While cryptocurrencies may have embarked on a sustained bear run of late (Bitcoin alone has shelved more than 50% of its value since it hit an all-time high in April), the total market capitalisation value of this market is still $1.33 trillion.
By underlining BTC’s innate volatility, it’s also fair to say that the recent crash has cast doubt over the ability of crypto tokens to ever replace fiat currency in the future.
We’ll explore this further in the post below, while asking whether Bitcoin in particular actually has more in common with gold as an asset?
The Pros and Cons of Crypto and Fiat Currencies
There’s an obvious and unique appeal to Bitcoin and similar crypto assets, as they’re completely decentralised and separated from any central point of control.
Instead, the underlying blockchain provides a transparent and immutable source of records and transactions, creating peace of mind for crypto users while negating the risk of price manipulation.
In contrast, fiat currencies are controlled directly by governments and central banks, whose monetary policy decisions have a direct impact on real-time valuations. Decisions pertaining to interest rates and inflation are particularly influential, particularly in terms of the level of demand from overseas.
Crypto assets also hold more intrinsic value than fiat alternatives, which can be issued at will and valued according to the relevant government. Conversely, there’s a finite supply of crypto assets, which in turn inflates the value of assets in instances where demand increases.
However, fiat currencies remain widely accepted across the globe, while the forex market is also far better regulated and less volatile than the cryptocurrency space.
Can These Entities Co-Exist?
As we can see, there are numerous differences between crypto and fiat currencies, particularly when you consider the finite supply and lack of central control that underpins Bitcoin.
Interestingly, these factors have caused some to suggest that BTC has more in common with gold than fiat currencies, and the similar trajectory of these assets in 2020 appears to bear this out.
This makes it more likely that fiat and cryptocurrencies will coexist in the future, and particularly in the near and medium-term. More specifically, fiat currencies will remain the dominant method of paying for goods and services and a popular derivative asset for speculation, whereas assets like BTC will persist as a secure store of wealth for investors across the globe.
The challenge will come as crypto assets begin to warn mainstream adoption, especially by banks and financial institutes. In this case, fiat and digital currencies will begin to occupy the same spaces more consistently, while the lines will be further blurred if government’s follow China’s example by issuing their own, centrally-controlled digital currency.
Wall Street banks are certainly inching closer towards adopting BTC and its underlying blockchain technology, while the emergence of more sophisticated and scalable third-generation crypto assets may also create alternatives to fiat currency in the future.