Learn Cryptocurrency
23 Nov 2021

Comparing Crypto Vs Fiat Vs Gold 

Mrudula M

As the world moves towards a virtual reality, our understanding of asset value is shifting into a virtual space as well. Data is the new oil, and cryptocurrency is the new gold. Young investors all across the globe are rushing to invest in cryptocurrency due to its high security, decentralization (direct transactions- no middle man), and reliability. Add to that their increasing market caps, and it becomes clear that cryptocurrency is well on its way to becoming the financial norm in the future.
             
Traditional cash standards like fiat money and gold still remain popular and globally acknowledged. Given how long they’ve been around, their behaviour is familiar, building trust in the users. 

The emergence of cryptocurrency into the scene naturally brings up the Fiat vs Crypto vs Gold debate.

Will cryptocurrency replace the other two to become the norm? Is investing into crypto now the smart thing to do, given you can start off with just ₹100?

This article will help you understand these three elements better in comparison with each other in order to help you make high return investments.

What is Fiat Money?

In simple words, fiat money is everyday currency that we use- the Indian Rupee, the US Dollar, the British Pound, etc are all fiat money. A value is attributed to these currencies by the governments of the respective countries- it has no intrinsic value. Which is to say that money, a piece of paper, has value because the governments say it has value, not because it is naturally valuable. For example, India’s demonetization of 2016. The government declared  ₹500 and ₹1000 notes obsolete overnight by stripping them of their value.

Since they’re not linked to any physical commodities, the central banks that regulate fiat money can limit its supply to protect its worth, or inflate it to stimulate growth.

Fiat money is used as currency for transactions and as store of value, popularly in the form savings and investing in capital assets

How is Gold Different From Fiat Money?

Gold, on the other hand, is regarded as valuable irrespective of the stability of the global economy. Today, it is the most common safe-haven asset, because it retains its value, if not gains it, during economic downturns. 

The effort that goes into mining this precious metal when compared to minting money, in addition to the fact that gold is in limited supply, makes it a reliable asset. In this volatile, fiat-based monetary system, gold can be a wise investment.  

Gold standard money, backed by actual gold, has boomed throughout the years, even during recessions. 

Gold is primarily a commodity stored for value rather than a currency for transactions.

What Makes Cryptocurrency Better?

Fiat money is currency, and gold is a commodity. Cryptocurrencies are an amalgamation of both. They are used for transactions and as investments.

The decentralized blockchains allow direct transactions between two parties without the need of a middle man, such as a bank.

The trust in crypto is based on the underlying blockchain technology. The system behind them is fully transparent and based on maths and consensus of the user. 

As assets, cryptocurrencies are non-dependent on stocks, bonds, and the value of a country’s currency. They’ve boomed in the last few years in terms of market value and reliability, thus building a secure network. Bitcoin, the top ranked digital currency, performed better than many other significant investment assets in the last 10 years, valuing at $49,970 as of August 2021.

Here’s a compartmentalized look into how cryptocurrency fares better than fiat money and gold:

There are 6 key aspects that determine the effectiveness of a currency:

Crypto Gold Fiat
Utility High Low High
Transactability High Low High
Scarcity High Moderate Low
Durability High Moderate  High
Portability High Low Moderate
Divisibility High Moderate

Moderate

Cryptocurrency vs Fiat Money

Both fiat money and crypto can be used for transactions and as store of value. However, being decentralized assets makes cryptocurrency better than fiat money in two ways:

1. As currency: 

Cryptocurrencies are not controlled by banks or governments, thus enabling direct transactions between two parties without any intervention. Unaffected by political disturbances.

2. As store of value:

– Fiat currency’s value heavily depends on the government’s stability and the nation’s economy.
– Cryptocurrencies have intrinsic value beyond the trust of the community, and it boils down to how effective a medium of exchange they are.

In terms of the ROI (return on investment) on Bitcoin and Fiat money, the numbers clearly favour the former. With fixed deposit interest rates at 1.85% to 6.95% per annum in 2021 (source), the returns on fiat money are minuscule.

For example, if you had opened an FD of ₹10,000 in January 2021, with an interest of 1.85%, your maturity amount by the end of August would be ₹10,124. And with the highest interest of 6.96%, the maturity amount would value at ₹10,472. (Source)

However, the same investment of ₹10,000 in Bitcoin in January 2021, would have returned ₹41,595.69 by the end of August, 2021. (Source)

Cryptocurrency vs Gold

Similarities 

For the sake of numbers, let’s narrow the comparison down by taking Bitcoin as the representative example for cryptocurrency. When Bitcoin entered the market, it was called digital gold due to the similarities between the two:

  1. They’re both rare, in limited supply, and are not backed by a central agency, or government.
  2. In terms of trading, tracking, and weighing, gold is spotless. It is nearly impossible to corrupt the metal. Thanks to its decentralized systems, and complicated algorithms, Bitcoin is also difficult to corrupt.
  3. Both gold and cryptocurrencies have no correlation with assets like currencies and stock indices.
  4. Both are extremely scarce. Bitcoin is even scarcer than gold with a fixed supply of 21 million units.

This is where the similarities end. And here’s what gives cryptocurrency a clear win over gold:

Return on Investment

Gold is immune to changes due to stock market corrections, and performs well during this time by remaining static while others decline. Static being the keyword. 

Historically, gold as an investment has proven to be diminishing (inflation-adjusted), never meeting expectations to make profits. Best case scenario- its value remains the same, with slight chances of going up by a little bit. 

For example:
If you had invested Rs.10,000 in gold in January 2021, by the end of August the same year it would have returned  ₹9791, at a loss of 2.09%. (Source)

On the other hand, if you had invested ₹10,000 in Bitcoin in January 2021, by the end of August the same year it would have returned ₹41,595.69. (Source)

In 2017, the price of one Bitcoin surpassed the price of a troy ounce of gold. Bitcoin is currently valued at ₹ 47,87,351.36

While gold is the traditional safe-haven asset to invest in, Bitcoins are quickly becoming popular haven assets.

A Closer Look

This Forbes article explains it best:

Let’s say each year there is 3,300 tons of gold produced– making it worth  $200 billion of new gold to be consumed each year by buyers. Thanks to the global population of 8 billion people, this is an easy feat. This reflects in the price as there is no dip in the price of gold as a never-ending new supply is introduced into the market. The global economy laps it up.

Let’s take a look at Bitcoin. Each year there is $6.5 billion dollars of new supply, at $10,000 a coin, that should be hoovered up by new demand to maintain its prices. This is very little compared to the issuance of new gold. Next year that issuance will inevitably halve. Since both $200 million and $6.5 million is not a major amount to be absorbed by the global market, Bitcoin will go up further and faster than gold in terms of being a safe-haven asset. This means Bitcoin’s price would react like the price of gold if half the mines in the world were closed every four years. On these terms alone, the upside of Bitcoin is insanely high.

Closing Thoughts

Here’s a parting thought: It is true that cryptocurrency hasn’t been around for centuries like fiat money and gold, and hence poses certain risks. But this is the case with all financial assets- a common denominator, if you will. 

In this equation, it is also undeniable that cryptocurrency has outperformed other financial assets in terms of market growth. This makes crypto a promising financial asset, and a future where it becomes the norm is inevitable.


Begin your crypto investment journey now


P.S: KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Mrudula M

Content Writer

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