Cryptocurrencies vs. paper money — these are the differences

Photo by Dmitry Demidko on UnsplashWhether it’s the euro, the U.S. dollar, or the Swiss franc, all major paper currencies have lost massive value against the top 5 cryptocurrencies over the past 12 months.But what is the cause of this development? To answer this question, one must first understand how the current banking system works and where the differences between paper money and cryptocurrencies lie.The most noticeable difference between cryptocurrencies and paper money is that cryptocurrencies are only available digitally, while paper money exists in physical form.Paper money currencies are centralized, while cryptocurrencies are decentralized. While a central authority (central bank) exists and prints money in the paper money system, there is no such central authority in cryptocurrencies. There is no Bitcoin bank or anything like that.Instead, cryptocurrencies are based on the blockchain, a decentralized database in which all financial transactions that have ever been carried out are stored.With paper money, the central bank ensures an inflationary and thus theoretically unlimited increase in money to supply the economic cycle with liquidity. With cryptocurrencies, the amount of money is usually limited. For example, in the case of bitcoin, the number of digital coins is limited to 21 million bitcoins. Thus, cryptocurrencies have a deflationary character.While paper money in the banking system is transferred via account numbers, digital currencies rely on addresses and cryptography. This encrypts private data and mathematically verifies identities.While banks create money virtually out of thin air (money creation through lending), cryptocurrencies are calculated (mining) or generated through staking (proof of work vs. proof of stake).As a result, cryptocurrencies have several advantages. For example, banks do not create the money in the crypto universe and lend it against interest, but users (miners) receive money for processing payment transactions.Users can thus mine cryptocurrency themselves, effectively becoming their own bank.Cryptocurrencies eliminate…