You’ve no doubt seen or heard the term “fiat wallet” flooding the cryptosphere recently, as it has become an integral part of the cryptocurrency investment process, yet it’s a pretty adamantine pairing of words that refuses to give up its meaning easily.
Not to worry though, as I’m going to be breaking it down for you in plain English right here in this post.
So, what is a fiat wallet? Well, it’s actually a very simple concept. You can think of it as an online bank account designed to make the trading of cryptocurrencies easier and more efficient.
Get it yet? No, I don’t blame you. Let’s dig a little deeper, shall we?
What Is A Fiat Currency?
Fiat wallets are named so because they contain only fiat currency, so let’s start by discussing what a fiat currency actually is. Fiat currency is defined as any official, government-issued currency that is its own asset; in other words, a fiat currency isn’t backed by a related commodity.
Almost all national or continental currencies are fiat currencies, including the US dollar, the UK pound, and the European euro.
Now, your next question may well be… if a fiat wallet just holds normal money, what makes it different from a current account with a major bank?
And, truth be told, on a basic functional level, fiat wallets are very similar to online bank accounts, but here’s the thing; they’re not in any way affiliated with banks, and they’re used almost exclusively to facilitate the buying and selling of crypto.
Why Do We Need Fiat Wallets?
Many crypto exchanges offer two types of wallet. The most important is of course the crypto wallet, but the fiat wallet certainly has its benefits.
As I’m sure you’re all too aware, using traditional banks and current accounts to move funds is a total nightmare, especially in a time-sensitive situation. Not only can it take days for a single transaction to process, you can also be hit with some pretty gnarly transaction fees.
By contrast, a fiat wallet supported by a crypto exchange allows you to make instantaneous transactions, usually for reduced rates. The expedited process enables users to take advantage of time-critical fluctuations in the value of cryptocurrencies on the market.
Let’s say, for example, that the price of certain crypto took a nosedive, so you decide to buy some at the newly reduced rate. If your fiat deposit takes up to three days to process, you’re going to miss out on an investment that has some significant potential.
Transitioning Fiat Currencies Related To The Trade Of Cryptocurrencies
As a dedicated cryptocurrency service, a fiat wallet is streamlined to support the trading process. You can think of it as the middleman for most crypto transactions. Fiat wallets allow you to…
- Transfer money from a fiat bank account to the fiat wallet itself
- Withdraw fiat money into a bank account
- Deposit money from the sale of crypto
- Pay for the purchase of crypto
Protecting Portfolios During Volatility
Volatility can lead to some huge upswings and truly amazing ROIs, but it can just as well lead to some assets guttering out in the market, leading to lots of devastating losses, but the humble fiat wallet provides a safe haven in which you can wait out the storm.
Should you predict some volatility on the horizon, rather than risk your cryptocurrencies losing value, you could sell up and store your investment funds as fiat money in your fiat wallet that you can easily reinvest when the market stabilizes.
If you play your cards right, you might even be able to buy back the exact same cryptocurrency for a lower price if its value drops during the turbulent period, leaving you with a tidy profit to diversify or expand your crypto portfolio.
What Is A Fiat Wallet- Frequently Asked Questions
What’s The Difference Between A Fiat Wallet & A Crypto Wallet?
The distinguishing factor between fiat and crypto wallets is the currency they hold. As established, fiat wallets can only hold fiat money, i.e. US dollars, Indian rupees, and UK pounds.
Crypto wallets, on the other hand, are built from the ground up to hold cryptocurrencies exclusively.
Before funds from one wallet can enter the other, a trade must occur.
For instance, in order to increase the assets held in your crypto wallet using the money in your fiat wallet, you must use the fiat money to purchase more cryptocurrency, and to increase your fiat assets using your crypto, you must sell some of the currency in your crypto wallet.
Do I Need A Fiat Wallet To Trade Crypto?
A fiat wallet is not considered an absolute essential, for as long as you have a crypto wallet, you can get in on the action.
But if you want to take advantage of cryptocurrency volatility and cash in on quick price corrections, then I highly recommend picking an exchange that offers fiat wallets.
In bygone days when fiat wallets were yet to be introduced, investors came up with a similar process involving the utilization of an intermediary Stablecoin or Bitcoin account.
This method allowed you to stay within the exchange ecosystem without sourcing funds from your current account… but there was a problem.
There was no easy way to get the funds back into your current account as fiat money. In order to do so, you had to sell the intermediary cryptocurrency for US dollars before attempting the transaction.
In essence, fiat wallets are a means of keeping your government-issued funds and cryptocurrencies in close proximity, thereby smoothing out the inter-currency trading process a great deal, not to mention the investment-to-current account transition process.
Fiat wallets are a comparatively recent addition to crypto exchange ecosystems, and they can be a massive help if you’re keen on making sudden value fluctuations work for you and your portfolio.
You don’t necessarily need one of these digital wallets to start trading cryptocurrencies, but thanks to instantaneous transfers, they can make such a pursuit far more enjoyable and lucrative.
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.