Considering adding cryptocurrency to your portfolio? There’s a lot of new terminology you may need to learn to work crypto platforms, including the concept of “fiat currency” and a fiat wallet.
What is fiat currency?
When you step into the world of cryptocurrency, you’ll meet a lot of new terms. Fiat is one that’s really important to know before you get in very deep. Fiat currency, simply put, is currency that’s controlled by a government, as opposed to cryptocurrency, which is decentralized and generally controlled by the owners of the currency.
Cryptocurrency
Fiat currency is money that most of us interact with every day and that we use to pay our bills and participate in the consumer economy. Most fiat currencies today get their values from central banks, but at one point, many were based on the value of reserve assets, such as gold or silver.
What is a fiat wallet?
A fiat wallet is a wallet that holds fiat currency. However, it’s not the same as your Google Wallet. Fiat wallets are a way for you to interact with cryptocurrency exchanges using the currency of your country, or of another country you might prefer for whatever reason.
When you use a fiat wallet, you load money from your bank into your fiat wallet to bring it into the crypto economy. Once there, you can circulate it in any way you see fit, whether purchasing stablecoins or immediately investing in cryptos that make sense based on your goals.
Why use a fiat wallet?
Crypto investors may choose to use a fiat wallet to have faster access to cash, should an opportunity present itself. For example, if you were to transfer money directly from your bank to a crypto exchange to buy a crypto on the dip, it may be far too late by the time your money actually arrives, since it can take a few days for the transfer to complete.
A fiat wallet, on the other hand, keeps the money available for near-immediate use, so if you see a bargain crypto appear, you can snatch some coins or tokens while it’s down. Crypto prices fluctuate violently, so being prepared is a big part of making money with cryptocurrencies.
It’s important to note that money in your fiat wallet can only be used to interact with crypto or decentralized ecosystems. This is how it differs from a more typical digital wallet, like Google Wallet, where you can keep banking and card information for use almost anywhere debit cards are accepted.
How secure are fiat wallets?
As we’ve seen in the last year or so, things in the world of crypto are only as secure as the entity holding them. With crypto, the person who holds the keys and recovery phrase to a wallet is the person who ultimately controls it. So if you use a fiat wallet that’s part of an exchange, but have no way to recover it if it were to get lost, you are at risk of the money in it disappearing if the exchange folds or behaves badly because in reality, the exchange likely owns your wallet.
Fiat wallets, like other crypto wallets, range from being wholly exchanged-owned to wholly user-owned, and you’ll have to decide how much faith you have in your exchange before you choose the one that you think will suit you best. For most people, it makes sense to research your exchange and use their wallet, so you can easily transfer money and take advantage of all the features the company has to offer.
However, if you want to use less consumer-friendly exchanges, it might make sense to open an independent wallet to hold your fiat currency. If you do, you’ll be given a recovery phrase that you must keep safe, or you’ll never be able to recover your wallet if it’s stolen. It’s kind of the ultimate security system, where you can actually lock yourself out forever, losing everything inside.
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