Cryptocurrency and fiat currency are used as a medium of exchange and has value as long as the people attribute some value to it. Gold, or a piece of land you own or Bitcoins, all have value because the demand and supply factors determine the price. And the explosive increase in the value of cryptocurrencies can be attributed to the mismatch in the supply and demand for these alternate coins. The main counter-argument put forth by some of the financial experts against these alternate coins is the scarcity in the availability of these coins would lead to an uncontrolled inflation. It would be surprising to know that there are 21 million Bitcoins, one of the variants of cryptocurrency, in circulation in the coin market.
Let me ask you if there is any difference between normal currency and cryptocurrency?
- The cryptocurrency doesn’t have a physical form and exists only on computers. They use blockchain technology to create tokens that complete multiple transactions which in turn facilitate the people to hold these digital currencies. These tokens divide these alternate currencies into several parts that can be traded separately. Whereas, the normal currency has a physical existence that can be exchanged for purchasing assets in return. We can hold the fiat coins physically, whereas the digital coins can be stored only in cryptocurrency wallet.
- Normal coins are backed by the respective governments and is accepted as the legal tender for buying and selling of goods and assets. These cryptocurrencies are not backed by any government and stringent legislation have been imposed by almost all the governments to check the rampant growth of these alternate coins.
- Since the physical currency is controlled by a government, it can be used to pay taxes. Whereas, these digital coins can’t be used to pay taxes. There is no centralized authority to control digital currencies. They use a blockchain technology to control these virtual coins. The transactions are entered in the public ledger that is unalterable in nature, generally.
- The demand and supply of normal currency are controlled by the government. In the case of cryptocurrency, the demand, and supply, in general, are overseen by a basic computer algorithm. If the supply of bitcoins becomes scarce, there is a precipitous rise in the prices of e-coins.
- Fiat currencies can be stored at home in a normal wallet. The virtual coins can only be stored in a cryptocurrency wallet in your computer. This digital wallet is in the form of keys that helps you to secure, hold and transfer money from your account to your peer account.
In short, just like fairies exists only in books, these cryptocurrencies exist only in computers. Its value wholly depends upon the demand and supply factors. The value continuously fluctuates and hence it is called as a bubble. It bursts when there is a sudden and a phenomenal crash in the coin market. There has been a steep tamps down in the price of many cryptocurrencies including Bitcoins because of different laws passed by governments to regulate them.But traditional currency exists physically and has legal backing because they are regulated by the government and are considered as legal tender in all countries.