Cryptocurrency vs Cash: What is The Difference?
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The term cryptocurrency describes alternative digital forms of money, but the term also includes thousands of tokens of dubious value. Still, a few cryptocurrencies, such as Bitcoin and Ethereum, stand apart from the pack. Bitcoin launched as a peer-to-peer electronic cash system, but can crypto work like cash? In this guide, we’ll compare cryptocurrency vs. cash and discuss the advantages and disadvantages of each.
What’s the difference between cryptocurrency and traditional currencies like the US dollar? Let’s examine how each works in the real world and what gives each currency value for transactions.
Summary: The Difference Between Crypto and Cash
Cryptocurrencies, or digital currencies, can offer a hedge against inflation, although this isn’t always the case in the short term. Which cryptocurrency you choose can make a huge difference. Cryptocurrencies like Bitcoin or Ethereum, which have a maximum or limited supply, often provide the best store of value paired with broader acceptance.
Cash has the advantage of nearly universal acceptance when transacting in the local currency. However, all traditional fiat currencies lose value, and sometimes quickly. As a benefit, cash offers the most privacy when using paper bills. Your activity can’t be tracked on the blockchain and is largely shielded from data aggregation.
What is Cryptocurrency?
Cryptocurrency refers to digital assets or tokens stored on a decentralized blockchain. More commonly known as crypto, cryptocurrency uses cryptography to secure the private keys that control digital assets on the blockchain. Each block in the chain is linked to the previous block, creating a tamperproof ledger of transactions.
Crypto tokens can be sent to other crypto wallets, much like sending cash to someone else to buy goods or services or to split the bill at your favorite restaurant.
Cryptocurrencies often have a fixed maximum supply, creating scarcity. For example, Bitcoin has a maximum supply of 21 million bitcoins. A worldwide network of Bitcoin node operators enforces this cap. As a technical matter, Bitcoin’s supply can be increased; code can be changed. As a practical matter, it’s extremely unlikely because node operators who own Bitcoin would have to act against their best interests to increase the supply beyond the cap.
The blue line in the chart below shows the steady supply growth, with the curve flattening as Bitcoin approaches its maximum supply.
What is Traditional Currency?
Traditional currency, also known as fiat currency, refers to the everyday cash we all carry. Although often digitized, our digital transactions using debit cards or payment apps still use physical cash as the anchor. The digits on your online bank balance can be withdrawn for physical cash.
The term fiat means “by decree,” meaning fiat money has value because our governments worldwide have assigned it as the official currency. Most fiat currencies are anchored by debt, meaning that new supply is borrowed into existence. Fiat currencies aren’t backed by any commodity, like gold, oil, or even bitcoins. This makes the supply elastic, although it’s much more common to see the supply of traditional currencies expand than shrink.
In the US, we use M1 and M2 to track the money supply. M1 measures the most liquid assets, such as cash and balances in checking accounts. M2, more commonly used, refers to M1 plus less-liquid assets, including balances in money market accounts, certificates of deposit, and other time deposits. M2 has been growing steadily since 1960, and M2 now exceeds $21 trillion in the US.
The Key Differences Between Cryptocurrency and Cash
While you can spend crypto and cash, the difference between cryptocurrency and traditional currencies centers on key characteristics, including centralization and transparency. Let’s examine some of the distinctions by comparing cryptocurrency vs cash.
Digital vs Physical
Cryptocurrencies are purely digital currencies. Although you might find some physical bitcoins on auction sites or sold as collectibles, the coins backed by Bitcoin are still linked to bitcoins held digitally on the blockchain. You can’t hold a Bitcoin, a dogecoin, or any other cryptocurrency in your hand, and you can’t put one in someone else’s hand. This approach to money differs from what we’ve all come to know: physical bills and coins.
By contrast, traditional currencies can be held or physically handed over to someone else as a gift, loan, or payment. The ability to touch, hold, and transfer traditional currencies has been one of money’s defining characteristics for centuries.
Decentralized vs Centralized
A second key difference between cryptocurrency and traditional currencies centers on how each is managed and distributed. Most well-established cryptocurrencies are decentralized, meaning no person or group has exclusive control over the protocol. To use Bitcoin as an example, while there is a group of developers working on the Bitcoin Core code, which version of the code to run is decided individually by node operators worldwide. Similarly, mining, the process by which the Bitcoin network validates transactions, is also decentralized. A worldwide community of miners participates in Bitcoin’s consensus.
By contrast, traditional currencies are centralized. Monetary policy is determined by governments and central banks, both of which can affect economies and the real-world value of the official currency. The recent pandemic offers a powerful example. As health concerns swept the globe, governments provided financial stimulus by borrowing and spending money. The side effect of this came later in the economy in the form of higher prices because a larger amount of dollars chased the same or smaller amount of goods.
Transparent vs Private
Public blockchains are transparent. All transactions are available for viewing, although our blockchain identities are pseudonymous. Blockchain explorers allow anyone to track the flow of cryptocurrency and which wallet addresses were involved in each transaction.
By comparison, traditional currencies are generally private. Your neighbors won’t know how you spend money or what you buy unless told or blatantly obvious, like a new car parked in your driveway. However, this privacy has limits when using electronic payments. Merchants, financial institutions, and governments can see what you buy and with whom you transact in many cases. Much of our purchase history is also sold. Physical cash sidesteps these privacy concerns, making each transaction a private exchange.
Algorithmic vs Governed Supply
Cryptocurrency uses several different mechanisms to manage supply. In some cases, a fixed number of tokens are minted. If the token contract does not support additional minting, supply is constrained. In other cases, an algorithm or market dynamic determines supply.
For example, ether (ETH), the native coin for the Ethereum blockchain, uses a push-pull mechanism to determine supply. The protocol mints new ether as staking rewards for those who help validate transactions by pledging their ETH as collateral. However, the base fees for the network, which are paid in ETH, are automatically burned by sending these fees to an unrecoverable address. The result is a relatively stable supply of ETH.
By contrast, the market demand for new borrowing determines the supply of fiat currencies, although governments can inflate the supply in various ways. These range from excessive borrowing and spending to devaluation, making a national currency nearly worthless. Zimbabwe has suffered a long history of currency crises, causing the currency’s value to fall dramatically.
The financially struggling nation introduced a new currency in April 2024 in an effort to stave off rampant inflation.
Advantages of Cryptocurrency Compared to Cash
Although its intangibility makes cryptocurrency difficult to grasp for some, it has some intriguing advantages compared to cash. These advantages include portability, inflation resistance, and additional utility in many cases. Let’s examine these advantages in more detail.
Global Accessibility and Borderless
Accessing your crypto assets just requires a crypto wallet. Most crypto wallets use a recovery phrase or seed phrase that can be used to recreate your wallet. Many crypto holders memorize this seed phrase, which makes it possible to take your assets with you anywhere in the world without the possibility of revealing your recovery phrase.
Additionally, cryptocurrency is easy to send across borders to other people. With just a wallet address, you can send crypto anywhere in the world. Many people use crypto to send money to their family abroad, for example.
Inflation Resistance
A fixed or algorithmically controlled supply makes crypto inflation resistant, meaning the cryptocurrency’s supply can’t grow overnight. However, cryptocurrency isn’t always a hedge against inflation in traditional currencies. Hundreds, perhaps thousands, of crypto assets crash in value every year. Even market leaders like Bitcoin have seen massive selloffs during crypto bear markets.
As a counterpoint, many point to a correlation between the money supply and Bitcoin’s price, suggesting Bitcoin’s price moves with changes to the M2 money supply.
Utility Beyond Transfer of Value
Many cryptocurrencies provide a utility that helps bolster their value. For example, the Chainlink token (LINK) pays for oracles. Chainlink oracles provide trusted data from outside the blockchain, allowing smart contracts to use this data as conditions. If this happens, then do that. This added utility helped the LINK token nearly double in value in the first half of 2024. By contrast, a dollar is still worth a dollar, and many goods and services now cost more in dollars than they did in previous months.
Disadvantages of Cryptocurrency Compared to Cash
Cryptocurrencies also have some disadvantages compared to cash. They can be difficult to use, and crypto prices can be very volatile when measured in traditional currencies like USD.
Price Instability
People who bought Bitcoin in late 2020 or earlier saw impressive gains as BTC skyrocketed to an all-time high of more than $69,000 in 2021. However, by late 2022, Bitcoin’s price fell to a low of $15,500. 2023 marked a recovery, sending Bitcoin to new all-time highs in 2024.
This volatility within the crypto market can make transacting in Bitcoin or other cryptocurrencies difficult. Due to its volatility, individuals and businesses have been reluctant to accept crypto for payments.
Technical Complexity
Cash is easy. You open your wallet to pay using the appropriate amount of bills and receive change you can spend later. By contrast, crypto wallets don’t work like traditional wallets. Crypto wallets are apps that hold the private keys to control your cryptocurrency on the blockchain. You must “sign” each transaction with your wallet to prove you have the private keys.
Many people are still unfamiliar with the concept of crypto wallets, and although some developers are working to make them easier to use, cash is still the simplest way to pay.
Increased Security and Fraud Risks
Crypto transactions can’t be reversed, which creates an environment where fraud often runs rampant. By comparison, electronic transactions made in traditional currencies can often be reversed, charged back, or at least investigated. The near-anonymous nature of cryptocurrency often makes it impossible to track down the perpetrators of fraudulent financial transactions.
Crypto wallets also come with security considerations. Most wallets use a seed phrase, a human-readable version of the wallet’s private key. When the key or seed phase is lost, the crypto secured by the wallet can’t be accessed. One early Bitcoin miner lost the keys to his bitcoins with an estimated value of about $500 million.
Should You Use Crypto or Traditional Currency?
Often, the decision to use crypto vs. cash hinges on the specific situation. While a growing number of merchants accept cryptocurrency payments, crypto still isn’t widely accepted. Let’s look at some top reasons to use crypto, as well as some reasons to use cash.
Top Reasons to Use Crypto
Although crypto isn’t perfect for every situation yet, several benefits highlight reasons to use crypto over cash.
- Inflation Hedge: Key cryptocurrencies such as BTC and ETH are seen as an inflation hedge due to their capped or relatively stable supply.
- Privacy: Crypto allows people to transact using a wallet address as their identity. While cash offers similar privacy — and arguably more — debit card transactions reveal your identity to numerous parties.
- Cost-effective Payments: Some crypto blockchains allow payments between wallet addresses for a fraction of a penny.
- Portability: Crypto can be sent anywhere in the world, and crypto holders can take their savings with them by memorizing a seed phrase that allows them to recreate their crypto wallet.
Top Reasons to Use Traditional Currency
Cash is still king in many situations, however. Let’s explore the top reasons for using traditional currency.
- Widely Accepted: Cash maintains an advantage over crypto because local currencies are accepted by local merchants. By comparison, relatively few merchants accept cryptocurrency in most parts of the world.
- Privacy (When Using Cash): Cash allows for private transactions that can’t be tracked on a blockchain. However, debit cards that let you access cash in your bank account sacrifice this privacy for convenience.
- Safeguards for Electronic Payments: Debit cards that access cash in a bank account have limited protection against fraudulent transactions. For example, your bank might decline suspicious transactions.
- Comparatively Stable Value: Crypto prices often fluctuate dramatically when priced in traditional currencies like the USD. Although fiat currencies typically lose value over time, the value remains comparatively stable.
Will Crypto Replace Traditional Currencies?
Cryptocurrency isn’t likely to displace traditional currencies in most parts of the world in the near future. Instead, we may see increased adoption of cryptocurrency and more merchants willing to pay transaction fees to accept it. Many payment providers allow instant conversions to local currencies, which removes much of the price risk associated with accepting crypto payments.
However, crypto has become a popular alternative to local currencies in some parts of the world where inflation runs hot. For example, many in Argentina and Turkey have turned to crypto as a safer alternative to traditional currencies that are losing value rapidly.
Regulatory uncertainty still casts a shadow over crypto markets, limiting investment in cryptocurrency. In the US, the Securities and Exchange Commission (SEC) has brought lawsuits against both exchanges and individual crypto projects, such as the ongoing case against Ripple (XRP). However, certain assets, such as Bitcoin and Ethereum, seem to have a green light, as evidenced by the recent approval of Bitcoin and Ethereum ETFs (exchange-traded funds).
Conclusion
The debate over cryptocurrency vs cash and which will prevail isn’t settled yet. Today, each has use cases in which it is a better fit than the other. However, both come with caveats as well. Crypto prices remain volatile, and fiat currencies remain vulnerable to inflation or devaluation. Many expect the crypto industry to overcome usability challenges, making crypto easier to use. This, one of the largest bundles to adoption, could quickly change the direction of the crypto vs cash discussion.
FAQs
Is cryptocurrency better than cash?
Cryptocurrency is better than cash in specific situations, such as when the local currency is being devalued. Crypto is also superior if you need to transfer value across borders or take your savings with you when crossing borders.
Is crypto safer than real money?
Crypto can be safe if you invest time in learning the best safety and storage practices. However, the space is largely unregulated, and crypto transactions are pseudonymous, making fraud and scams prevalent in the crypto world.
Can you turn crypto into cash?
You can convert crypto to cash by selling your crypto through an exchange or peer-to-peer exchanges. Larger cryptocurrencies like Bitcoin and Ethereum enjoy worldwide markets and deep liquidity.
How do you know whether to hold crypto or cash?
The inflation rate where you live may play a role in whether it’s wiser to hold crypto or cash. However, adoption also weighs on the decision. If crypto isn’t accepted by merchants in your area, you may need to hold both crypto and cash, using crypto as a hedge against inflation and cash for daily transactions.
References
- M2 (M2SL) (stlouisfed.org)
- Zimbabwe introduces new currency as depreciation and rising inflation stoke economic turmoil (apnews.com)
- M2 money supply ‘holds the key’ for Bitcoin’s next move — Market analyst (cointelegraph.com)
- Half a Billion in Bitcoin, Lost in the Dump (newyorker.com)
- Cryptoverse: Digital coins lure inflation-weary Argentines and Turks (reuters.com)
- Ripple’s Big Court Win Nonetheless Muddied Waters on Whether XRP Is a Security Deserving Tougher Regulation (coindesk.com)
Camila Karam 
Tayler McCracken 