Why Digital Currencies Could Replace Fiat Currencies

As digital currencies continue to grow in popularity, the debate about its potential to replace fiat money becomes even more relevant. The former holds a lot of promise and many advantages, so it could be well on its way to becoming the next ubiquitous method of exchanging value. There are already countries, governments, and major companies poised in anticipation of this change, with many already accepting crypto as payment, so it’s well worth considering digital currencies as a long-term investment.

In this article, we’ll discuss the reasons why digital currencies like Bitcoin could be the currency of the future. You’ll see their advantages, current trends, and what the next years are projected to look like.

Digital VS Fiat Currency: The Main Differences

While digital and fiat money serves the same purpose — as ways to exchange value — there are fundamental differences between them. These distinctions are often the reasons why one is better than the other, depending on the application.

Fiat Currency: Fiat currency is the legal tender created and backed by a government, like the US dollar or Mexican peso. These do not derive their value from physical commodities, but instead from the trust that the public gives to centralized authorities. This means that fiat money has no intrinsic value, but that the value comes from what’s assigned to it. Today, every country in the world runs on fiat currency, with the money issued by their central banks.

Digital Currency: Instead of a national government, digital currency or cryptocurrency is issued by a decentralized network of computers through a blockchain. Its value is controlled by supply and demand instead of a central bank, freeing it from many restrictions that fiat currency has. This gives crypto a huge advantage in many aspects of finance.

The Advantages of Digital Currency

Here are a few reasons why cryptocurrency is becoming a major upheaval in the finance industry.

Increased Security and Anonymity

Thanks to the blockchain technology that powers digital currencies, it’s next to impossible to duplicate a transaction once it’s authorized. The exchange is recorded and stored, which protects against fraud and counterfeiting. However, we want to emphasize that only the transaction history is recorded, and not the parties who made it. There’s no need to register with banks or third-party merchants who could sell and use your data to their ends; anonymity is guaranteed.

Resistant to Inflation

The biggest issue with fiat currency is how it can be literally printed, with more money being created out of thin air, indefinitely. As more money enters circulation, the less powerful the currency becomes, and more of it is needed to purchase products or services. This is called inflation.

Many digital currencies like Bitcoin are immune to this because they have a limited supply and can’t be “printed.” The supply of Bitcoin on the market can only grow when a new block is mined. The maximum supply of Bitcoin is 21 million coins, and all 21 million won’t be on the market until the year 2140 when the last block is mined.

Thanks to this scarcity, Bitcoin could become more valuable over time, leading to more investments and so on. It’s similar to how gold increases its value over time thanks to its finite supply.

Quick and Global Remittance

The biggest appeal of digital currency is how it can be exchanged or used in transactions all over the world without the need for centralized forex exchange. Since it all happens on the internet, the entire process can happen in a matter of seconds. Fiat currency needs at least a few business days for the same transaction, and you’ll need to have a bank account or third-party entity to handle the transaction. Additionally, transferring one currency to another could come with costs. In a world that’s increasingly connected via the internet, fiat money becomes a huge inconvenience.

Minimal Transaction Fees

Processing fiat currency under third parties and intermediary institutions entails many fees. This expense is the gripe of many, especially for simple transactions like fund transfers. Since cryptocurrency is powered by decentralized computer networks, the need for intermediaries is essentially eliminated. This results in very minimal fees for transactions, if any. It’s also easier to monitor the progress of transactions through blockchain instead of blindly trusting a third party to do the job.

Current Trends in Digital Currency

Many private and public entities have already realized the potential of digital currencies thanks to the benefits above. In fact, many countries are starting to adopt cryptocurrency as a legal tender. El Salvador, in particular, was the first to adopt a form of virtual currency as a national currency.

Companies like Tesla and MicroStrategy are also building their crypto portfolios, with many other companies following suit. It’s a definite sign of digital currency’s growth, which is expected to continue over the next few decades. Many coins have had all-time-high prices in recent years, with more and more people becoming interested in them.

Decentralized finance, or DeFi, is also starting to trump traditional transactions, largely because of how it removes intermediaries. There’s also the rise of non-fungible tokens, or NFTs. NFT trading is increasing every year, with the monthly trading volume at $31 billion in the final quarter of 2021 alone.

Of course, most centralized governments don’t want cryptocurrency to replace fiat currency. If and when it does, central banks would lose a vast amount of power they hold over the citizenry. But as crypto becomes more popular, and more companies begin to accept payment in crypto, we could indeed see a slow replacement of fiat currencies.

It may take some time, but one day in the future, all financial transactions could occur across the blockchain, with government initiated monetary inflation a thing of the past. All it will take for this to happen is for the public to demand it.