Cryptocurrencies have completely changed the world of traditional finance to an extent where entire governments are now considering using central bank-issued digital currencies (CBDCs) built pretty much the same way as crypto. The increasing popularity of cryptocurrencies and blockchain technology has made it easier for businesses to transact across borders and at cheaper costs.
While traditional fiat money is designed to be issued by a central bank and requires an intermediary like a bank to transfer, cryptocurrency is decentralized and digital money that can be sent directly over the internet from one person to another without the need for any middleman.
Over a decade since its launch, Bitcoin is still the top coin and a very different investment than traditional financial assets such as stocks. In this article, we will closely examine how crypto differs from traditional finance.
Overview of Traditional Finance
Traditional finance has been around for centuries and kicked off mainly through the exchange of physical currency such as coins or paper bills. To enable efficiency, the banking system was established, thus allowing people to deposit money, withdraw cash, and earn interest on their savings.
Over time credit cards and other electronic payment methods emerged, and trading in financial markets became increasingly electronic.
However, even though traditional finance has been here for a while, it also comes with shortcomings.
One of its biggest shortcomings is the fact that its highly centralized, with banks and financial institutions controlling the lion’s share of the flow of money.
This control gives centralized banks and other major financial institutions the power to manipulate financial markets to their benefit as well as control who has access to finances.
As a result, most people (particularly those in developing countries) have been excluded from the global financial system.
Overview of Cryptocurrency
On the other hand, cryptocurrencies are the complete opposite of traditional finance.
Since the launch of Bitcoin in 2009, the ethos of decentralized finance has grown in popularity exponentially.
Bitcoin emerged as a reaction to the 2008 financial crisis and offered a decentralized alternative to traditional finance.
Unlike traditional finance, cryptocurrency is not centralized and does not require the approval or involvement of any third party.
This means that it can be used without banks or intermediaries such as VISA or PayPal.
Furthermore, cryptocurrencies enable users to transact directly with each other with complete privacy. This means that all transactions are completely anonymous, which helps to keep people’s financial information safe and secure.
Cryptocurrencies also allow for faster payments than traditional methods, as it takes just a few seconds for the transaction to be processed on the blockchain.
Typically, most fiat money transactions take up to three days.
Comparing Crypto and Traditional Finance
Even though most traditional fiat money exists today as digital currencies, they operate completely differently from cryptocurrencies.
Crypto is more like a digital asset that can be exchanged, while traditional financial systems are more like contracts and agreements (IOUs) between two or more parties.
Some of the pros that come with cryptocurrencies include the following:
- Pseudo-anonymity: With cryptocurrencies, users can transact semi-anonymously and securely.
- Decentralization: Crypto is not controlled by any government or financial institution. This makes it a great way to reduce corruption, censorship, and manipulation of the global financial system.
- Low Transaction Costs: Cryptocurrency transactions are much cheaper than traditional methods as there is no need for intermediaries.
- Faster Transaction Times: Crypto transactions are much faster than traditional methods, taking just a few seconds for the transaction to be processed on the blockchain.
Even so, crypto is not perfect. Many scams are taking place in the crypto space, and it can be difficult to regulate due to its decentralized nature.
It is also not accepted by many businesses as a form of payment yet, making it hard for people to use it daily.
Advantages of Traditional Finance
Traditional fiat money has multiple advantages, with ease of access being its biggest strength.
Since it has been here for a while, most businesses are familiar with it and accept it as a form of payment. This makes it easy for people to pay bills or buy goods and services without any difficulties.
It is also backed by governments and financial institutions, which means you can be sure your money won’t disappear overnight.
Finally, banks and other financial institutions provide a secure way to store your money, which makes it reliable in the long run.
How Does Crypto Achieve Decentralization?
Bitcoin and other cryptocurrencies solve the issue of transparency and fraud that has plagued the world of traditional finance by using a technology called the blockchain.
Blockchain is a distributed ledger technology allowing immutable, secure, and transparent record-keeping. Every cryptocurrency transaction is recorded on a public blockchain, meaning that anyone with access to the blockchain can view all transactions.
This makes it impossible for transactions to be manipulated or tampered with since all of the data is encrypted. Furthermore, since the public blockchain is distributed across numerous computers, it also ensures that there is no single point of failure and that the network remains secure even if one computer or node fails to function correctly.
Conclusion: The Needs for Decentralization
To wrap up, it is important to note that cryptocurrencies and fiat money or traditional finance each have their own advantages and disadvantages.
Crypto is great for providing secure, fast, and anonymous transactions. At the same time, traditional fiat money is more accessible to the public since it’s been around longer and is accepted by most businesses as a form of payment.
Despite that, cryptocurrencies are becoming increasingly popular due to their decentralized nature, which eliminates the need for intermediaries and makes them more secure than traditional methods.
Ultimately, it’s up to you to decide which is best suited for your needs. You can set up a balance where you use both interchangeably to get the best of both worlds.