Cryptocurrency vs. traditional money: Key differences

While any currency is intended to provide a way to store and transfer value, the primary difference between fiat money and cryptocurrency is the issuing party and its control over the asset. Cryptocurrencies contrast in many ways with the fiat currencies issued by governments around the world.

Fiat currencies are typically issued by a nation's central bank as legal tender, and their value is assured by the authority of that government. Therefore, governments can affect the value of these currencies with legislation and policy, such as issuing new money and adjusting interest rates.

In creating Bitcoin, the intention was to provide an alternative to the traditional financial system. Cryptocurrencies are typically components of decentralized networks. As programmable assets, they are not subject to the decisions of a central governing body. Instead, cryptocurrencies have inherent characteristics that are controlled with computer code, which can generally only be changed with democratized governance and community development. Like equities or commodities, their value is largely driven by market supply and demand factors.

Powered by distributed ledger technology like the blockchain, cryptocurrencies use different technology to bypass traditional intermediaries and efficiently facilitate transactions between parties. In allowing users more direct control over their funds, value can be retained, and transactions can often occur more quickly.

Crypto is renowned for its transparency, decentralization, and programmability. Unlike traditional cash, cryptocurrency can be programmable. Its underlying code can help establish rules like a fixed maximum supply, specific rates of inflation or deflation, or even be used to power smart contracts.

However, some of the features of cryptocurrencies also have their limitations. For example, crypto's natural transparency makes transactions pseudonymous rather than completely anonymous. Furthermore, because cryptocurrencies operate outside the traditional financial system, they generally cannot be used for many of the ways fiat currency is currently used, such as paying for taxes or taking out a traditional mortgage.

One of the simplest ways to understand the digital asset landscape is to divide digital currencies into three main categories: coins, tokens, and central bank digital currencies.

While cryptocurrencies offer new technological possibilities, they also come with unique risks that differ from traditional currencies.

Volatility is a primary factor. Crypto prices can experience extreme fluctuations in short periods, leading to substantial gains or losses. This volatility can make crypto a risky holding, especially for those seeking stability.

Another consideration is limited recourse. Unlike bank deposits, which are often protected by government insurance, crypto assets are not typically insured. If an exchange fails or a user's wallet is compromised, recovering the funds can be difficult or impossible.

Finally, security risks are inherent to holding digital assets. Cryptocurrency wallets and platforms can be vulnerable to hacking and theft. Protecting private keys and choosing secure, reputable platforms is essential for anyone participating in the ecosystem.

Disclosures:

Content provided for educational purposes only. Not investment advice or a recommendation. Trading and owning digital assets involves significant risk, including the risk of substantial loss. Cryptocurrency services are offered through an account with Robinhood Crypto, LLC (NMLS ID 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency held through Robinhood Crypto is not FDIC insured or SIPC protected.