Can the World of Cryptocurrencies be learned through FIATs (Traditional Currencies)?

First, it's important to note that this article is not investment advice and is absolutely not intended as such. Its purpose is to consider whether we can learn about the increasingly popular world of cryptocurrencies using our traditional currencies that have been in use for years. The text is a loose comparison between the fiduciary world and the digital world.

So what exactly are the FIATs, or fiat money? As beincryptopolska explains, "fiat currency is a type of money that has obtained legal status as a means of payment in a given country. It is not backed by any physical commodity like gold or silver but is based on trust in the institution that issues it, most often a central bank."

And what exactly are these mythical cryptocurrencies for many? According to binance, "a cryptocurrency is a digital currency based on blockchain technology that enables peer-to-peer (P2P) transactions." It's worth adding that it is decentralized, thus independent of any one person in a central bank, and its value should depend on the free market.

Can the two be compared? Although they have many differences, such as centralization and legal regulation, I think that to better understand cryptocurrencies, we can try to compare them to traditional currencies.

The most well-known cryptocurrency today is Bitcoin, introduced in 2009 by a person or group of people under the pseudonym Satoshi Nakamoto. For supporters of this cryptocurrency, one of the most important features, which we have already mentioned, is that unlike FIATs, it is not dependent on any central issuer. Bitcoin can safely be called the progenitor of digital currencies. If we wanted to compare Bitcoin to one of the traditional currencies for purely educational purposes, the choice would be the British Pound. Introduced in the 8th century, the penny is considered a direct ancestor of the British Pound. Since 1964, it has been controlled by the Bank of England, i.e., centralized. Both currencies can be described as very stable in their markets and not "celebrities," not constantly demanding our attention. Both are very stable and valued by long-term investors. Very good for people not looking for quick profits of x100 value increase right now but valuing the peace and strength of a given investment.

The second-largest cryptocurrency by capitalization is currently Ethereum. In 2013, Vitalik Buterin, one of Ethereum's co-founders, published a whitepaper outlining a new platform designed to address Bitcoin's flaws. A year later, ETH sales began, and interested parties could purchase this cryptocurrency using Bitcoin. Like Bitcoin, Ethereum is decentralized, independent of any central institution. Ethereum has been a rapidly growing cryptocurrency in recent years, both in terms of capitalization and value. If we were to compare it to an existing fiat currency, it could be the Swiss Franc. Strongly rising but also having significant international importance. Again, similarities can be seen: both the Franc and Ethereum guarantee the security of invested funds. If we want to talk about security regarding cryptocurrencies. In 1920, the Franc was tied to gold, and until 2000, the constitution ensured 40% coverage of all issued means of payment in this precious metal. This guarantee, combined with great trust in Swiss financial institutions, led local banks to earn a reputation as a stable and safe financial haven for the world. Today, despite a small economy, the Franc is in the basket of the world's most important currencies, mainly due to its perception as a stable deposit currency.

The next pair should not lack the American Dollar and the so-called Stable Coin, i.e., USDT. Both currencies play a very important role in the world by settling a large part of global trade. Many countries trade using the Dollar, and the same happens with USDT. Most large cryptocurrencies are exchanged with USDT. Imagine we are going on vacation to Mexico or just want to invest in, say, Mexican Pesos. It might be difficult to buy them with PLN. Here, the American Dollar comes with help. We exchange PLN for dollars and dollars for pesos. This works exactly the same in the context of smaller, emerging cryptocurrencies. We may not always be able to exchange Bitcoin for every cryptocurrency. Here, USDT comes with help. We exchange Bitcoin for USDT and USDT for a small cryptocurrency in which we believe strongly. This is a very simplified way to show how such an exchange mostly works.

Another comparison that might explain another cryptocurrency is the EURO and Binance Coin. Why pay attention to this pair? Because both currencies were created thanks to a certain community. In the case of the Euro, it's the European Union; in the case of Binance Coin, it's the Binance exchange, which since its creation in 2017, quickly gained the title of the largest crypto exchange in the world. Both these currencies are powered not only by the market but are also strongly connected to the communities that allow them to exist and gain increasing significance in their markets.

The last group of pairs that can be imagined are the so-called Memecoins or very small cryptocurrencies compared to the currencies of small or unstable countries. The increases or decreases of the Pound, Franc, or Euro and, consequently, Bitcoin, Ethereum, or Binance Coin may be percentage-wise small, making them stable currencies. The percentage changes of Memecoins or the currencies of smaller countries can be several dozen percent, allowing us to take more risks and potentially gain more. These currencies are certainly less stable and dependent on many factors, giving us more freedom of action and the possibility of greater risk and greater potential reward.

Many more such comparisons can be made. With each deep dive into the world of traditional finance and those related to digital currencies, one can find as many similarities as differences. The biggest similarity, however, is that both these worlds are absorbing, and without sufficient knowledge of how they work, one can become a provider of funds to those who already have this knowledge. Therefore, I encourage you to deepen your knowledge before making any first moves with your capital.