Crypto is for criminals. If you’ve heard this sentiment, you’re not alone. The mainstream media likes to portray crypto in this light.
They are not entirely wrong. Look at the current FTX/SBF fiasco. That’s reason enough to stay in the legacy financial system.
The problem is that the legacy financial system also has criminals. Unfortunately, whenever you’re dealing with money, you meet people from all walks of life.
Cryptocurrency presents an interesting new phenomenon in the world of money. With any financial investment, there will always be risk. In this guide, we will learn about the risk of cryptocurrency and how it compares to fiat.
Let’s read on for the inside scoop, shall we?
What is Fiat currency?
Fiat currency is money issued by the government. It is not backed by anything (gold or silver) other than the specific governing body itself.
Supply, demand and stability determine value. Examples of modern fiat currencies include paper currencies like the US dollar, euro, or yen.
When fiat money first appeared, governments minted coins from a valuable commodity like gold or silver. Government-printed paper money could be exchanged for a certain share of one of these physical commodities.
Since there is nothing that supports fiat currency, unfortunately it cannot be exchanged. By itself, the trustee has no value – the value is held by the government.
What is Cryptocurrency?
On the other side of fiat currency is cryptocurrency. Cryptocurrency is digital money that is not controlled by a central authority or a third party (such as a government).
Cryptocurrency takes advantage of a few key technologies – cryptography and blockchain.
Cryptocurrencies use cryptography, which makes them virtually impossible to counterfeit or double spend.
“Crypto” is a general term you will hear often that refers to cryptocurrencies, cryptographic algorithms, and cryptographic techniques (elliptic curve cryptography, public and private keys, and hashes).
There are several ways to start investing in cryptocurrencies. For example, you can mine it or buy it through a cryptocurrency exchange.
blockchain
Blockchain technology is the distributed ledger operating on a decentralized network (network of nodes). That said, some cryptocurrencies will be more centralized than others. Always DYOR (do your own research).
A blockchain is a set of blocks forming a chain that creates a transparent online ledger. Each of the blocks contains transaction data. Each block is independently verified by each node in the network.
Blockchain is a robust technology that creates a secure network that makes it virtually impossible to tamper with transaction histories.
Since everything is visible on the blockchain, it is much more difficult for criminals and hackers to get away with it.
Industries leveraging blockchain technology include supply chains, voting, crowdfunding, finance, payment processing, and more.
Fiat’s reward
Fiat currency allows people to store value and provides a digital amount and the ability to exchange. It all depends on the current status of a nation and its government.
An advantage is that since the fiduciary is not tied to a commodity, it is more economical to produce (lordship).
Fiat is also not rare, fixed or finite (instead of gold or bitcoin). This gives central banks more control over supply, which in turn gives them greater power over things like liquidity, credit supply, the velocity of money, and interest rates.
Do more research on the Federal Reserve to see the level of control and power it has.
What’s interesting is why people find fiat still valuable, given that it’s not technically backed by anything. If it’s backed by anything, it’s faith and trust in the government.
A government like the United States requires you to pay your taxes every year. Failure to do so could result in severe penalties, including imprisonment.
The reward of cryptocurrency
We believe you are interested in investing in cryptocurrencies. Before we dive into the potential risk of cryptocurrencies, let’s see what advantages they have.
Cryptocurrencies offer a new form of currency that is completely independent of third parties. The transaction between two parties does not need an intermediary to enforce or control the trust.
Most cryptocurrencies are decentralized, meaning there is no single point of failure (unlike a financial institution like a major bank).
Peer-to-peer (p2p) transactions are possible and facilitated (without third parties) thanks to public and private keys.
Your public key (a long string of random numbers and letters) is what allows you to receive cryptocurrency. It is also used to verify the digital signature. Your public address is a hashed (compressed and abbreviated) version of your public key.
When you want to receive cryptocurrency, you need to share your public address with that peer. It is similar to an email address in this regard.
Your private key signs transactions and proves ownership of a blockchain address. It is a secret number used in cryptography.
A private key (randomly generated number) is similar to a password, so it is imperative to store them securely. Remember the mantra – not your keys, not your cheese.
Fiat’s risk
As stated, the fiduciary is centralized, which means it is central to a party, such as a bank, government, etc. This means that there is a point of failure.
Compared to decentralized cryptocurrencies, there is no central point of failure. You can think of them like hydra plants – when you chop off the head of one, another will grow bigger and stronger.
Gold pegged coins are more stable than fiat due to their limited supply. Since fiat can be printed virtually out of thin air, this can lead to risks such as bubbles, inflation, and even hyperinflation.
Unfortunately, fiat is not a foolproof method of protecting the economy.
So you play things that marginalize people or make it harder for them. For example, what should people with or without a bank do? They cannot keep their money in a bank account due to fees, income or identification.
Speaking of identification, there is something called KYC (Know Your Customer). In a nutshell, it means providing some kind of credentials for your finances. Although this may seem like a good thing at first glance, it also has its problems.
For example, by providing identification for your finances, scammers and hackers are more likely to scam or phish you. Do you want people to know what you spend your money on and how much money you have? We do not think so.
Cryptocurrency aims to solve many of these problems. You don’t need anyone’s permission to create a wallet. You can easily download one to your smartphone or purchase an inexpensive hardware wallet.
With crypto – you are your own bank.
The risk of cryptocurrency
The cryptocurrency market also has its share of risks. Let’s see what potential risks there are with this new technology and if there is anything you can do on a personal level to avoid them.
A cryptocurrency risk is simply human error – incorrectly writing your private key or seed phrase and instant storage. Write down your private keys and seed phrases offline and keep them away from prying eyes.
To put it simply, most of the time you will receive a main sentence. It consists of human readable alphanumeric characters of 12 to 24 words.
You will have access to an initial phrase when you download a hot wallet to your smartphone or computer.
A hot wallet is connected to the Internet. This makes things much easier to get started, especially for beginners. Although more convenient, a hot wallet is also more vulnerable to hacks because it is online.
Popular choices here are Samurai, Exodus, Atomic, and MetaMask. Do not confuse hot wallets with exchanges.
For example, you don’t want to store your cryptocurrency on an exchange like Coinbase. It goes back to the mantra – not your keys, not your cheese.
A cold wallet is not connected to the Internet. It’s a much safer way to keep your encryption. A cold wallet will look like a USB flash drive or hard drive.
Popular choices here are Ledger and Trezor.
Much of the risk in cryptocurrency lies with the person interacting with it. Crypto takes time to learn, so do your due diligence and learn the ropes. Search, then search again.
Cryptocurrency trading comes with its own set of risks such as volatility, emotions, all-in pulls, and slippage. To learn more about slippage, read this guide.
Crypto is an endless onion
Whether it is fiat currency or cryptocurrency, there will always be pros and cons. When you understand the risk of cryptocurrency and fiat, you can reap the reward.
You will make mistakes along the way. Don’t let that stop you from becoming a financial wizard! You are on your financial path to freedom.
One way to set yourself up for success is to set a budget. To step up your budget organization, be sure to read our blog.
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