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The Future of Fiat Money, Digital Dollar Payments, and Cryptocurrencies in a Nutshell

Many governments are thinking of capitalizing on Blockchain technology that runs cryptocurrencies, and thereby investing in their own virtual currencies.

Fiat Money and Cryptocurrency

Table of Contents

Since the introduction of Bitcoin in 2008-09, there’s been huge popularity in cryptocurrencies, and today, the collective net worth of crypto assets is pegged at $1 trillion USD. It includes currencies like BTC, Ethereum, Litecoin, Dogecoin, Cardano, Solana, and more. In the present times, a lot of governments around the world are thinking of capitalizing on the Blockchain technology that runs cryptocurrencies, and thereby investing in their own virtual currencies.

A Trillion Dollar Market Size in the Making

Over the years and in the last decade or so, cryptocurrencies have grown from just being mere digital novelties, to nearly trillion-dollar markets, giving stiff competition to the existing global financial system. Today, Bitcoin (BTC) and other cryptocurrencies are being referred to as legitimate investments and used at par with traditional currencies or fiat money to buy goods & services online. It is mostly used to buy digital real estate, software, drugs, etc. In fact, due to a lack of international regulations, cryptocurrencies are being misused by terrorist organizations, drug peddlers, and some rogue states.

As of today, there are some governments that have legalized the use of cryptocurrencies, whereas some have banned it in every form. The United States of America in particular is considering introducing its home-grown central bank digital currencies to compete with the extensive proliferation and boom in crypto.

What is Cryptocurrency?

It is a virtual currency in the form of coins exchanged on decentralized computer networks between buyers, sellers, and investors. It runs on a Blockchain payment gateway system and requires a digital wallet and a crypto exchange for performing any kind of transaction. Some of the most popular cryptocurrency exchanges, platforms, and crypto payment processors are Coinbase, CoinRemitter, Biance, and so on. Investors in cryptocurrencies send funds between the addresses of digital wallets. Moreover, each and every transaction is recorded in ‘blocks’, thus the name blockchain technology. The transactions are confirmed across the network. There’s adequate privacy in crypto transactions, as blockchain does not record the names or addresses of users, providing a degree of anonymity.

Bitcoin as a Cryptocurrency

If you go by the latest statistics, the total market supply of Bitcoin is estimated at 21 million coins, but not all cryptocurrencies have such limitations. The prices of BTC and other cryptos are based on the overall demand and supply graph. However, the prices of some cryptocurrencies are static, as they’re backed by assets, thus the name ‘stablecoins’. While these coins have an exchange rate of $1 USD per coin, some were debarred from their valuation after a spate of volatility in the year 2022. Today, BTC & ETH, which are the two main cryptocurrencies have skyrocketed in popularity, with a combined valuation pegged at more than a trillion USD.

There’s a ‘heavy’ fluctuation in the price of Bitcoin, thus somewhat restricting its efficacy as a means of transaction. Whereas, some Shopify stores and WooCommerce giants accept Bitcoin payment, and there are a lot of investors that want to hold on to Bitcoin as a speculative asset, rather than using it as a mode of payment for buying digital assets like virtual real estate. Some dynamic investors look into Bitcoin (BTC) as a hedge against an inflationary market, as its supply is fixed, unlike forex and fiat currencies, which are regulated by central banks, and whose supply can increase many folds. In fact, El Salvador is the first country to make BTC a legal tender, wherein citizens can pay taxes and settle bad debts with Bitcoin.

The Role of Decentralized Finance - DeFi

With the advent of cryptocurrency and blockchain technology, it has given rise to a new portfolio called ‘decentralized finance’ or DeFi business. This particular branch of finance strives to offer people, access to a plethora of traditional financial services, viz; borrowing, lending, and online trading, without the intervention of authorized institutions, such as brokerage firms and centralized banks, which mostly charge commission fees, per transaction. As a majority of DeFi Apps are built around the Blockchain technology, it is surging in popularity among crypto investors, who are pouring billions of dollars into it.

Lack of Regulation and Volatility

With the steady increase in cryptocurrency and DeFi-based enterprises, transactions worth billions of dollars are taking place in an unregulated manner, thereby increasing the risks of tax evasion, fraud, malpractices, and cybersecurity. Moreover, if cryptocurrencies become a staple source of global payments, it could drastically hamper and curtail the abilities of central banks, especially those in developing and emerging nations to formulate a monetary policy for the control of funds supply. It is due to the high level of volatility and lack of a robust regulation policy that led to the destruction of several prominent cryptocurrencies, as borrowers were unable to pay back their lenders, which were mostly crypto firms. The forex market is considerably less volatile than crypto.

Forex & Crypto

There’s a high level of fluctuation in the crypto market, which is not the case with forex. Foreign exchange or fiat money is fully regulated by central banks, offering a huge profit potential, provided you’ve invested a bigger sum. Forex trading of fiat currencies like USD, GBP, EUR, CAD, AUD, JPY, etc. is performed by banks, which are the brokers. Crypto trading is performed on two basic platforms, viz; centralized and decentralized exchanges. The most popular forex pairs are USD/GBP, USD/EUR & USD/JPY. Similarly, the central bank digital currencies (CBDCs) introduced by the US Federal government work in a similar fashion to cryptocurrency. A lot of people are investing in them.

Final Thoughts

With the advancement in computer technology and a high-speed internet connection, the accessibility to diverse trading arenas has increased substantially. It is to be understood that due to the immense popularity of cryptocurrency, a lot of forex traders have switched over to crypto trading in the past few years. However, there are still many ‘old school’ investors that prefer trading in foreign exchange and fiat currencies, as that provides better stability and less volatility than cryptocurrency trading. The choice is always yours.