Cryptocurrency vs fiat currency: What does fiat mean and three main differences to consider
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Some exchanges of cryptocurrencies accept fiat money such as dollars, euros, etc. and some are Bring Your own Bitcoin (or sometimes other digital assets). The differences run deeper. Here are the differences.
Entry and Exit
Crypto exchanges that accept fiat currency make life easier for newcomers to the world of digital coins. You sign up for an exchange, deposit money and you can hit the ground running. The more comfortable exchanges accept credit and debit cards (typically higher fee) while others only allow wire transfers. In both cases, you already have a card and a bank account. The same goes for withdrawing funds. You can make a transfer back to your account and spend the money as you would do with other funds. The one-stop shop is much more accessible than the other option.
With cryptocurrencies that do not accept regular or fiat money, the process is longer. You first need to buy an intermediary cryptocurrency such as Bitcoin or Ethereum before you can join the action at the exchange. You first need to pass through the first hurdle of opening an account at an exchange that does accept fiat, described earlier. This requires going through the document verification process twice.
Another option is to open a wallet, buy Bitcoin in a peer-to-peer manner and then transfer it to the crypto-only exchange. The process may be cheaper but harder for most people that want to enter this world.
Exchange by Deposit Methods
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Peer to peer: Think eBay or a dating website
The P2P websites match buyers and sellers of cryptocurrencies. You have to find someone to buy the specific amount of coins at a specific price and also agree on the method of transfer. In many cases, the buyer first makes the transfer of fiat money and upon the receipt, the bitcoin is sent.
Over The Counter transfers mean the buyer and the seller actually set a meeting, or a date if you wish, to transfer the fiat and digital money. This decentralized system goes hand in hand with the original spirit of Bitcoin, but may be inconvenient for many.
Variety of coins
So, while the fiat-friendly exchanges have an advantage in getting in and out, centered once win the battle for variety. Exchanges that accept fiat currency usually offer a limited amount of cryptocurrencies. Some are limited to dozens and some only to a handful. Also, they usually take their time before adding a new cryptocurrency to their offering.
Crypto-only exchanges usually offer a broad array of coins, going deep down the rabbit hole when it comes to market capitalization. Some digital currencies may only have insufficient liquidity, but if you want to trade, they offer the option. Some exchanges are quicker than others, actively looking for the latest successful Initial Coin Offering (ICO) to add the newest coin to their portfolio.
These are broad generalizations, and you may find a fiat-friendly crypto exchange which offers more coins than a specific crypto-only one. However, the bigger ones are usually, the heavier ones, and the smaller ones are speedy.
If you are not intimidated by the process of first buying Bitcoin and then transferring it to your exchange, and your cryptocurrency of choice appears on both a fiat-friendly exchange and a crypto-only one, where will you go? There are many considerations when choosing a crypto exchange, and in general, you would prefer an exchange that provides more expertise.
Moreover, here there are two types of expertise which make the answer complicated. An exchange focused only on digital coins will likely have more knowledge in cryptos. They may be better to equipped to help if you run into issues with wallets and other essential aspects. Beyond these basics, a crypto-focused exchange may also be more adept at handling forks. Forks are opportunities that you can seize, but you need to know what you are doing and act in a timely fashion. Expertise in forks is more likely to be found at those focused only on cryptos.
However, if you are looking into trading the coins, the picture changes. A fiat-friendly exchange has other tools apart from the option to pay with regular money. The trading platform may be more sophisticated. Up-to-date charting tools, technical indicators, and assistance in trading can be found at those accepting fiat money more often than not.
As with the previous point, you can always find a crypto-only exchange that has no clue about forks and a fiat-friendly one which has terrible trading tools. There are still exceptions. Nevertheless, the tendency is for more specific expertise in a particular field.
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The information provided by FXStreet does not constitute investment or trading advice and should be just treated for informational purposes. Our content may also include affiliate links or advertising from other websites, however we are not responsible or liable for any actions of other websites. Investing in Cryptocurrencies involves a great deal of risk, including the loss of all your investment, as well as emotional distress.