SoFi

Crypto mining and staking are two different ways for a blockchain network to achieve consensus and validate transactions. They use different means to achieve a similar end. While mining uses a consensus mechanism called proof-of-work (PoW), staking uses another consensus mechanism called proof-of-stake (PoS). Crypto mining and staking can also generate rewards for network users or participants, which is why many people are interested in them.

Introduction to Crypto Mining and Staking

Crypto mining and crypto staking are two different protocols cryptocurrencies may use to validate transactions and reach consensus on network data. Staking involves locking up tokens for a fixed period, while mining requires running specialized hardware.

What Is Crypto Mining?

Crypto mining is a consensus protocol utilized by some blockchain networks. It’s grown into a multi-billion dollar industry, mostly because the mining process can lead to rewards in the form of new coins or cryptocurrency. In effect, mining involves computers solving complex mathematical problems or equations, validating data on the blockchain, and “unlocking” new blocks on the network. Users who participate may be “rewarded” for doing so, and receive cryptocurrency for their efforts.

What Is Crypto Staking?

Crypto staking is a consensus protocol utilized by PoS blockchain networks, serving as an alternative to mining. It involves users pledging or “locking up” their crypto holdings to a network, which may be used to validate data on the blockchain. Users can then earn staking rewards for doing so. In that way, it’s similar to putting money in a savings account and generating interest.

Why Do Both Methods Exist in Blockchain?

Both crypto mining and staking work to the same end: To entice users to participate and validate data on a given blockchain network. They’re simply two different ways to do it. There can be some advantages and disadvantages to both, of course, and those involved in the crypto space would do well to understand each.

How Crypto Mining Works

Crypto mining is a fairly complex process that doesn’t involve pickaxes or hard hats, but rather, computer processors.

The Proof-of-Work Mechanism Explained

As noted, a proof-of-work consensus mechanism on blockchain networks involves miners solving mathematical equations. Doing so validates transactions on the network, which helps ensure that the information stored on the blocks is accurate and secure. That all requires computational power and resources, which miners supply.

As the data on each block is validated, new blocks are opened up, which also unlocks new cryptocurrency. So, participants who “mine” are forking over their computational resources in hopes of earning some of that new, unearthed crypto.

Essential Mining Hardware and Software

Crypto mining involves using computer processing power, and that can take many forms. In short, though, miners can use CPUs, GPUs, or advanced “mining rigs” called ASICs to mine crypto. In many cases, mining hardware is designed specifically for solving cryptographic equations, and can cost thousands of dollars.

Block Validation, Rewards, and Incentives

Again participating on a blockchain network as a miner involves validating data in hopes of earning a reward. That’s the main incentive for miners. Each blockchain network is different, and on some networks, such as Bitcoin, there are hundreds of thousands of miners at work, meaning that competition for mining rewards is fierce.

Energy Consumption and Environmental Concerns

One concern that’s become front-and-center as it relates to crypto mining is how resource intensive it tends to be. Dedicating computer hardware to solving cryptographic equations requires electricity to run and cool the machines, and in aggregate, can eat up a lot of energy.

That’s drawn the ire of some individuals and groups, who may feel the energy may be better used elsewhere, and who have voiced concerns about how that energy is being generated, and the impacts on the environment.

Popular Cryptocurrencies You Can Mine

There are numerous mineable cryptocurrencies on the market. Bitcoin is the most popular (and the most competitive), but it certainly isn’t the only one.

And as a quick reminder, proof-of-work coins offer miners newly minted tokens as a reward for helping to solve the computational problems involved in processing a block of transactions — though there isn’t necessarily a guarantee that participants will be rewarded for leveraging their computational resources as a part of that process.

Some popular PoW cryptocurrencies include:

•   Bitcoin (BTC)

•   Bitcoin Cash (BCH)

•   Litecoin (LTC)

•   Ethereum Classic (ETC)

•   Dogecoin (DOGE)

Note, too, that different PoW coins can use different mining algorithms. While Bitcoin uses SHA-256, Litecoin and Dogecoin use Scrypt, for example. Moreover, to mine a specific coin, the hardware (be it ASICs or GPUs) must be compatible with the type of algorithm used to mine that coin.

How Crypto Staking Works

Crypto staking has a very different approach to blockchain transaction validation compared to mining. In effect, it involves users pledging their crypto holdings to a blockchain network, basically as collateral, which helps validate the data on that network (similar to mining). Participants may then earn passive rewards, usually expressed as a percentage yield of the coins staked.

The Proof-of-Stake Mechanism Explained

On a proof-of-stake network, participants are referred to as “validators” (or stakers).” Validators “stake” their holdings on the network, and those resources are used by the network to validate and secure the data on the blockchain. It can be a complex, granular, and intricate process when you get down to it, but as mentioned, the aims are the same as mining: Validate data, and generate rewards for participants.

How Staking Pools, Validators, and Exchanges Operate

Participants may combine their holdings for staking purposes to try and increase their odds of being rewarded. This is called a staking pool, and represents the combined efforts of several validators. A single point-person or entity may run these pools, called a pool operator, who can then divvy up any rewards proportionally, too. Pool operators may also charge a fee for their services.

Conversely, becoming an independent staking validator often requires a large sum of tokens, along with keeping a computer up and running constantly. Validators can receive a penalty for not having 24/7 uptime, and starting your own validator node can come with a hefty price tag.

It’s also possible to stake coins through a crypto exchange. This is one of the easiest ways to stake, but these can also involve higher fees or commissions that reduce the amount of the rewards received.

Staking and Reward Distribution

A PoS cryptocurrency generally benefits from having more coins staked to its network. Having a higher staking ratio makes it harder for attackers to gain control of the cryptocurrency, and it can also help promote price stability, since fewer coins may be bought and sold.

But the critical thing to know about crypto staking is that, in general, the more crypto holdings you stake, the higher your chances of being selected to validate transactions and earn a reward.

Depending on the blockchain network, too, there may be different rules as to whether a participant’s pledged holdings can be “unlocked” or “unstaked” at a given time. So, you’ll want to do some research if you’re uncomfortable with the idea of not being able to liquidate your crypto for a period of time, if it’s staked.

Accessibility and Technical Requirements for Staking

A big advantage to staking versus mining is that staking doesn’t really require any equipment or resources, other than some current crypto holdings with which to stake. So, if you don’t have any interest in buying a mining rig or seeing your energy bill increase, staking can be an alternative. And for those with only a smaller amount of crypto to stake, the ability to join a staking pool can also be enticing.

Popular Cryptocurrencies for Staking

There are an increasing number of cryptos on the market that use the proof-of-stake protocol. Ethereum is the biggest and most popular, and Ethereum itself actually switched from a proof-of-work network to a proof-of-stake one in 2022.

Again, stakers can lock up their native PoS blockchain tokens on the platform in exchange for a potential reward. Some popular PoS cryptocurrencies include:

•   Ethereum (ETH)

•   Solana (SOL)

•   Cronos (CRO)

•   Avalanche (AVAX)

•   Polkadot (DOT)

Staking vs Mining: Key Differences and Similarities

There are both similarities and differences between crypto staking and mining.

Comparing Consensus Mechanisms (PoW vs PoS)

As covered, both mining and staking have the same goal, which is to validate and secure blockchain networks. They both incentivize participants to pledge their resources to the network with the prospect of potentially earning rewards. Again, though, the difference comes down to how each consensus mechanism works on a more fundamental level.

In a nutshell: Proof-of-work networks use computational power to solve cryptographic puzzles or equations, validating the data. Proof-of-stake networks ask users to stake their holdings, use those resources to validate the network’s data, and reward some of those stakers.

Hardware, Software, and Resource Requirements

A huge difference between the two consensus protocols is the resources required for participants to actually get involved. Mining requires mining equipment, or, in other words, computational power and resources. Miners need computers, and the energy required to run them.

Stakers don’t; they simply need crypto holdings they’re willing to stake.

Reward Systems and Potential Profitability

The potential profit or rewards of crypto staking versus mining depends on a few things.

Staking could be more profitable for the average user because the only thing required is money. Mining requires specialized hardware, access to cheap electricity, and some technical knowledge.

The value of the coin in question is also important. Users could mine a lot of coins or have a lot of coins staked, but if the coin’s value falls against their local fiat currency, they could still realize losses.

Then there are the barriers to entry. It bears repeating: Many proof-of-stake exchanges or networks allow users to stake tokens in order to earn a relatively small yield. Mining, on the other hand, requires buying the necessary hardware and learning how to use it.

Security Considerations for Each Approach

Proof-of-work networks are frequently noted as being more secure than their counterparts. That’s because they’re relying on decentralized computational power from a number of participants; that makes them more difficult to attack, and the blockchains themselves a bit more secure.

Proof-of-stake network participants, on the other hand, are financially incentivized to maintain the security of the network since bad actors could lose the coins (and money) they have stored in the network.

Plus, as cryptocurrencies become more established, they’re continuing to build security features into the networks.

Accessibility, Scalability, and Barriers to Entry

Proof-of-work networks can be less accessible, given that they require participants to have expensive mining rigs for computational power they’re willing to dedicate to the blockchain. So, in that sense, mining may be less accessible to the average individual, given that there can be up-front costs involved.

Staking, conversely, is comparatively easy to do — you simply need to have some crypto holdings to stake, which can be purchased from an exchange in order to get started. However, the high cost of the more established PoS coins can make them inaccessible to the average staker.

Environmental Impact: Mining vs Staking

As touched on, the crypto space can require substantial resources, which can have an environmental impact. If that’s important to you, specifically, staking may be the way to go.

Mining rigs suck up a lot of electricity, and electricity is generated one way or another (it may be via burning coal, or generated by a wind turbine, for example). That generation may cause pollution^[1], and the electricity itself may be used for other things besides mining — which some people may prefer.

As such, staking is seen as a much more environmentally friendly alternative.

Pros and Cons of Crypto Mining and Staking

Both mining and staking have their advantages and disadvantages. Here’s a rundown.

Advantages of Mining

When compared to staking, crypto mining shines in a few key ways. Perhaps most prominently, miners may have the potential to earn higher rewards compared to staking, though the upfront costs of the mining rigs need to be considered in terms of profitability.

Additionally, proof-of-work networks could be more secure in certain cases. In addition, users aren’t required to lock up their holdings as collateral, and miners themselves actually own their equipment, which they may use for other purposes as well.

Disadvantages of Mining

On the other hand, the main drawbacks to crypto mining are that there can be a high barrier to entry for individual miners, given the prohibitive cost of mining equipment. Also, for more established PoW coins, it’s virtually impossible for individuals to compete against the large warehouse mining operations that are now more prevalent, and there is also the environmental impact to consider.

Advantages of Staking

Staking has a clear advantage over mining in that it’s typically much cheaper and easier to do, potentially serving a passive form of crypto income. There’s no equipment required, and it’s a more environmentally-friendly alternative for generating crypto rewards.

In all, staking is a lower-cost alternative in terms of financial costs for participants, and potential costs to society in terms of resource usage.

Disadvantages of Staking

The high costs of established cryptocurrencies, such as Ethereum, can pose a high barrier to entry for those who wish to stake independently. Staking rewards also tend to be lower overall compared to mining, though they may be steadier, with lower operational costs.

Aside from that, some believe that PoS networks could potentially be less secure compared to proof-of-work protocols, given the computational power the latter uses to secure the network. Users also need to lock up their holdings when staking, which means they can’t use them for other purposes, and they could lose value during that time.

Choosing Between Staking and Mining: Key Factors to Evaluate

Making a decision about crypto staking vs. mining comes down to a few important things.

Common Scenarios and User Profiles

Those interested in participating in the mining or staking process might want to ask themselves questions like:

•   How much time and money do I want to devote?

•   What is my level of technical expertise with crypto and computers?

•   Which cryptocurrencies am I interested in, and which network do I want to support?

•   Do I want to become my own miner/validator, or have someone else do the heavy lifting?

Those with technical knowledge who want to handle things themselves could consider mining an appealing option. Or, those looking to invest less time and money might simply choose to stake some tokens on an exchange. The potential profit you can fetch from staking vs. mining varies according to a number of factors, including how much an individual is willing to invest upfront, as well as the market price of the token involved.

Assessing Technical Skills and Experience Level

Another thing to consider is how technologically savvy you are when it comes to the crypto space. A mining rig may require some expertise or a certain level of skill to set up and get running; staking, on the other hand, may be as simple as flipping a switch on a crypto app. With that in mind, staking can be much easier for beginners, or those without a wealth of technical knowledge.

Financial Commitment and Operational Costs

Worth mentioning again: Mining requires some financial commitments and ongoing costs in the form of equipment and resource usage. That is, you need to buy stuff to do it, and pay for the energy required to keep your equipment running.

If that sounds like a lot, staking may be the more attractive option, given that equipment and resource requirements are vastly different.

Environmental and Regulatory Considerations

As discussed, mining is much more resource-intensive. If you have concerns about the environmental impact of the crypto space, you might consider staking over mining.

There may also be some differences in how the two methods are viewed by regulators. A lot of things are still being sorted out across the federal agencies involved in regulatory authority, such as the Securities and Exchange Commission (SEC), Department of the Treasury, Federal Reserve, IRS, and others, so that may be something to keep an eye on going forward.^[2]

Balancing Risks, Rewards, and Practicality

Taken all together, each individual will need to assess what is practical and reasonable if they’re hoping to generate crypto rewards. There are risks to be aware of when considering any type of cryptocurrency, and each person is going to have different resources available to them, skill sets, risk profiles, personal preferences, and more.

The Takeaway

Crypto mining and crypto staking are both methods utilized by blockchain networks to validate and secure data. They incentivize users to pledge their resources to the network by offering the prospect of a potential reward, but each method is different in some key ways.

To sum it up: Mining is generally more expensive and resource-intensive given the computing power that’s required, but may offer the prospect of bigger rewards. Staking can be a cheaper and easier-to-access alternative, but the rewards may be lower (if more steady). It’s important to always assess the risks involved, too, before deciding whether to stake or mine crypto.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

FAQ

Can I switch from mining to staking if I already own cryptocurrency?

Whether you can stake or mine crypto depends wholly on the specific crypto, and which mechanism its respective blockchain network uses to validate and secure itself. So, no, you can’t necessarily switch from one to the other.

Do staking and mining affect the value of the cryptocurrencies involved?

It’s possible that staking or mining could affect the value of crypto over time, as some cryptos have a capped quantity. As more coins or tokens hit the market, it could impact value.

Is it possible to mine or stake all cryptocurrencies?

Cryptocurrencies can either be staked or mined, not both. Though some cryptos may switch consensus mechanisms, as Ethereum did in 2022.

How does the environmental impact of staking compare to mining?

Staking is much more environmentally friendly than mining, as it doesn’t require as much computational power, and thus uses far less resources (energy) to process.

Are there tax implications for mining and staking rewards?

Yes, if you earn rewards as a result of mining or staking, you may generate a tax liability. The IRS considers those rewards to be ordinary income, so you’ll be taxed for those at your ordinary income rate. Conversely, gains you realize from selling, exchanging, or converting crypto are subject to capital gains taxes.

About the author

Brian Nibley

Brian Nibley is a freelance writer, author, and investor who has been covering the cryptocurrency space since 2017. His work has appeared in publications such as MSN Money, Blockworks, Business Insider, Cointelegraph, Finance Magnates, and Newsweek. Read full bio.

Photo credit: iStock/nortonrsx

SOCRYP-Q325-106

The way we handle money is quickly changing. With the rise of apps, online platforms, and cryptocurrencies, people now have more ways than ever to store and move their funds. One tool gaining attention in this evolution is the fiat wallet — a digital wallet that allows you to store fiat currencies (traditional money like U.S. dollars or euros) and easily convert between fiat and crypto.

Fiat wallets are gaining traction due to their vital role as a bridge between traditional banking and the cryptocurrency ecosystem. What follows is a closer look at what fiat wallets are, how they compare to bank accounts and crypto wallets, their benefits and drawbacks, and where they may fit in the future of money.

What Is a Fiat Wallet?

A fiat wallet is a digital account for storing, sending, and receiving fiat currencies. In addition, fiat wallets are typically integrated into cryptocurrency exchanges. This allows you to easily convert your fiat currency into cryptocurrency and vice versa, offering a seamless transition between traditional and digital assets.

Fiat currency is money declared legal tender by a government. It is not backed by a physical commodity like gold or silver but instead derives its value from the trust and confidence people have in the issuing government and its economy. The U.S. dollar is one example of fiat currency; the euro is another.

Fiat Wallets vs. Traditional Bank Accounts

While traditional bank accounts and fiat wallets both hold government issued currency, they serve different purposes.

•   Traditional bank accounts: Operate within the established financial system, offering services like debit cards, check, savings options, and loans. They are regulated, secure, and designed primarily for everyday banking needs. Transfers, however, can be slow — especially when moving money across borders.

•   Fiat wallets: Typically found within crypto exchanges and platforms, fiat wallets are designed for speed and direct integration with digital asset markets. They don’t replace a bank account but act as a staging area where users can deposit cash and instantly use it to buy or sell cryptocurrencies. This makes them less about long-term money management and more about quick access to funds in a digital transaction environment.

Key Differences Between Fiat and Crypto Wallets

A crypto wallet is a holding place for cryptocurrency keys. These keys are passwords that allow you to access and manage various cryptocurrencies, such as Bitcoin and Ethereum. Crypto wallets may be physical, meaning you write your keys down on paper or store it on a hard drive, or you may store your keys digitally. Whatever method you choose, your crypto itself remains on the blockchain.^[1]

By contrast, fiat wallets only hold traditional, government-issued money (like USD, GBP, or EUR). You can link your fiat wallet to a traditional bank account and use the funds in your fiat wallet to interact with cryptocurrency platforms. This allows you to make seamless transitions between traditional and digital assets.

Here’s a look at fiat wallets vs. crypto wallets side by side:

Common Use Cases for Fiat Wallets

Fiat wallets are commonly used as a holding place for fiat currencies before purchasing crypto or after selling digital assets. They are often integrated into or used alongside crypto platforms to facilitate the conversion of traditional currency into digital assets and vice versa.

Here’s how the process typically works:

•   Create a fiat wallet on your chosen platform by providing personal information and ID verification

•   Create a link to your bank account, debit card, or credit card.

•   Deposit money to your fiat wallet using your connected bank account or card.

•   If necessary, link your fiat wallet to your preferred crypto platform and establish a crypto wallet.

•   Follow the platform’s instructions to buy cryptocurrency coins using the money in your fiat wallet.

Once again, the cryptocurrency you buy is stored on the blockchain; the key you need to unlock it is held in your separate crypto wallet.

To sell your cryptocurrency, you would follow the crypto platform’s instructions. The proceeds from the sale are deposited into your fiat wallet. You can then transfer that money to your linked bank account or use it to buy a different coin.

Benefits of Using a Fiat Wallet

Using a fiat wallet can offer a number of advantages. Here are some to consider:

Fast Access to Funds for Trading

In digital markets, timing can be everything. Fiat wallets allow near-instant transfers within digital platforms. That can be particularly helpful for capturing sudden “dips” in volatile crypto markets, where waiting for a traditional bank transfer to clear can take several days and cause you to miss an opportunity.

Seamless Exchange Between Fiat and Crypto

Fiat wallets make it simple to switch between government-issued money and digital assets without extra steps. Instead of moving funds through banks each time you want to trade, you can deposit once into your wallet and quickly convert between fiat and crypto as market conditions change.

Enhanced Convenience and User Experience

Fiat wallets can enhance user experience in a number of ways:

•   They offer a simple interface for managing transactions.

•   Many are already integrated into major crypto exchanges.

•   They allow for quick withdrawals back to a linked account.

•   They provide access to your money at any time and from anywhere.

Potential Cost Savings

Fiat wallets may reduce costs by charging lower transaction fees (compared to repeated bank transfers) and avoiding multiple intermediary steps in the crypto buying and selling process. They may also allow you to avoid currency exchange fees.

Drawbacks to Fiat Wallets

While the benefits are compelling, fiat wallets are not without risks. Here are some to keep in mind:

•   Limited regulation: Not all providers of fiat wallets are regulated like banks, potentially exposing users to risk if a platform fails.

•   Withdrawal limits: Some fiat wallets set caps on deposits, withdrawals, or transactions, which may be frustrating to high-volume users.

•   Platform dependency: Unlike a bank account, a fiat wallet usually ties users to a single platform or cryptocurrency exchange.

•   Security risks: Although providers invest in encryption, cyberattacks and breaches are possible.

How to Choose a Trustworthy Fiat Wallet Provider

Here are some key factors to consider for when choosing a fiat wallet for cryptocurrency:

•   Reputation: Consider established exchanges and fintech companies that are known for reliability and safety.

•   Convenience: Make sure the wallet supports your local currency, accepts your desired payment method, and offers integration with your preferred crypto exchange.

•   Security infrastructure: Look for a wallet that offers strong security features like two-factor and biometric authentication and conducts regular security audits.

•   User experience: A clean, intuitive interface can make regular use much easier.

•   Speed and efficiency: Some wallets may complete transactions at a faster pace than others, offering virtually instant access to funds. That may be important if you want to keep delays to a minimum.

•   Cost: Be aware of any fees you might pay to use a fiat wallet, including monthly or yearly subscription fees, transaction fees, or currency conversion fees.

The Future of Fiat Wallets in Digital Finance

Growing interest in cryptocurrency and digital assets underscores the importance of fiat wallets and their usefulness in connecting centralized vs. decentralized finance. We’ll likely see greater integration between fiat wallets and cryptocurrencies in the coming years as fintech companies continue to challenge the traditional banking narrative.

Trends and Innovations in Fiat Wallet Technology

Here’s a look at some continuing and emerging trends in the fiat wallet ecosystem:

•   Use of artificial intelligence (AI) and machine learning to detect potentially fraudulent activity

•   Biometrics and the use of fingerprint or facial ID to unlock fiat wallets

•   Integration into a broader range of crypto and financial platforms

•   Increased focus on user-friendly interfaces and mobile compatibility

•   Improved regulatory clarity and enforcement, helping to legitimize the crypto industry.

The fiat and crypto wallet market was valued at roughly 1.17 billion in 2024 and is expected to grow to $4.68 billion by 2033, suggesting that more people will turn to both technologies for their financial needs. That may spur even greater demand for tech innovation.

Evolving Role in the Crypto Ecosystem

In the crypto world, fiat wallets are more than just on- and off-ramps — they represent the meeting point between traditional and decentralized finance (DeFi). As regulation surrounding cryptocurrency increases and adoption grows, fiat wallets may serve as the backbone for compliant, mainstream participation in the cryptocurrency universe.

The Takeaway

Fiat wallets are a niche tool that enables users to easily convert fiat to cryptocurrency and vice-versa through crypto exchanges. As technology evolves, they are likely to become an increasingly important link between traditional banking and digital assets.

For anyone exploring the digital economy, understanding how these wallets work can make it easier to move confidently between the traditional financial system of bank accounts and government-backed money and the emerging world of cryptocurrency.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

FAQ

Are fiat wallets safe to use?

Fiat wallets are generally safe when provided by reputable financial institutions or regulated platforms. They typically use encryption, two-factor authentication (2FA), and other security measures to protect your funds. However, safety also depends on user practices, such as keeping login details secure and avoiding public Wi-Fi for transactions. Always choose wallets with a strong track record of safety and positive reviews.

How do I deposit money into my fiat wallet?

Depositing money into a fiat wallet is usually straightforward. Wallets typically allow transfers via bank accounts, debit/credit cards, or even payment apps. To deposit money, you typically need to log into your wallet, select “Deposit” or “Add Funds,” choose your preferred payment method, enter the amount, and confirm the transaction. The funds should appear in your wallet within minutes to a few business days, depending on the method and your bank.

Can I withdraw money from a fiat wallet to my bank account?

Yes, you can typically withdraw money from a fiat wallet and deposit it into your bank account via electronic transfer. The process usually involves linking your bank account to the wallet, initiating a withdrawal by specifying the amount and destination, and completing any required security verifications. Keep in mind that transfers may take several business days to process.

Can I use a fiat wallet to buy cryptocurrency?

Yes, fiat wallets are commonly used to buy cryptocurrency and are often already integrated with a crypto platform. Buying crypto is often as simple as selecting a cryptocurrency, choosing your fiat wallet as the payment method, and tapping “Buy.” To complete the transaction, you may need to confirm it with a passcode or biometric verification.

Can I convert crypto to cash with a fiat wallet?

Yes, many fiat wallets allow you to convert cryptocurrency to cash. This process usually involves selling your crypto through a connected exchange, then transferring the resulting fiat currency to your wallet. Once the funds are in your fiat wallet, you can withdraw them to your bank account.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/tommaso79

SOCRYP-Q325-087

We use money to pay for things all the time, yet many of us don’t stop to think about what gives it value. A paper bill or digital balance on your checking account has no real worth on its own. So why does it work? The answer lies in the fiat money system.

Fiat money is currency that has value not because it’s backed by a physical commodity like gold or silver, but because governments declare it legal tender and people trust that it will be accepted. In the U.S., fiat money is simply the dollars and cents we use every day. In the UK, it’s pounds, and in Japan, it’s yen. Below, we’ll explore how fiat currency works, how it came to be, its pros and cons, and what the future may hold as digital currencies rise in influence.

What Is Fiat Money?

Fiat money, or fiat currency, is a form of exchange or legal tender that’s backed by faith in the government, not an underlying asset like silver or gold. You can also think of fiat money as a national or regional currency. Examples of fiat currency include the dollar In the U.S., the pound in England, and the yen in Japan. Fiat money gets its value from public trust in the issuing government, the stability of that government, and the dynamics of supply and demand.

Fiat money is different from commodity money (like gold), which is tied to a tangible good’s inherent value, and digital currencies (such as cryptocurrency), which have no tangible form.

Origin and Meaning of the Term “Fiat”

“Fiat” is a Latin word that means “let it be done,” referring to an authoritative declaration or command. This term was chosen for fiat money because the money’s value is established by a government’s authority, not by its intrinsic worth or a commodity like gold. The value of fiat currency relies on public trust in the issuing government and the stability of the economy, making the government’s authority key to its worth.

Fiat Money vs. Commodity Money: Key Differences

Commodity money is a type of currency that is itself a valuable physical good, meaning it has intrinsic value apart from its use as money. A gold coin is valuable both as money and as gold. Commodity money can be used outside the monetary system. For example, silver jewelry retains value regardless of government policy.

By contrast, fiat money has no intrinsic value. A $20 bill is just a piece of money. Its worth comes from collective trust and the fact that the U.S. government requires its acceptance for payments.

A middle-ground money category is representative money, which once dominated economies. Under the gold standard, for example, paper notes were redeemable for a fixed amount of gold stored by the government. Today, however, almost all natural currencies are purely fiat-based.

Why Fiat Money Has Value

While fiat money is not backed by a tangible asset, people accept it in exchange for goods and services. This is due to a combination of legal authority, public trust, and market forces.

The Role of Government Backing and Legal Tender Laws

Fiat money is backed by the authority of the government that issues it. For example, the U.S. dollar is backed by the “full faith and credit of the U.S. government.”

Legal tender laws specify which types of fiat money are considered valid currency. American law, for example, states that:

“United States coins and currency (including Federal Reserve notes and circulating notes of Federal Reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.”^[1]

This definition specifically refers to physical currency. Debit cards, credit cards, and personal checks are not included, since they’re payment methods. However, they’re all tied to fiat money.

By this definition, digital currencies are also excluded. While you could technically use a digital currency to pay for goods or services, the currency itself has no backing from the U.S. government and is not legal tender.^[2]

Public Trust and Perception

Ultimately, fiat money relies on trust. People accept dollars, euros, or yen because they believe others will also accept them tomorrow. This collective belief gives the currency stability.

Trust can be strengthened by sound monetary policy, low inflation, and political stability. Conversely, when trust erodes, people may abandon the currency in favor of alternatives such as foreign money, commodities, or even barter.

Determinants of Fiat Currency Value

The value of fiat money is tied to several factors, some of which we’ve already mentioned. The most significant influences include:

•   Public perception and confidence

•   Government stability

•   Economic policies and conditions

•   Supply and demand

It’s the role of central banks to promote economic and monetary policies that are designed to lend stability to the money supply and currency valuations. In the U.S., the Federal Reserve (aka, “the Fed”) is tasked with conducting monetary policy. The Fed manages the value of fiat money primarily by controlling the money supply through three main tools: open market operations, interest rate adjustments, and reserve requirements.

By buying or selling government securities, setting benchmark interest rates, and influencing how much money banks must hold in reserve, the Fed can stimulate or slow economic activity, manage inflation, and maintain public trust in the currency’s stability and purchasing power.

Fiat Money: Past and Present

Understanding the origins of fiat currency can offer a perspective on why it’s become so important today.

Early Examples and Global Development

Asset-backed coins and paper money are believed to have first emerged centuries ago in China. This representative money caught on because people could use it to pay for goods and services — and also redeem it for its underlying commodity. Eventually, the use of physical money spread to Japan and other parts of Asia.

Silver and gold coins were the standard for payment in Europe until the first paper banknote was printed in Sweden in 1661. However, these notes were backed by a government guarantee to redeem them for gold and silver. That likened them to promissory notes, rather than a form of fiat money.

The United Kingdom, and later the U.S., used the gold standard to determine currency values. Under a gold standard system, a country’s money supply is tied to gold. A certain unit of currency is assigned a value based on a certain amount of gold.

The Move from Gold Standard to Fiat Systems

For much of modern history, nations operated under the gold standard, where currencies were tied to a specific amount of gold. This created stability but also limited governments’ flexibility during economic crises.

The turning point came during the 20th century. After the Great Depression and World War II, the Bretton Woods system established the U.S. dollars as the world’s reserve currency, pegged to gold. However, by the early 1970s, mounting economic pressures led President Richard Nixon to suspend dollar convertibility into gold. This effectively ended the gold standard and ushered the global fiat system we know today.

Here’s a look at other notable milestones in U.S. currency history:^[3]

•   1690: First issuance of paper notes in the Massachusetts Bay colony.

•   1739: Ben Franklin introduces anti-counterfeiting measures to stop the illegal reproduction of paper notes.

•   1775: The Continental Congress issues paper money to fund the Revolutionary War; lack of government backing results in a dramatic loss of value.

•   1791: Alexander Hamilton establishes the Bank of the United States to facilitate borrowing and lending for the U.S. government.

•   1861: “Greenbacks” are issued to finance the Civil War.

•   1862: Legal tender notes are issued in denominations of $1, $2, $5, $10, $20, $50, and $100.

•   1913: Federal Reserve Act establishes the Federal Reserve as the nation’s central bank.

•   1971: Nixon takes the U.S. off the gold standard.

Fiat Money in Modern Economies

Fiat money is the standard currency globally. Governments issue fiat currencies, which can be exchanged for other currencies. For example, if you’re traveling to Asia you could exchange dollars for Japanese yen or South Korean won.

The existence of fiat currencies is what powers governments and gives them the authority to direct monetary policy and the broader economy. Adjusting the money supply or interest rates, for instance, can help promote stability in times of economic uncertainty. The more volatile nature of commodities makes commodity money less attractive as a world currency.

While governments can and do maintain gold reserves, the value of the country’s currency is not dependent on that. That also allows for greater flexibility in managing and regulating currency and the money supply.

Advantages and Disadvantages of Fiat Money

Fiat currencies have many attractions, but they aren’t foolproof. Comparing the pros and cons of fiat money can help in understanding its importance and role on the global stage.

Advantages:

•   Flexibility: Fiat money allows for flexibility in managing economic policy and the money supply, potentially reducing the risk of banking disruptions.

•   Efficiency: Unlike commodity money, fiat money does not rely on scarce resources like gold.

•   Support for modern economies: Fiat money enables complex financial systems, credit expansion, and international commerce.

•   Portability and convenience: Paper bills and digital balances are easier to use than heavy coins and bullion.

Disadvantages:

•   Risk of inflation: Without strict limits, governments can over-issue money, eroding value.

•   Dependence on trust: If public confidence collapses, fiat money can quickly lose worth.

•   Potential for mismanagement: Poor monetary policy or political instability can trigger crises.

•   No intrinsic value: Unlike gold, fiat money has no fallback use if confidence collapses.

Real-World Examples of Fiat Money

If you need an example of fiat currency, look no further than your wallet. However, the dollar is just one type of fiat money in existence.

Major Fiat Currencies in Circulation

Most currencies today are fiat money. Some of the most significant fiat currencies include:

•   U.S. dollar

•   Mexican peso

•   Canadian dollar

•   Indian rupee

•   Japanese yen

•   Chinese yuan

•   South Korean won

•   British pound

•   Euro

•   Australian dollar

•   New Zealand dollar

Notable Cases of Fiat Currency Failure

There are several instances of fiat currency failures throughout history. Some of the currencies that have collapsed in the modern era include the:^[4]

•   Zimbabwe dollar (2000s)

•   Belorussian ruble (1990s)

•   Venezuelan bolivar (1990s – present)

•   Russian ruble (1990s)

•   Indian rupee (1990s)

•   German papiermark (1920s)

The collapse of the papiermark after World War I is notable because of the sheer size of the gap between its value and the dollar. In 1923, you would have needed 4.2 trillion German papiermarks to have the equivalent of one U.S. dollar.

Comparing Fiat Money With Alternatives

Fiat money is the primary means by which global commerce operates. However, a new class of digital currencies is on the rise.

Fiat Money vs. Cryptocurrencies

In recent years, digital currencies like Bitcoin have sparked debates about the future of money. Unlike fiat currencies, cryptocurrencies are managed by a decentralized network rather than any government or single authority.

Transactions made with cryptocurrencies are permanently logged on a ledger known as a blockchain. This ledger is viewable to anyone, therefore functioning as a public database. Cryptocurrencies offer a wide range of potential benefits, including faster transaction speeds, lower fees, and greater accessibility. However, they still face challenges, including price volatility, environmental concerns, and lack of regulation. Security risks and limited consumer protection are also ongoing concerns.

Stablecoins, Digital Assets, and Central Bank Digital Currencies (CBDCs)

Stablecoins are digital currencies whose value is tied to another asset. For example, a stablecoin may be pegged to the U.S. dollar. Most token issuers hold assets in reserve so that stablecoin holders can redeem them at any time. Stablecoins may be bought and sold and used as a form of payment for goods and services.

Accessibility and the potential to earn interest on holdings are fueling interest in stablecoins. However, the safety of a stablecoin depends on its backing assets, the transparency and solvency of its issuer, and the security of the wallet used to store it.

One potentially interesting development in the digital currency landscape could be the advent of central bank digital currencies (CBDC) — virtual currencies that are created and backed by a nation’s central bank.

CBDCs sound to some people like an oxymoron because cryptocurrencies, by definition, are decentralized and don’t have an authority backing them. However, more central banks are exploring the possibilities of using them.

The Future of Fiat Money

Fiat money isn’t going away any time soon, but we may see a blend of traditional systems and digital innovation in the coming years.

The Rise of Digital Currencies and Electronic Payments

The use of digital currencies as a payment method is growing. The federal GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoin) Act, which was signed into law in July 2025, opens the door to a regulatory framework that would allow the use of stablecoins as a form of payment. The Act requires stablecoin issuers to hold reserves in U.S. currency and enforces key rules surrounding transparency. It does not, however, convey government-backed status to stablecoins and prohibits issuers from marketing their coins as being backed or insured by the government.

Changing Role of Central Banks

As the number of digital currencies continues to grow, central banks are increasingly forced to pay attention. The uptick in the number of countries exploring CBDCs is evidence that governments are aware of the risks of digital currencies and are seeking ways to mitigate those risks by integrating them into payment systems.

In the U.S., the Federal Reserve recently withdrew guidance for banks related to crypto assets. They also issued a joint statement with the Office of the Comptroller of the Currency (OCC) and the FDIC addressing the safekeeping of crypto-assets by banks on behalf of their customers, creating a clear signal that banks can serve as custodians of digital assets.^[5]

The Fed has also drafted several papers on the pros and cons of introducing a CBDC in the U.S. In the Board’s opinion, a central bank digital currency would represent a significant innovation and offer Americans access to a form of currency with no liquidity or credit risk.^[6]

It’s unclear whether a CBDC will materialize in the U.S., and questions surrounding the risks of CBDCs continue to be obstacles to widespread adoption.

Ongoing Debates on Stability and Longevity

Cryptocurrency’s decentralized nature puts it at risk for wide swings in valuation. Compared to the dollar or other forms of fiat money, digital currencies may see values go up or down dramatically in a short period of time. Lack of government backing means that public confidence can play an even greater role in determining which way a cryptocurrency’s price moves.

Stablecoins are structured to maintain a relatively stable value and reduce volatility by pegging themselves to fiat currencies. However, concerns remain about how to make digital currencies accessible on a broad scale, as well as their overall longevity. Numerous cryptocurrencies have been abandoned for various reasons, but the common thread among them is that they lost all or nearly all of their value. Stablecoins could depeg, moving farther away from their intended value, for a number of reasons, such as illiquidity, regulatory challenges, or tech failures.

Banks are opening pathways with crypto checking and savings accounts that blend traditional banking with digital asset management. They allow you to hold fiat money in an FDIC-insured bank account while storing cryptocurrency in a secure digital wallet. (Keep in mind, however, that crypto assets are not FDIC insured and may lose value.) These hybrid account options may entice more people to explore digital currencies and help push them to the forefront of financial systems in the U.S. and abroad.

The Takeaway

Fiat money is a form of currency, such as the U.S. dollar or the euro, that is not backed by a physical commodity like gold or silver, but is instead given value by a government’s decree. Its value is based on the trust and confidence that people have in the issuing government and its economy. Most modern economies use fiat money, allowing central banks to control economic factors like inflation by managing the money supply.

Digital currencies offer an alternative to the fiat currency system, and are attracting significant interest from governments and the public due to their potential for faster, cheaper transactions, and new financial applications. These newer currency options range from decentralized cryptocurrencies to stablecoins and CBDCs.

Staying up to date on the latest trends affecting fiat currency and digital currencies can help you make informed decisions with your money.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

FAQ

Why does fiat money have value if it isn’t backed by a commodity?

Fiat money has value because people trust the government that issues it and accept it as a medium of exchange. Its worth comes from legal tender laws requiring its acceptance for debts and taxes, along with widespread confidence in its stability. Unlike gold or silver, fiat currency doesn’t rely on intrinsic value but on collective belief in its purchasing power. This is supported by strong institutions, economic productivity, and central bank policies that maintain confidence in the system.

How does fiat money impact inflation and hyperinflation?

Fiat money gives central banks flexibility to manage the money supply, which can help control inflation when used responsibly. However, if too much money is printed without corresponding economic growth, inflation rises as purchasing power declines. In extreme cases, such as political instability or uncontrolled spending, this can spiral into hyperinflation, where prices skyrocket, and money rapidly loses value. Fiat money’s reliance on government discipline makes inflation risk management crucial to maintaining trust and economic stability.

How is fiat money regulated?

Fiat money is regulated primarily by central banks, which oversee its issuance and circulation. They use tools like interest rates, reserve requirements, and open market operations to control money supply and maintain price stability. Governments also enforce legal tender laws, banking regulations, and anti-counterfeiting measures. Financial institutions also play roles in monitoring cross-border flows and exchange rates. This system of regulation ensures fiat money remains stable, trustworthy, and effective as a medium of exchange in modern economies.

Are cryptocurrencies likely to replace fiat money?

Cryptocurrencies provide decentralized, borderless transactions, but they face challenges in replacing fiat money. Most lack price stability, broad adoption, and government backing, making them less practical for everyday use. Governments also prefer to retain monetary control, which cryptocurrencies bypass.

While digital assets may complement fiat money, offering alternatives for financial portfolios or niche transactions, full replacement is unlikely soon. Instead, central banks are exploring central bank digital currencies (CBDCs), which blend digital innovation with government oversight, bridging the gap between crypto and fiat.

What happens if trust in a fiat currency disappears?

If people lose trust in a fiat currency, its value can collapse because it depends on public confidence rather than intrinsic worth. In such cases, individuals may turn to foreign currencies, commodities like gold, or even barter to preserve purchasing power. Severe loss of trust often leads to hyperinflation, economic instability, and social unrest. Governments may respond with monetary reforms, introducing a new currency, pegging value to a commodity, or adopting international support to restore stability and rebuild confidence.

Why do governments continue to use fiat money over alternatives?

Governments use fiat money because it’s stable, reliable, and flexible. Fiat currencies can be exchanged for goods and services in countries around the world. There’s no need to store large quantities of physical commodities, like gold or silver, that in the past have been used to determine the value of currency.

Governments use fiat money because it provides flexibility to manage economies. Unlike commodity-backed systems, fiat currency allows central banks to adjust supply in response to crises, growth, or inflation. It also simplifies transactions, reduces reliance on scarce resources, and supports modern financial systems like credit and banking. Alternatives, such as gold standards or purely decentralized currencies, limit monetary policy options.

What makes fiat currencies different from digital assets?

Fiat currencies are government-issued, legally recognized as legal tender, and regulated by central banks. They rely on public trust and institutional backing, ensuring broad acceptance for everyday transactions. Digital assets, such as cryptocurrencies, are decentralized, often unregulated, and rely on blockchain technology rather than government authority. While fiat money is relatively stable, most digital assets are volatile and speculative. In addition, fiat currencies integrate seamlessly into traditional financial systems, while digital assets operate outside them, offering new opportunities but also greater risks.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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