Cryptocurrency and paper money-these are the differences | by Lukas Wiesflecker | The Capital | June 2021
Whether it is the euro, the US dollar or the Swiss franc, all major banknotes have depreciated significantly relative to the top 5 cryptocurrencies in the past 12 months.
But what is the reason for this development? To answer this question, one must first understand how the current banking system works, and what is the difference between paper money and cryptocurrency.
- The most significant difference between cryptocurrency and paper currency is that cryptocurrency can only be provided in digital form, while paper currency exists in physical form.
- Paper currency is centralized, while cryptocurrency is decentralized. Although there is a central agency (central bank) in the paper currency system that prints money, there is no such central agency in cryptocurrency. There is no Bitcoin bank or something like that.
Instead, cryptocurrency is based on blockchain, which is a decentralized database in which all financial transactions that have been conducted are stored.
- Using paper money, the central bank ensures inflation, thereby theoretically increasing money indefinitely and providing liquidity for the economic cycle. For cryptocurrencies, the amount is usually limited. For example, in the case of Bitcoin, the number of digital coins is limited to 21 million Bitcoins. Therefore, cryptocurrency has deflationary characteristics.
- Paper money in the banking system is transferred through account numbers, while digital money relies on addresses and cryptography. This encrypts private data and mathematically verifies the identity.
- Although banks create currency almost out of thin air (to create currency through borrowing), cryptocurrency is generated through calculation (mining) or through pledge (proof of work and proof of equity).
Therefore, cryptocurrency has several advantages. For example, banks will not create currency in the cryptocurrency world and lend it with interest as collateral, but users (miners) will receive funds for processing payment transactions.
- Therefore, users can mine cryptocurrency by themselves and effectively become their own bank.
- Cryptocurrency eliminates middlemen (banks, etc.), allowing direct transfers from one person to another. This makes it possible to transfer funds across national borders at low cost within a few seconds.
- Through cryptography, digital currencies are generally more secure and harder to manipulate than paper currency systems.
- The transparency of the blockchain (transactions are visible to everyone) also makes corruption more difficult, so some countries are now considering the use of blockchain in public services.
However, complete digitization will also lead to the disadvantages of cryptocurrencies.
- If the Internet fails or the user cannot access the global data network, no transactions can be made or forwarded.
- If the cryptocurrency owner loses his private key or accidentally deletes his wallet from the PC, if there is no backup digital wallet or other protection, there is a risk of losing the digital currency.
- Payment error or transfer to the wrong address will result in the loss of digital currency, because the user does not have a central location where he can call for help in the event of an error. Therefore, encrypted users should always check the address carefully when making transfers.
- Cryptocurrency is more suitable for users who understand computers, and its acceptance in traditional transactions is still low.
- It has been shown in the past that cryptocurrencies are also not protected by hacker attacks, so accounts may be stolen, or the system itself may be attacked
Cryptocurrency is still in its infancy and sometimes encounters expansion problems. Nevertheless, the advantages of cryptocurrency outweigh the disadvantages compared to paper money.
the reason: Cryptocurrency allows billions of people without bank accounts to access financial services. Especially in developing countries, nearly 60% of adults are excluded from the banking system because they do not meet the minimum account requirements.
In addition, cryptocurrency helps maintain value and exchange in countries with weak currencies (Venezuela, Zimbabwe, etc.). Cryptocurrency is also becoming more and more popular among businesses and banks. IBM estimates that by the end of 2017, about 15% of banks will use blockchain technology because they make financial transactions more efficient and cheaper.
But for investors, investing in cryptocurrencies may be worthwhile, because although traditional banks hardly offer more interest due to low interest rates, the crypto world sometimes attracts interest rates that are significantly higher than overnight and fixed deposit rates.
In addition, investors can of course also profit from the possible appreciation of cryptocurrencies. However, it should be noted that cryptocurrencies are very unstable and prices may fluctuate significantly.