What are the differences between fiat currency and stablecoin? There are several different financial instruments that you can invest in and fiat currencies and stablecoins are two popular options.
However, if you want the fiat currencies and stablecoins to provide high returns on your investment, you should know the difference between them as well as their features and functionalities.
The financial market is considered to be a chaotic world where you need to make your investments very cautiously. Investing in stablecoins or fiat currencies will offer some sort of stability to your financial health.
However, for that, you will first need to know which of the two currencies is the most suitable for your savings and investments, both in the short term and long term.
This article entails all the primary differences between these two asset classes so that you select the one that will serve your purpose and your needs well.
And, when you know the differences between them you will know how exactly you can leverage the particular currency you have chosen. Check out Differences Between Fiat Money and Cryptocurrency.
Just make sure that you do not skip the ‘Which is better’ section of this article if you want to make a more educated and informed investment decision.
9 Differences Between Fiat Currency and Stablecoin
Just like any other type of investment, while investing in fiat currencies and stablecoins you should also keep in mind and consider their characteristic risks.
However, these risks can be somewhat minimized and appropriate actions can be taken accordingly if, and only if, you know the major and basic differences between them.
Therefore, without any further ado, here they are.
1. Issuance and Support
The fiat currencies are usually issued by the government of the nation and backed by it and as long as the country is in existence, the currency of it will have value.
If it ceases to exist, as it happened to the Union of Soviet Socialist Republics or the USSR a couple of decades ago, the fiat currency will be nothing more than a piece of paper because there will be no government to support it.
On the other hand, the stablecoins are typically issued by the crypto companies. These crypto companies usually have to put an equal amount of fiat money into the bank accounts in order to issue the pegged stablecoins especially.
Typically, the stablecoins are considered to be much safer to invest as compared to some of the major cryptocurrencies because these are backed by more conventional fiscal investment tools.
Usually, an equal amount of the coins are held in fiat currencies such as USD into bank accounts. In addition to that, these coins can be pegged with precious metals, industrial metals, and foreign exchange-traded commodities as well.
Also, a few specific stablecoins are backed by other crypto coins as collateral. These are called the collateralized stable coins and the non-collateralized stablecoins usually use an approach that is governed by an algorithm that helps in controlling the supply of those particular stablecoins.
On the other hand, usually, fiat currencies are not backed by any asset as it is in the case of the stablecoins.
3. Control and Regulation
The value of the currency entirely depends on the authorities of the country as well as the financial policies and regulations of the central banks.
It is the central banks that decide on the amount of the currency or the number of notes and coins that will be in circulation in the market.
According to the requirement and the specific situations, the central banks can either print more notes to meet with the rising demand or withdraw a specific amount to reduce the supply of it.
In contrast, the stablecoins are usually issued and controlled by the crypto companies that are not regulated by any external authorities. These companies either issue or burn the coins in order to regulate their supply and retain their value.
One significant difference between stablecoins and fiat currencies is in their acceptance. Typically, the stablecoins are not accepted by all countries and merchants.
This is because it all depends on the diverse policies and regulations of the nations. Few countries like China have banned using crypto coins altogether but a few promote the use of them, with or without some restrictions of course, as you will find in the United States of America.
In these countries, the regulators prefer the stablecoins over the more volatile crypto assets such as BTC.
On the other hand, fiat currencies are accepted universally all over the world. However, the type of fiat currency may differ but to use it you can convert them according to the currency rules and regulations of the country.
5. Inflation Aspect
When it comes to inflation, the fiat currencies are more vulnerable to it than the stablecoins. The fiat currencies are therefore subject to losing their value pretty quickly.
In the case of inflation, the currency units lose their purchasing power and the value keeps on declining steeply. Inflation usually is the result of printing banknotes one too many by the government which is done typically with an intention to deal with and do away with the general increase in the price level of them.
If this inflation happens much too fast and is out of control from the hands of the governments, then the fiat currency will lose its value in the foreign currency market as well.
If the worst happens, the government will then have to substitute the current currency that is experiencing inflation with some other alternative asset.
Stablecoins, on the other hand, are not subject to such inflation and changes in prices. No matter whichever method is applied, the value of the stablecoins remains stable according to the level of fiat values pegged against them.
Inflation cannot change that. However, the stablecoins that are pegged to the value of US Dollars may be influenced by the greenback inflation levels sometimes but the price of these coins however stays the same even though the actual value of a dollar may change.
The only event when the stablecoins, just like other crypto coins, may lose their value and fail is when the developers, investors, and validators shy away from them.
Both fiat currencies and stablecoins can be used as a means of monetary exchange but the difference lies in how useful they are in this matter.
As for the fiat currencies, it seems to be very evident that you can spend these currencies in the simple form of cash or use it as plastic money after loading cash onto your credit card or debit card.
You can use the fiat currencies to buy goods and services directly or to transfer funds from one account to another. You can also use fiat money to pay your taxes or your utility bills as well.
On the other hand, when it comes to using the stablecoins, most of the users do not have a clear idea about putting these coins to the best of use. One of the most commonly followed ways is to trade them at different crypto exchanges, which is quite obvious.
Some other variants of applications of stablecoins include lending them and earning interest from them, but that is subject to the policies of the crypto exchanges as to whether or not they will allow it.
7. Conversion Requirement
Typically, most of the fiat money can be used within the peripheries of the nation or for domestic purchases only. If you want to use the fiat money across the borders directly, you will first need to exchange them in the currency of the region you are in.
However, in the case of USD and EUR and a few other fiat currencies, you can use them across the border without having to exchange them into the local currency.
You can also use stablecoins for making daily purchases at compatible and conventional selling points. In that case, since the coins are accepted widely, you do not need to make a conversion of the currency in order to make the payment.
However, if only specific types of coins are accepted, then you can quickly convert them into fiat money by using multi-currency wallets.
A few of these wallets are Trust Wallet which is one of the most popular ones, the BitPay wallet app which is used by consumers and merchants all over the globe, and a few crypto ATMs at specific locations such as Instacoin in Canada.
8. Fees and Interests
Usually, you will have to pay for the fees associated with such exchange in value. The exchange fees can be quite high, especially when you use your credit card.
Most of the time these fees are quite straightforward but if it is not shown, there is usually an exchange rate margin involved in it.
This is actually the difference between the percentage of the exchange rate of the currency exchanges and that of the banks offered to the consumers.
On the other hand, the fees for exchanging stablecoins can vary but are usually quite affordable in most of the cases.
However, in the case of lending, you can use P2P crypto lending marketplaces and fixed and flexible lending models.
As for the rate of interest earned on the stablecoins, it is quite high in comparison to that of fiat money. Usually, on most of the crypto exchanges, this rate ranges anywhere between 5% and 25%.
9. Investment Profitability
Profitability is the next important point that will help you to differentiate between stablecoins and fiat money easily.
The amount of interest earned will however vary depending on the type of currency, growth rate of the asset chosen, the terms and conditions of the particular investment, and the bank policies.
If you consider the US Dollars, the national average rate of interest for savings is 0.05% APY but several national banks may also pay only 0.01% Annual Percentage Yield.
As for returns on stock investments, it is usually 10% per year considering the S&P 500 as the benchmark for measurement.
As for the stablecoins, since it is not affected by inflation much, the return is quite high as compared to that offered by the fiat currencies.
You may earn an Annual Percentage Yield anywhere between 5% and 25% when you lend your crypto assets, which is much higher in comparison to the fiat money.
On the other hand, if you choose to hold your coins in one of those high-yield savings accounts, you can earn anywhere from 2% and up to 5% APY depending on the type of coins held in it.
Some particular accounts such as that of Nexo and other fintech platforms may offer a return of up to 12% on savings with zero fees and daily compound interest. And, for staking some of the popular stablecoins you can earn a yield anywhere from 2% and up to 22% APY.
Which is Better – Fiat Currency or Stablecoin?
Most people would consider fiat currencies to be much better a currency to invest in and there are several good reasons behind it. These are:
- Fiat currencies are typically issued by the government which raises the trust level among the users automatically.
- The central banks are offered better control by the fiat currencies over the use and minting of them by the economy.
Most importantly, the fiat currencies give the governments a much greater flexibility in managing money as well as setting their monetary policy.
Both these eventually help in stabilizing the global markets. And, with the fractional reserve banking feature, the commercial banks can multiply the amount of money on hand so that they can meet the demands of the borrowers.
However, most of the fiat currencies being paper currencies are vulnerable to loss and damage.
Another significant downside of the fiat currencies is that if the government prints too much of these currencies then it may result in hyperinflation.
The stablecoins, on the other hand, are also quite good to consider in today’s scenario. It will need a closer and deeper look into it to understand why these coins are gaining popularity these days.
The stablecoins are considered to be the newer type of crypto coins.
These coins are gaining notable popularity among the crypto traders and investors since they are efficient enough to deal with the common and major problem of cryptocurrency – its volatility.
As for the stablecoins, if you invest in these specific currencies, you will get the best of both worlds, over and above the returns offered by it.
It includes a decentralized service, the ability to make anonymous transactions, steady valuations, and a safer, faster, and more secure global payment mechanism.
It is for this reason that the stablecoins are so popular and their popularity is growing at a rapid pace each day.
Every day the number of new coins launched in the market is increasing which adds to the variety, making it easy for the traders and the investors to choose their favorite coins.
The first stablecoin, Tether, was introduced in 2014 and since then the list has been growing steadily. A few significant names in the list of stablecoins include:
- True USD
- USD Coin
- Digix Gold
- Binance USD
- Havven’s Nomin and
- Paxos Standard
In addition to that, this large variety of stablecoins also offers a diverse collection of personalized collateral methods.
All these will help you to accomplish all your investment objectives as well as price stability, which is an essential quality desired by all crypto traders and investors.
However, proper selection of coins and strategic approach is required while investing in stablecoins since the outcomes as well as the success are different for different levels.
You must remember that in spite of all the claims made for a foolproof and better working mechanism, as is common for any financial instrument, extreme events may also cause a serious impact on the performance of the stablecoins.
For example, the Basecoin stablecoin, which was introduced in 2018 and renamed as Basis later on, was shut down even before the year ended due to the intercession of the Securities and Exchange Commission or SEC.
It is the same for fiat currencies as well in the real world. You will get a lot of such instances happening in the world like the ones that happened with different types of fiat currencies of different countries such as Riyal of Saudi Arabia, Bolivar of Venezuela, and Dollar of Zimbabwe.
However, in spite of all the downsides of the stablecoins, these coins are considered to be quite good and are worth considering. The different reasons behind it are:
- The stable currencies are not subject to price swings to the magnitude of the crypto coins.
- These coins have more in common as with other speculative trading instruments such as the derivatives and therefore are quite attractive a choice for the speculators especially.
- The coins can be used as a reliable store of value as well as a good medium of exchange.
- These coins do not experience major inflation and therefore can retain their purchasing power quite efficiently which makes them an encouraging asset to spend rather than store them.
Ideally, people rely on the stablecoins because these coins are quite efficient in retaining their value.
The main reason behind it is that most of the stablecoins are pegged with an underlying asset. It was gold, historically, and it is the US Dollars usually nowadays.
Since the dollar value is quite stable, it prevents the value of the stablecoins from going down so much that it would eventually disrupt the economy.
There are different types of stablecoins available in the market and each of these types achieves price stability in different ways. The types of stablecoins are:
- Fiat-collateralized stablecoins
- Crypto-collateralized stablecoins
- Asset classes-backed stablecoins and
- Non-collateralized stablecoins
With their features and functionalities, the stablecoins will have an increased adoption which will increase their potential as well.
This will act as a catalyst to popularize it even more and may also be used for different applications over the blockchain networks to trade goods and services, derivative contracts, decentralized insurance solutions, consumer loans and other financial applications as well as prediction markets.
To summarize, it can be said that fiat currencies are very important for an economy but stablecoins are not to be looked down upon.
With more DeFi projects in the pipeline, the possibilities, potential, and opportunities of this financial asset are growing constantly and rapidly.
It is just a matter of time when the economy will enter into a new era of stablecoin payments.
Though it is not legal as of now, the recent letter from the Office of the Comptroller of the Currency, a division of the US Treasury, to the legacy banking institutions allows them to take part in safe blockchain transactions.
The regulators of the US consider the stablecoins as the new and better type of payment technology.
They believe that the banks can act both as a node of a specific blockchain and even issue these coins themselves.
This is a remarkable milestone that will surely have positive effects on the acknowledgment of stablecoin payments and their trustworthiness.
Now that this article has helped you in exploring some of the major differences between stablecoins and fiat currencies, you surely have gained some knowledge about how each of these currencies functions and which one is good to invest in.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.