Cryptocurrency and cash are both methods of payment. All merchants accept cash, and some are warming up to crypto. However, crypto remains less understood than cash, leading to some hesitancy and questions. We will explore the cryptocurrency vs. cash debate and share the pros and cons.
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What is cryptocurrency?
Cryptocurrencies are decentralized digital currencies that use the blockchain to verify transactions. Bitcoin is the most established cryptocurrency, with Ethereum as a close second.
Advantages and disadvantages of crypto
Crypto has been around for over a decade but is still in the early stages. We have highlighted the advantages and disadvantages of crypto below.
- Appreciation potential: Cryptocurrencies can provide significant returns, unlike cash. Bitcoin traded at under $1,000 per coin in the first quarter of 2017. The crypto asset has skyrocketed to over $40,000 per coin.
- Fixed supply: Inflation is a major concern. We got to this point partly because the Fed significantly increased the money supply during the pandemic. Now, they have to tighten the money supply, causing interest rates to rise. Crypto’s fixed supply and decentralized nature protect it from this type of tinkering. Some people view Bitcoin as an inflation hedge.
- Decentralized: The government can’t freeze your account. You are the only one who oversees your crypto holdings.
- Avoid middleman fees: Transferring overseas gets expensive. Crypto transfers help you escape these fees while providing money to those who need it. Cryptocurrencies aim to become universal currencies you can use anywhere instead of exchanging your cash at undesirable foreign exchange rates at the airport.
- The potential for losses: Bitcoin surged from $1,000 per coin to over $40,000 per coin in the past five years. However, the crypto asset has an all-time high of over $67,000 per coin. If you bought in 2017, you made some nice gains. People who bought at the high have lost money.
- Volatility: Bitcoin’s price does not stay constant. It may rise or fall 5% in a single day. World news and other uncontrollable factors influence crypto prices.
- No government oversight: Crypto’s decentralized nature has many perks, but no government oversight also presents disadvantages. Your crypto holdings are not FDIC insured. If a hacker steals your funds, they’re gone. You can take protective measures to reduce the likelihood of this scenario, but this risk is significant for any crypto holder.
- Not every merchant accepts crypto: More companies have opened up to crypto, but the majority still don’t accept it as a form of payment. The path to widespread acceptance is more difficult for altcoins.
What is traditional currency?
A government backs a traditional currency. Merchants accept these currencies as payment for a good or service.
Advantages and disadvantages of cash
People have bartered with each other since the beginning of time. Cash has given us a universally accepted method to exchange goods and services. Merchants set the prices, and consumers decide if they want to pay that price. We have highlighted the advantages and disadvantages of cash below.
- Government-backed protection: The U.S. government insures the first $250,000 in your bank account. If a hacker steals funds or the bank fails, your money is protected. Make sure a bank is FDIC-insured before creating an account and depositing funds.
- Widely accepted by merchants: You don’t have to worry about a merchant rejecting the domestic currency. If you are in the U.S., your dollar can help with any transaction.
- Many fiat currencies have stable prices: Cash holders don’t have to worry about significant price fluctuations. A loaf of bread won’t cost 20% more or less, depending on how the U.S. dollar moved in the past week.
- Fraud protection: Many governments have protocols in place to protect people from fraud. You can file a report of fraudulent activity on your credit card and get off the hook. Crypto does not provide consumers with this option.
- Reliance on governments: Not every government is economically stable or acts in its citizens’ best interests. Some fiat currencies are volatile, and the government can limit what you can do with the currency. Your account could get frozen.
- Cash is guaranteed to lose value: Inflation decreases the purchasing power of your liquid cash each year. While this phenomenon always takes place, it’s gained more attention as we find ourselves with the highest inflation in 40 years.
- Higher fees: Between the bank and foreign exchange rates, fiat currency holders pay higher fees than crypto enthusiasts.
- Centralized intervention: The government can increase or tighten the money supply at will. These measures impact your money’s purchasing power and interest rates. You can get caught up at a bad stage of the cycle. When the Fed tightens the money supply, housing prices fall, and interest rates rise.
Understanding crypto vs. cash
We have highlighted the pros and cons of both assets. We have provided additional context below to help you understand the state of crypto vs. cash.
Crypto and paper cash let you remain anonymous on every transaction. Some people are more concerned about their privacy and don’t want big tech following them. Both currencies let you remain anonymous, but you lose your privacy with purchases done through a debit or credit card.
The government can garnish or freeze your fiat currency accounts. Suddenly losing access to funds is stressful. You don’t have to worry about these types of regulations for cryptocurrencies. No centralized authority can touch your holdings.
Cryptocurrencies have lower fees than traditional banks. These lower fees become more significant for people transferring their money overseas.
Since crypto is a digital asset on the blockchain, it can’t get duplicated or be fraudulent. Counterfeit fiat currency looks real on the surface. Some people use counterfeit money to pay for goods and services, causing it to circulate across the economy. The risk is small but always present for fiat currencies. Crypto holders do not have to worry about this risk.
Traditional banks have several requirements to open a new account, such as government-issued documents and a social security number. You don’t need any of those documents to open up a digital wallet and buy crypto. You only need an internet connection to get into crypto and access your funds.
Cryptocurrencies and cash each have security risks. Hackers can enter your accounts and use your funds to their desire. Cryptocurrencies and paper cash are almost impossible to track and recoup your losses. Debit and credit cards offer better protection that can help you recoup losses.
Cryptocurrency transactions are faster than cash transactions at traditional banks. Transfers to overseas accounts can happen quickly with crypto, but it can take a while for fiat currencies to arrive.
A diverse portfolio mitigates risks and helps investors achieve higher returns. Investors can choose from many crypto holdings and currencies to spread their exposure across many assets.
Should you get crypto or cash?
Cryptocurrencies and fiat currencies offer several advantages. Neither of these currencies is perfect, but having both gives you the best of both worlds. Consumers should diversify their portfolios based on their risk tolerances.
Is cryptocurrency safer than cash?
Cryptocurrency and cash each have security risks. The decentralized nature of crypto prevents government meddling but also doesn’t provide FDIC-insured protection.
Will cryptocurrency replace money?
Cryptocurrency aims to become a viable currency people use as an exchange for goods and services. It may not replace fiat currency entirely, but it provides consumers with a useful alternative.
Is Bitcoin as good as cash?
As more merchants accept Bitcoin, it will become more valuable. The volatility presents a risk, but it also represents appreciation potential, a considerable perk over cash given the asset’s historical price movement.