The evolution of money from the barter system, Bretton wood system to fiat money has been a great journey. From ancient times in India, precious metals were used as currency. As the technology evolved, the system changed, regulations came in and money was made stronger.
The world is moving towards WEB 3.0, technical advancements, and blockchain technology. It made a few sections of society realize that there is no need for a centralized system that manages everything, as they discriminate against some of the other points. This ideology gave birth to a new ecosystem called a decentralized financial system which runs entirely on code and computers. Cryptocurrency is a part of this system.
Understanding federal currency and cryptocurrency
Cryptocurrency is a digital currency that acts as a medium of exchange. It does not require any middleman such as a bank or a payment processor and it operates on a binary data system. Thousands of various cryptocurrencies are in circulation across the globe and it is now a big instrument for investment. It uses complex code or protocol based on mathematics for protection.
Federal currency is mostly physical currency, but it can be digital too. It requires a bank as an intermediary. The presence of intermediaries and other factors make federal currencies safer. It is produced and monitored by central authorities. This form of currency is more usable for transaction and exchange purposes compared to cryptocurrency.
Difference between Federal Currency and Cryptocurrency
Meaning
A federal currency is a physical currency issued by a central authority. It is generally backed by the governments of respective countries.
Cryptocurrency is a digital currency operated by a decentralized private system. It is secured by cryptography to prevent duplicate transactions. Cryptocurrencies are not issued, they are mined digitally.
Issuing medium
Federal currency is issued and operated by the Central bank or any authorized entity of the origin country. Cryptocurrency is not issued by the government or any regulatory authority. It is operated by a private system independently.
Intermediaries
For the exchange and transfer of federal currency, intermediaries such as banks are required. Even for digital transactions, payment processors and banks are an intermediary. Cryptocurrencies do not require any intermediary for the transfer or validation.
Medium of Exchange
The medium of exchange for federal currency can be physical or digital whereas, for cryptocurrency, the medium of exchange is digital-only.
Supply
Federal currency is unlimited in supply. The reason is that the government does not have any restricted extent to which it can produce money. It prints money based on the requirements and prevailing conditions. No one can exactly tell how much money is in circulation.
The supply of cryptocurrency is limited to an extent. For instance, Bitcoin, the world’s largest cryptocurrency, is limited to 21 million.
Legality
All the countries across the globe have their federal currency. These currencies are operated by a central authority and backed necessarily by the government. Therefore, federal currencies are a legal medium for exchange and transaction.
On the other hand, trading and exchange of cryptocurrencies are banned in some countries. The reason being it can be used to support illegal activities such as terrorism.
Tangibility
Federal currencies are physically exchanged using coins or notes. In contrast, cryptocurrencies do not have any physical form. It is a digital medium of exchange with encrypted codes. It is intangible.
Storage
Federal currencies can be stored in bank accounts. Digital federal currencies can be stored in digital form on payment platforms. Those who have the currency are the owners.
Cryptocurrencies are stored in cryptocurrency wallets that are made up of unique information. This wallet validates the users as owners.
Safety
Transacting in federal currency is safer. The reason is simple, it is backed by a central authority. Comparatively, any fraud can be detected and resolved easily.
Transacting in cryptocurrency is risky. The possibility of anonymous transactions makes it unsafe. Additionally, it is not operated or backed by the government or any such central authority. The problem of data hacking and fraud can occur in crypto transactions. Tracking and catching the fraud is more challenging.
Representation
Federal currencies are represented by coins and notes. Cryptocurrencies are represented by a computer code that can be public or private. These codes are unique as well as complex and prepared based on mathematics and engineering principles.
Volatility
Federal currencies are less volatile as there is a central system controlling the flow of currency in the market. The speculation involved in cryptocurrency makes the currency more volatile as there are no intermediaries or regulatory bodies involved who act as a watchdog on its movement.
Transaction Cost
Transaction cost is higher in the case of federal currency because of the presence of intermediaries. The absence of intermediaries in cryptocurrency reduces the transaction cost significantly.
In short, both federal currencies and cryptocurrencies have some similarities and some differences. While both are used for transaction purposes, they can be divided into smaller units. The major differences between both include issuance, storage, tangibility, and intermediaries.
FAQs
Meaning. A federal currency is a physical currency issued by a central authority. It is generally backed by the governments of respective countries. Cryptocurrency is a digital currency operated by a decentralized private system.
How is cryptocurrency different from government currency? ›
Fiat currencies are legal tender controlled by governments. Cryptocurrencies are digital assets that use blockchain technology. After reading this, you'll understand: Many cryptocurrencies use automated market makers and liquidity pools to determine their value.
What is the main difference between cryptocurrency and other forms of currency? ›
Cryptocurrencies have no legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market. This is in contrast to national currencies, which get part of their value from being legislated as legal tender.
What is the difference between physical currency and cryptocurrency? ›
Physical currencies have many requirements such as the establishment of physical manufacturing facilities. Whereas, in digital currencies, no such expense is involved. Also, digital currencies are immune to soiling or physical defects that are present in physical currency.
What is the main difference between fiat currency and cryptocurrencies quiz? ›
Answer: Cryptocurrencies are decentralised, while fiat money is controlled by a central authority. Question 3: Who validates transactions on the blockchain? Answer: Special users referred to as 'miners' or 'validators'.
What is the difference between federal currency and cryptocurrency? ›
A federal currency is a physical currency issued by a central authority. It is generally backed by the governments of respective countries. Cryptocurrency is a digital currency operated by a decentralized private system. It is secured by cryptography to prevent duplicate transactions.
Can you turn crypto into cash? ›
Yes, you can convert cryptocurrency to cash (like USD or INR) using various methods. Popular options include cryptocurrency exchanges, peer-to-peer marketplaces, and Bitcoin ATMs. Always choose a reputable platform and be aware of potential fees and withdrawal times when converting your crypto holdings to cash.
Why use crypto instead of dollars? ›
Safety and security
They have strong, audited security measures in place. But printed cash can be counterfeited. Cryptocurrencies can be stored two ways: self-custody or third-party custody.
Why use Bitcoin instead of cash? ›
If used correctly, Bitcoin can be used as an anonymous currency free from spying governments. When you use Bitcoin, you don't need to provide your email, name, social security number, or any other identifying information. Bitcoin is just numbers, 1's and 0's, traveling through the internet.
Will central bank digital currency replace cash? ›
While central bank digital currencies (CBDCs) often position themselves as 'digital cash', they lack key benefits of physical currency, meaning they will never be a replacement for it.
Cryptocurrencies exist in digital form as they're created by computers and operate as private pieces of code. The means of exchange are thus purely digital. In contrast, paper money can exist in both digital and physical forms.
What is the difference between foreign exchange and cryptocurrency? ›
Market Size and Liquidity: Forex is more liquid and less volatile than crypto. Regulation: Forex is heavily regulated, while crypto is less so. Trading Hours: Forex markets are open 24/5, while crypto markets are open 24/7. Volatility: Crypto markets are more volatile than forex markets.
Why is money called cash? ›
The English word cash originally meant 'money box', and later came to have a secondary meaning 'money'. This secondary usage became the sole meaning in the 18th century. The word cash comes from the Middle French caisse 'money box', which comes from the Old Italian cassa, and ultimately from the Latin capsa 'box'.
What is the main difference between fiat currency and cryptocurrencies? ›
Fiat money is legal tender whose value is tied to a government-issued currency, like the U.S. dollar, while cryptocurrency is a digital asset that derives its value from its native blockchain.
How is cryptocurrency different from government issued currency? ›
A cryptocurrency is a digital representation of value that is built on a blockchain and utilizes cryptography. Crypto can function as a medium of exchange, a unit of account, and a store of value. Unlike fiat currency, most crypto is entirely decentralized and operates peer-to-peer without any intermediary.
What is the difference between cryptocurrency and traditional currency? ›
Traditional fiat transactions typically involve intermediary banks, financial institutions, and currency conversion processes, which incur various fees that can accumulate at each step. In contrast, cryptocurrencies operate on decentralised networks, enabling peer-to-peer transactions without multiple intermediaries.
How is cryptocurrency different from regular money? ›
Safety and security
They have strong, audited security measures in place. But printed cash can be counterfeited. Cryptocurrencies can be stored two ways: self-custody or third-party custody. If providing your own custody, you are fully responsible for keeping your crypto safe.
What is the difference between cryptocurrency and traditional money? ›
A cryptocurrency is a digital representation of value that is built on a blockchain and utilizes cryptography. Crypto can function as a medium of exchange, a unit of account, and a store of value. Unlike fiat currency, most crypto is entirely decentralized and operates peer-to-peer without any intermediary.
Why do governments not like cryptocurrency? ›
Bitcoin Can Circumvent Government-Imposed Capital Controls
Governments often institute capital controls to prevent currency outflows because exports could debase their currency's value. For some, this is another form of control governments exert on entities within their jurisdictions.
Is crypto a real money? ›
Cryptocurrency, or crypto, is virtual or digital assets purchased with real money ($, £) traded on blockchain technology. It does not have all the values of real or fiat currencies.
