Crypto vs. fiat: What’s the difference?

Before cryptocurrencies existed, most people – aside from precious metals investors – rarely questioned what money actually is.

But once you dive into the crypto rabbit hole, you’ll quickly find that one of the most popular conversations is the “crypto versus fiat” debate. It touches on everything from global money supply and central banks to converting crypto to fiat currencies – and, of course, the infamous “money printer go brrr” meme.

Beyond the jokes, understanding the difference between crypto and fiat – and the blockchain technology behind digital assets – is essential for anyone who wants to better understand how financial systems work. Both serve as the foundation for transactions, but each has its own unique traits.

In this guide, we’ll explain the similarities and differences between crypto and fiat currency and why many believe digital assets have sparked a financial revolution.

What’s fiat currency?

From 1879 to 1971, the United States operated on the gold standard, which pegged the dollar to the price of gold. After 1971, many countries moved away from the gold standard and adopted fiat-based currency systems. This shift marked a fundamental change in how those nations valued and managed money.

Fiat currencies are forms of legal tender issued and controlled by governments, in contrast to decentralized alternatives like cryptocurrencies. Unlike gold-backed money, fiat isn’t tied to any physical asset or commodity. Under the gold standard, the dollar’s value depended on gold. In a fiat system, value depends on government credibility, economic conditions, and the supply of money in circulation.

Since fiat money isn’t backed by anything tangible, governments can increase the money supply at will – usually through central bank policies rather than literally printing paper bills. But that flexibility comes at a cost: Every new dollar created reduces the purchasing power of those already in circulation.

Central banks, such as the Federal Reserve in the U.S., are responsible for managing fiat currency supplies through a process called open-market operations – a stark contrast to how decentralized blockchain networks function.

To inject fiat currency into the money supply, the Fed purchases Treasury bonds or other assets from commercial banks and pays by crediting the banks’ reserve accounts. These reserves, which banks must hold, support lending activity. When the Fed sells treasuries back to the banks, it pulls cash from their accounts and reduces the overall money supply. In this way, central banks control the flow of money in and out of the economy.

Characteristics of fiat currency

Fiat currencies share four primary traits:

• Durability: To function as a medium of exchange, fiat currency must be able to withstand wear and tear. Modern bills and coins are durable enough to be passed from person to person many times without falling apart.
• Divisibility: Fiat currencies must be divisible to function as a unit of account, supporting transactions of varying sizes
• Uniformity: Every currency note or coin of the same denomination must be the same size and shape to ensure consistent value.
• Portability: For daily use, fiat currencies need to be easy to carry. Paper bills and coins fit neatly in wallets – unlike, say, a gold bar.

What’s cryptocurrency?

The digital age has transformed nearly every aspect of society, including how we think about money. While most fiat currency is digital, it still follows the same underlying mechanisms as physical cash.

In contrast, cryptocurrencies are fully digital assets that use blockchain technology to process and secure transactions. Unlike fiat currency, cryptocurrency can be programmed to serve specific uses. Most digital assets also have fixed parameters, such as a hard cap on the total supply.

For example, Bitcoin (BTC) has a maximum supply of 21 million coins. No bank or government can change that, which is one of its most compelling features. 

While there are various ways to determine a cryptocurrency’s value, most rely on market demand. In other words, a digital asset is worth what someone is willing to pay for it on a cryptocurrency exchange or peer-to-peer (P2P) platform, depending in part on market liquidity.

Because cryptocurrency can be volatile, stablecoins have gained popularity as a more reliable way to store value. Stablecoins track the price of other assets – such as the U.S. dollar for coins like Tether (USDT) and USDC (USDC) or gold for coins like Tether Gold (XAUt) and Pax Gold (PAXG). 

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Fiat vs. crypto: Key differences

At a basic level, both fiat money and crypto assets serve as mediums of exchange. You can buy crypto with fiat and vice versa, but the comparison goes much deeper. Here are five key differences between the two: 

Control

Governments issue and control fiat currencies, managing factors like supply through central banks. Cryptocurrencies, on the other hand, are decentralized digital assets with no single authority controlling their supply or value.

Transaction speed

Fiat transactions rely on traditional banking infrastructure, which includes multiple intermediaries. This often makes them slow and costly, sometimes taking several days to process.

On the other hand, cryptocurrency transactions run on decentralized networks that can finalize transfers in seconds – securely and without intermediaries.

Supply

Governments and central banks can expand the fiat money supply at will. Each newly created dollar, euro, yen, or yuan dilutes the purchasing power of existing currency by adding liquidity to the system.

Meanwhile, most cryptocurrencies have a fixed supply. This helps protect against supply-driven inflation, though crypto prices remain highly volatile due to other market factors, including liquidity constraints on smaller tokens.

Inflation risk 

Despite the measures in place to mitigate price swings for fiat currencies, inflation still occurs. The risk becomes pressing when governments issue more fiat money without a corresponding increase in goods and services. In extreme cases, printing too much fiat can lead to hyperinflation. 

Many view crypto assets with fixed supplies as a hedge against inflation since scarcity can drive up value when demand grows. Still, this idea remains debated, with mixed results across different economies, regulatory environments, and levels of market liquidity.

Security

Fiat currencies face a broader range of security threats because they exist in both physical and digital forms. Physical theft – though less common today – still happens, from bank robberies to cash heists. Counterfeiting also remains a major concern. Digitally, banks and payment processors must defend their systems against hackers, fraud, and other cyber threats.

Conversely, cryptocurrencies exist only digitally. Their networks use advanced cryptography and blockchain infrastructure to prevent counterfeiting and secure transactions, which are permanently recorded on the blockchain ledger. Tokens are stored in cryptocurrency wallets protected by private keys.

That said, crypto assets aren’t immune to risk. Phishing scams, exchange hacks, and user error are just a few ways to lose digital assets.

Pros and cons of fiat currency

Like any financial system, fiat currency has its strengths and weaknesses. Here’s a brief overview: 

Pros 

• Built on secure and transparent blockchain networks that record every transaction immutably
• Gives central banks to manage and influence the economy
• Minimizes production costs for issuance
• Enables governments to adapt to economic conditions with greater flexibility

Cons

• Doesn’t guarantee complete economic stability
• Can contribute to speculative bubbles
• Exposers users to the risk of inflation

Pros and cons of cryptocurrency

Many see crypto as the next evolution of global finance, but digital assets also come with trade-offs to consider:

Pros

• Eliminates central points of vulnerability
• Simplifies fund transfers between individuals
• Operates without the need for traditional financial intermediaries

Cons

• Transactions maintain a level of anonymity
• Lacks clear legal regulation in many regions
• Some networks increasingly shifting toward centralization
• Limited liquidity – especially during volatile market conditions

How businesses can manage crypto-to-fiat transactions efficiently

As blockchain adoption grows, more businesses are exploring the benefits of digital assets – from faster payments to global reach. But many still have questions about how to integrate crypto into their daily operations, including concerns about converting crypto to fiat. 

Here are four ways businesses can manage crypto-to-fiat transactions more efficiently: 

• Implement an automated accounting system: Use crypto-integrated accounting tools to track conversions, reconcile balances, and streamline financial reporting. 
• Work with crypto-friendly banks and exchanges: Work with crypto-friendly banks and cryptocurrency exchanges that are familiar with the technical and legal nuances of crypto-to-fiat transactions.
• Adopt a risk management strategy: Develop policies to address cryptocurrency price volatility, custody solutions, and potential fraud or security risks.
• Ensure compliance with local regulations: Stay informed on evolving cryptocurrency laws and tax requirements to avoid penalties.

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Whether you’re trading crypto assets or accepting them as a form of payment, you’ll eventually need to convert them into fiat currencies to deposit them into a bank account. Fortunately, CoinTracker makes that process easier by offering up-to-date information on all crypto tax situations, including comprehensive guides on crypto arbitrage, crypto staking rewards, and more.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.