Moving Foward: An Analysis of Cryptocurrency vs. Fiat Money

At some point in history, we decided to trade linen and cotton sheets for things like food, homes, and jewelry. These pieces of paper are being printed constantly, and are only valuable because an authority says it is. It is backed by nothing but the word of the people who are in charge of creating more. When you put it that way, the US Dollar seems a bit shady, doesn't it?

Alright, let me backtrack a bit, as I'm sure that sort of tone is a little hyperbolic for some people.

Today, I'll be talking about a topic that has had a fair bit of debate; the benefits of cryptocurrency vs. fiat.

For those who don't know, fiat money is the money that is printed by a government or authority, such as the US Dollar, British Pound, or the Euro. Cryptocurrency on the other hand, is digital currency that is intangible, decentralized in nature, and almost always utilizes a blockchain as a public ledger.

So, looking at both of these mediums of exchange, which one is superior? Will cryptocurrency pave the road to a more decentralized future, or will fiat money prevail?

Money Throughout History

While this may come as a surprise to the less historically-inclined, money did not always exist. Long ago, thousands of years before today, our ancestors would simply trade or barter things they had made or found. This first form of economic exchange worked in theory, but it wasn't without fault.

There's a concept known as Coincidence of Wants in a barter-based economy. "Coincidence of Wants" essentially means a scenario in which two people have exactly what the other person wants to facilitate an exchange. For example, if you grow corn, and I make shirts, and you want shirts and I need food, then we can trade without issue. The problem arises when one party produces a good that the other party does not want, thus making trade difficult. While they can try to find someone trading a third good that the other party wants, this can be a time consuming process, and time wasn't exactly in good supply when most, if not all labor was done by hand.

Enter money; a third good that everyone wants.

There are many examples of money in early history; gold and silver coins, pearls, beads, even shells could serve the purpose of currency. So long as it lasted a long time, was in limited supply, and was considered universally valuable, it would do.

This system of hard currency lasted many centuries, and worked well, in theory, but it wasn't scalable (a phrase I'm sure most of us cryptocurrency enthusiasts have heard more than once). While gold coins were valuable, they were heavy and difficult to transport in large amounts. There's also the issue of a limit on the gold supply of any given nation.

We then began to transition to paper money, but it had a catch. Paper money was backed by a commodity good; such as silver, gold, even alcohol, such as in the early american colonies. If you had these bills, you could still use them as money, but if you felt so inclined, you could take them to a bank or capital and exchange them for the amount of the backing commodity they were worth.

This solved the problem of transportation and scalability, and helped enable a larger economy, which was necessary for our rapidly industrializing world. We would use this system for centuries after, until one day, we once again saw faults with our new system.

For an example of how this system can be cheated, look at the Great Depression, and similar economic crises. When people saw that the dollar was collapsing in value, they rushed to withdraw their gold from the banks, when they realized that there simply was no gold left. Somewhere along the line, money was being printed without any gold to back it up, and bankers were lending more money than they had gold to back up.

While using paper money backed by a commodity good solved the issue of transport difficulties, there is still the issue that there is a limited supply of commodity goods. When you have to finance a war, or similar large scale project, and you don't have enough specie (hard currency) to cover your costs, you run into a pretty serious dilemma. Do you print enough money you need to finance these projects, and risk causing your currency to inflate into worthlessness? Take post WWI Germany. In order to pay off the debts the nation was saddled with following the conflict, they printed money on a mass scale, far more than any nation at the time would have specie to back up. As a result, their currency inflated to the point that it was cheaper to wallpaper your house with money than it was to actually buy wallpaper.

This was a serious issue, and obviously required a solution if the global economy was to move forward. In 1971, US President Richard Nixon attempted something pretty radical.

He decoupled the dollar from gold.

This would lead to the system of fiat currency that we have today, and was adopted on a global scale. However, recently people have begun to seriously question the value of fiat money.

Finally, we enter our oh-so-favorite buzzword; cryptocurrency. Following no central authority, almost impossible to tamper with, and provably scarce, it practically solves the problems of both fiat and commodity currency combined.

To avoid being vague; here a list of its advantages over fiat money.

• Cryptocurrency's value is defined by its users instead of the people who create it.

• Cryptocurrency is typically in limited supply designed by the initial creators.

• Being intangible, it is easy to transport, so long as there's an internet connection and both parties have a wallet.

These are all obviously great for any medium of exchange, but it is not without its fair share of roadblocks. For starters, when a new cryptocurrency is created, it is done so without any initial users aside from its programmers. As a result, it's easy for someone on the outside looking in to be confused at the concept, or even consider it a scam.

If you're a medieval merchant who's trading for gold coins and commodities, and someone were to offer you a bunch of slips of paper for your goods, you'd be forgiven for thinking it was a scam too.

Cryptocurrencies are currently extremely volatile, and while this is slowly beginning to even out as the international market adjusts and sees better laws and regulations regarding cryptocurrency and ICOs, having a currency that can skyrocket up and down at the drop of a hat does not make for a good medium of exchange. While many people no doubt have made great wealth from investing in cryptocurrency, I'd find it hard to believe that all the people who bought Bitcoin were intending to spend it on anything other than more of their national currency.

That being said, I'd still argue that cryptocurrency, and subsequently blockchain technology, will become more and more ingrained into our daily lives in the months and years to come. Once the market settles down and cryptocurrencies become more viable as a medium of exchange, they will be easier to accept as people begin to discover its advantages over fiat currency. Stablecoins such as Tether and USDC are helping to bridge the gap between fiat and crypto, allowing potential newcomers to ease into the technology instead of having to metaphorically jump in the deep end.

While we're still some time away from seeing a ₿ or Ξ instead of a $ in a supermarket or convenience store price tag, I'd argue that the cryptocurrency movement is still gaining momentum, and those days may be closer than we think.