Why Digital Money Needs Fiat Currency

As opposed to fiat currencies, which are backed by real, physical gold or cash, cryptocurrencies are not backed by any physical asset. These new forms of currency make it possible to easily transfers funds between users and also, eliminates the need for an intermediary, such as a bank or Paypal. Cryptocurrencies operate by using a decentralized system that spreads itself out across a network of its users. Therefore, the only way that the system can collapse is if all the computers that are part of the network were to go offline at the same time. Even if fiat currencies are being phased out, it is important to remember that they have been an important part of the way we have managed out economic activity over the past several centuries. And, as experts like Tim Sawson agree, cryptocurrency will always need traditional money for reasons of stability and liquidity.

A Volatile and Unstable System

Cryptocurrencies were first born when Bitcoin was created in 2009. Since then, cryptocurrencies have continued to emerge and one by one, there are attracting an ever-increasing number of traders. Bitcoin has been such a success that its total market cap exploded from $40 billion to a staggering $144 billion when it reached a unit price of $20,000 near the end of 2017. By using cryptocurrencies, transactions between two people are significantly improved in terms of speed and transaction costs. They are also protected by a complex encryption protocol, which makes them unfalsifiable, at least in theory. However, digital currencies almost seem to be defined by their volatility. There are often staggering highs and groundbreaking lows, and this is exactly why many people are still reluctant to buy into this new form of trading. One of the biggest risks involved with virtual money is the very real threat of piracy. Even though these systems are highly secure, there have been a few recent examples of exchanges that have been forced to declare bankruptcy due to fraudulent activity. This was exactly the case for Youbit, a South Korean exchange website which was hacked twice in recent history.

Long Live Fiat Currency

For the last few years, banks, financial institutions and governments around the world have watched in awe as cryptocurrencies have shown exponential growth. With the arrival of this newer form of currency, our old banking system starts to seem more restrictive and outdated. This, then pushes many people towards the more practical and free alternative of digital currency. However, money cannot be completely digitized… At least, not yet.

Fiat Currency Remains the Basis of Earnings

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Digital money will remain dependent on fiat currency, at least for the coming years. As proof of this, every cryptocurrency in circulation today has prices quoted in either Euro, USD, Yen and so on. Although these virtual currencies can generate significant revenue, they are still always calculated in terms of national currency. And, most of the revenue is based directly on the conversion rates of these currencies. For now, it is certain that the traditional world of finance will continue to grow without the help of digital money. On the other hand, cryptocurrencies remain entirely dependent on the stability of the existing national economies.