With the rise of cryptocurrencies as both a store of value and payment method, many might wonder how they compare to traditional fiat currencies. Notably, the former might seem like a massive improvement over the latter, but that isn’t exactly the case. Both have their pros and cons. In this post, we’ll specifically break down the advantages and disadvantages of fiat money.
Cons of Fiat Money
Fiat money takes a long time to transfer, especially depending on what you’re using it for. If you’re trying to transfer money across the globe, for instance, this could take days. It will also cost you extra fees. Converting one fiat to another is quite the pain.
Trying to buy gold online is difficult as well. In doing so, you must verify your identity and go through the cumbersome process of linking a bank account. From there, you’re going to be charged extra fees, among other problems.
Inflation is another problem. Fiat money can be infinitely produced, diluting its value over time. The United States government is a big proponent of this, often printing much more of the dollar during hard economic times. This might be a short-term solution but weakens the dollar in the long run.
Fiat money also forces us to rely on other parties. We must rely on the government to make it, banks to hold it, and vendors to judge its value per product. There’s little to no control from the spender’s perspective. Also, the more one earns, the more they’re generally taxed. This isn’t much of an incentive for many to accumulate funds.
In that same vein, these institutions charge additional fees for random reasons. Some might charge you for holding too low of an amount with them. Others will charge you for withdrawing funds or simply because they want to make money. It’s not great from the citizen’s point of view.
That, and fiat currencies aren’t really backed by anything. Cryptocurrencies and precious metals are backed by something tangible. Fiat currency only works because we believe it works. That could be its downfall in the future, especially as alternative currencies push forward.
It’s easier to get away with crimes using fiat. Tax evasion, illegal payments, theft, and more are untraceable using cash. For law enforcement and governments, this is a significant issue. Fiat currencies are a massive incentive for criminals to keep doing what they do.
Finally, it’s quite easy to produce counterfeit fiat currency. Considering the assets are made simply of paper, technically anyone can print a dollar and spend it. From there, it’s up to the vendor to decipher if a dollar is real or not.
Pros of Fiat Money
While it’s not necessarily great for the long-term prospects of an economy to print more money, it can be helpful. If a country is going through a tough time, the government can somewhat manage how much money is in circulation. This allows them to keep, increase, or diminish fiat value. They can raise or lower interest rates and credit limits, for instance. In the right hands, this control can greatly assist most consumers.
Stability is another key benefit, here. Considering cryptocurrencies, gold, and other assets can fluctuate at random points, fiat is quite reliable. The value of a fiat currency will never rise or drop thousands of dollars in minutes, as Bitcoin may. That, and it’s not possible to “pump and dump” fiat. It’s much more difficult for bad actors to manipulate the cash market as they could crypto or other markets.
Fiat currencies are relatively easy to store and manage. If you have some money, you can keep it in your home or use a bank to store it. While relying on a third-party isn’t always the best idea, it helps those who have no other option.
It’s also relatively easy to invest with fiat currency. Holding a bank account, investors can simply link it to a platform and place money wherever they’d like.
Now that you’re aware of the pros and cons of fiat currency, you can make a more informed decision regarding where to hold your funds. Some are okay with fiat as it is. Others are looking for something more modern, such as cryptocurrencies or other financial avenues. Regardless, just be sure you know what you’re getting into before converting your money to something other than fiat.