Fiat (Traditional) Money vs. Cryptocurrency: Major Differences

Basic explanation of fiat money and cryptocurrency and their core differences, advantages and disadvantages of both types of assets

We continue the series of basic articles within the crypto industry. The previous article was dedicated to Bitcoin and its history, and in this one will provide the comparison between fiat money and cryptocurrency.

Before Bitcoin, people only used money backed by governments and central banks. We also call it fiat money. Cryptocurrencies, such as Bitcoin, do not fall under any authority. They are decentralized and community-driven.

Dollars, euros, pounds, roubles, and all other national currencies are fiat money. Fiat money is all the cash and digital money in bank accounts. We use fiat money every day to pay for goods and services. However, Bitcoin and other cryptocurrencies offer alternative money that has a number of important differences.

Centralized vs. decentralized

Fiat currencies are centralized. Only governments and central banks can print new money and the supply of this money is virtually limitless. This causes inflation. Goods become more expensive because money slowly loses its value. In Bitcoin, the community issues new money (coins) by way of mining. The amount of coins to ever exist has a limit or a cap. Bitcoin, for example, is capped at 21 million coins. This is why inflation in cryptocurrencies is a non-issue, and the value of a bitcoin is only expected to grow.

Opaque vs. pseudonymous

To offer their services, banks and credit companies usually need to verify their clients’ identities to make sure that they are law-abiding citizens. This process is called the KYC procedure (Know Your Customer). All this information allows governments and banks to withhold money, freeze accounts, and reject or revert transactions. Cryptocurrencies, on the other hand, do not need any identity verification from users. Bitcoin is a pseudonymous network; people use addresses that do not carry any personal data.

SWIFT vs. blockchain

Today most banks are connected to a network called the Society for Worldwide Interbank Financial Telecommunications, or SWIFT for short. This system allows banks from all over the world to transfer money between one another. It was created in 1973 and some people think that it is rather outdated. Money transfers via SWIFT can take up to five business days and have relatively high fees. Open-ledger technology, used in cryptocurrencies, offers a new way for banks to communicate with one another and to make transactions faster and more efficient.

Double-spending problem

Before cryptocurrencies, digital money had one big issue — the double-spend attack. This means that a fraudster could spend some money, copy it, and spend it again, and there was practically no fully reliable way of knowing that. Bitcoin solved this problem using digital signatures, timestamps, and an open distributed ledger.

Scalability problem

Though cryptocurrencies have many advantages over traditional digital payment systems, they are not without their flaws. Due to its core design principles, Bitcoin, as well as a number of other cryptocurrencies, has certain scalability issues.

Bitcoin is supposed to be run by a community of users. Bitcoin wants everyone to be able to fully participate in the network. This puts certain restrictions in terms of the size of its blockchain and, consequently, the transaction speed. Bitcoin, at the moment, can process at most 7 transactions per second (tps), while the speed of traditional fiat-based systems like Visa and PayPal averages at 1700 and 193 tps respectively.

Blockchains and open ledgers seem to have found answers to the problems centralized digital systems have been struggling with for a while. However, cryptocurrencies have a set of inherent drawbacks, which are now being addressed with varying degrees of success.

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How a Large Cryptocurrency Mining Operation Is Handling the Current Market

Cryptocurrency miners of all sizes have been suffering from the bear market that has heavily depressed prices, causing some to abandon the field as their proceeds were no longer covering expenses. However, for others this period has formed a time to grow while their competitors are struggling. To find out how one operation is handling the situation, news.Bitcoin.com talked to the CEO of Bitfarms about a big step his company recently took. Also Read: Bitmain Releases Miner 3x More Powerful Than Its Predecessor Bitfarms Secures $20 Million in Loan Financing Bitfarms Ltd. (TASE: BLLCF) notified investors earlier this month that it has secured $20 million in strategic debt financing to fund the crypto mining company’s ongoing operational expansion. The capital is being provided by New York-based Dominion Capital and will be made available in four $5 million tranches tied to various milestones such as infrastructure building and hardware purchases. The loan will bear a 10 percent interest rate and Dominion will receive approximately 6.7 million equity purchase warrants that can be exercised to acquire Bitfarms’ common shares. Bitfarms operates four mining farms in Québec, Canada with about 220 Ph/s of hash-power, all using green and renewable hydroelectricity. Wes Fulford, CEO of the company, explained to news.Bitcoin.com that Bitfarms has already begun deploying the proceeds of the debt financing deal. The plan is to construct a new center in the municipality of Sherbrooke, Québec and purchase new generation, higher efficiency ASICs as “current hardware pricing presents a compelling opportunity to invest in our operational build-out.” Crypto Winter Brings Challenges But Also Opportunities Besides the obvious negative effects of a sustained bear market, the situation also offers opportunities for big miners. These include the aforementioned cheaper hardware prices as well as killing off weaker competitors who depend on more costly electricity, and also deterring new miners from entering the business, thus clearing the field for those that survive this period by hunkering down. “It has been a very challenging environment for many cryptocurrency miners to maintain profitability,” explained the Bitfarms CEO. “At current network difficulty and BTC pricing, and assuming the average miner allocates 10% of power to cooling, a 13.5 TH/s S9 Antminer (arguably the most prevalent SHA-256 ASIC miner in use) is currently losing money at power costs above US$0.068 per kWhr. This break-even analysis doesn’t include operational overhead. Despite falling BTC prices, in 2018 we witnessed a period of exponential network hash rate growth as miners purchased earlier in the year were brought online.” “Many miners paid exorbitant pricing for hardware in late 2017 and during the first half of last year. Much of this hardware landed in expensive hosting facilities under contracts that are no longer economic,” Fulford told news.Bitcoin.com. “With the decrease in BTC pricing and increase in mining difficulty, these participants have failed to recover their original hardware costs which will certainly deter further investment. As in any nascent industry, markets will experience volatility and things will take time to mature. Going forward, external investment capital will be reserved for the best projects led by experienced operators.” The head of the mining company also sees some positive signs in the market. “In recent months, we are pleased to see a more normalized and somewhat predictable correlation between price and difficulty. With attractive current hardware pricing, specifically price/TH metrics, we have a unique investment opportunity and plan to aggressively pursue our operational expansion,” he said. “We believe the industry is shifting from hobbyist ‘garage’ miners to large industrial operators,” added the Bitfarms CEO. “The pricing and difficulty correlation looks to be stabilizing at these levels. We anticipate further growth in hash rates throughout 2019, however at a much more subdued pace to that witnessed last year. In a stable BTC environment, network growth will be heavily influenced by the undercapitalization of major hardware manufactures (i.e. smaller production runs), marginal hardware efficiency gains and a more measured pace of capital investment.” Do you think crypto winter is good for ecosystem development and company consolidation? Share your thoughts in the comments section below. Images courtesy of Shutterstock. Verify and track bitcoin cash transactions on our BCH Block Explorer, the best of its kind anywhere in the world. Also, keep up with your holdings, BCH and other coins, on our market charts at Satoshi’s Pulse, another original and free service from Bitcoin.com. The post How a Large Cryptocurrency Mining Operation Is Handling the Current Market appeared first on Bitcoin News.
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