✔️ Information reviewed and updated in November 2023 by Eduardo López
The arrival of cryptocurrencies was undoubtedly a blow to the table for the world monetary system, since these new currencies, unlike the conventional ones, have a different way of acquiring value. Although, this does not mean that they are totally independent from traditional or fiat money.
And it is precisely fiat money which can turn out to be a great ally, or an executioner, for these cryptocurrencies. Why? For the appearance of cryptocurrencies that replicate fiat currencies. Here we will tell you everything you need to know about both currencies.
➡✨What are fiat currencies?
Fiat currency is practically any bill or coin, since these find their value in what is assigned by central banks and government, not so much in the manufacturing material as happened with the gold coins.
Being practically the money we use today, fiat currencies have become an important part of the world of cryptocurrencies. This because of, Fiat money is the means used to buy cryptocurrencies, and also, the end when you sell them to generate profits or liquidity.
➡✨The mechanism between fiat currencies and cryptocurrencies
If you have never had cryptocurrencies, you should know that fiat money is the only way to access them. With a few dollars you can buy your first cryptocurrency which you can use, to exchange for others, for example, or save it until it increases in value.
When the time comes and you sell it, you will collect your earnings in fiat money so, at the end of the day, traditional currencies are an important part of trading. That is why there is a symbiotic and dependent relationship between one and the other that will hardly cease to exist, at least not for now.
➡✨The problem of conversion
One of the problems that exists between this mechanism is that, today there are few cryptocurrencies that operate with a pair in fiat money. This means that you cannot convert them directly from a cryptocurrency to common money.
The process to do so is to change your cryptocurrencies for those that do operate under this pair, for example, Bitcoin so you have to take your cryptocurrencies to an exchange broker and then to one that allows trading. All this translates into a tedious and complex process of moving coins from one place to another.
Suppose that you buy NEO cryptocurrencies and that you decide, for some reason or another, to exit that position and sell your NEO coins for fiat currencies. What you would have to do is, first, exchange the NEOs for Bitcoin on an exchange platform.
Then, you will have to take those Bitcoin and look for its pair in USDT, which is the way in which fiat money is presented, in order to sell the Bitcoin and capitalize. This should only be done on a platform that allows you to sell cryptocurrencies for fiat currency, which implies a lot of time invested.
➡✨ What are cryptocurrencies that replicate in fiat money?
Cryptocurrencies that replicate in fiat money are a unique type of cryptocurrency which has the ability to directly replicate conventional money. That is, we not only find it in pairs with other currencies but also with other currencies.
This makes the process of converting cryptocurrencies to conventional money much faster. We do not have to go from one cryptocurrency to another and then to money, but We can do it directly, as if we were trading a traditional currency. In this way, users can save a lot of time.
➡✨ How do you get a cryptocurrency to have a fiat currency pair?
For a virtual currency to have parity with a traditional currency, it is necessary that it has a backing in said fiat currency. That is, you need to have actual funds in a bank account, such as a stock.
Being backed by dollars, This currency is guaranteed to have sufficient liquidity in case all its users want to convert the virtual currency into real money. Although this might sound simple, the complexity is in the amount that you need to have in stock.
➡✨The problem of financial support
The problem with backing a virtual currency with real money is in the large amount that is required to achieve it. And it is that, according to the laws, the stock must be equivalent to the capitalization of the cryptocurrency in question.
For example, if the cryptocurrency has a capitalization of $ 3 billion, it is necessary to have that amount in a bank account. As the capitalization increases due to the release of cryptocurrencies, it will become necessary for the fiat money reserves to increase in order to guarantee parity and support.
➡✨ Why is it a good idea to trade cryptocurrencies with fiat currency pairs?
Without a doubt one of the best ideas you can have is to operate with this type of currency. Why? Because they turn out to be much easier to use, especially if you want to convert them into traditional money.
Thanks to the fact that you can find them in a direct pair between cryptocurrency and fiat money, you will no longer have to do all the complicated process of converting them to another virtual currency and then exchanging them for money. Thus, you save a lot of time and complications, without having to change from one to another.
➡✨Will more fiat-backed cryptocurrencies come?
Although it is very beneficial for users to have direct support for a fiat currency, this is not the most positive at all. All because launching a currency with this parity involves a lot of investment and meeting certain requirements.
As if that were not enough, there are some points to take into account, since some currencies may lose value due to not having adequate reserves, as well as spending rises. All this ends up taking a toll on the user by making them more expensive and limiting the appearance of more options.