might make sense to say 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 received a 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 digital currencies will bring.
The crypto space has also received investments and adoptions from large institutions. This sign that it is on the right track as such investors do not gamble where to put their money. They select the most viable options as most of them 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. Therefore, learning how to DYOR and investing only what you can afford to lose in the crypto space is advisable.