Although most of the world still prefers fiat currency over all over forms of money, cryptocurrency and other types of virtual currencies are definitely starting to bring some real competition to the table. Governments have always liked the idea of controlling the money supply, but these new forms of money are trying to take that kind of power out of the hands of centralized institutions. Let’s take a look at the advantages and disadvantages of the three most popular forms of money right now.
Fiat currency is the government-backed money that gets its value from the fact that people need to use it if they want to pay their taxes. In other words, men with guns will come to your house and take you away if you don’t use this type of money at some point during the year. While many mainstream economists feel like we’re currently living under the best monetary system ever devised, the reality is that this current model is only held up by the barrel of a gun. A monopoly on anything in the marketplace means that consumers are left with less options, so the government-backed monopoly on money and interest rates should be viewed with contempt. If fiat currency was really the best form of money available to the world right now, then it probably wouldn’t need to be protected with monopolistic rights.
Most of the developed world enjoys relatively stable fiat currencies, but inflation can become a real issue when a government is under duress. While Americans may be fine with a dollar that declines in value by a few percentage points each year, the people of Venezuela don’t feel that great about the 50% of inflation for the Venezuelan bolivar in 2013. In addition to possible inflation that hurts savers, fiat currency also faces the problem of fairly distributing new money after it has been created.
Cryptocurrency takes care of some of the issues related to fiat currency by putting the power of money back into private hands. In fact, cryptocurrency offers the most decentralized version of money creation and distribution in human history. Anyone with the right hardware can mine cryptocurrencies, although some currencies are becoming more difficult to mine than others. Transparency would have to be the main selling point of this form of money. The blockchain allows everyone to see the rundown of the entire currency on a distributed ledger system, and there is no central authority controlling the newly created currency. Everyone can see exactly how the currency works by taking a look at the open source code.
For the most part, virtual currencies are really just digital versions of the fiat currencies that many people already use today. In fact, most of the dollars, euros, and forms of money in the world are really nothing more than ones and zeros. When you’re using online banking or PayPal, you’re using virtual currencies.
In addition to the various forms of virtual currency that most people already use, there have also been virtual currencies backed by some kind of real commodity. When you send dollars to PayPal, you’re basically trusting PayPal to actually keep those dollars for you on their ledger. On the other hand, currencies such as e-gold and Liberty Reserve actually used gold as money instead of fiat. The problem that these kinds of alternative currencies faced was that they were easy targets for government shutdowns.
The true breakthrough that came along with Bitcoin as a new form of cryptocurrency was that it’s censorship resistant. Governments around the world can shutdown virtual currencies when they’re hosted on centralized servers, but they can’t stop people from using a distributed currency that has no centralized source of power or control.