What is a Fiat Wallet and How Does It Work? (2024)

Cryptocurrency exchanges offer hosted wallets for users to hold their cryptocurrencies. But they also provide fiat wallets to make it easier for users to buy and sell cryptos with fiat currencies. This offers several benefits for both the exchanges and the users.

What is a Fiat Wallet?

A fiat wallet is a digital storage compartment for fiat currencies. If a user wants, they can store US Dollars, Euros, and other fiat currencies inside one. The main reason people do this is to provide greater liquidity within their exchange accounts.

How Does a Fiat Wallet Work?

Fiat wallets are not complicated tools. In fact, if you have an online bank account, you already have something highly comparable to a fiat wallet. Both of these tools are simply accounts with a stored value of fiat currencies.

However, using a crypto wallet is different because you are storing your money in an account meant for faster crypto transactions alone. You do not receive most of the services banks (including online banks) offer. Fiat wallets instead offer excellent utility for the single-minded purpose they were created for.

To use a fiat wallet, you simply need to connect your crypto wallet to a bank account. After that, you need to transfer the fiat currency into the crypto wallet. You can generally choose to order this transfer at any moment.

It will typically take a few days to transfer money from your bank account to your fiat wallet. However, once the fiat currency is in your fiat wallet, it can be used to quickly conduct transactions for cryptos. So, it’s important to transfer your money to the fiat wallet a few days before you expect to start needing the speed offered by fiat wallets.

As an alternative, you can sell some crypto for fiat currency and place the proceeds in your wallet on the same platform on many platforms.

In these ways, fiat wallets are relatively flexible.

What Gives a Fiat Wallet Value?

In a word, liquidity. Without a fiat wallet, it can take several business days to complete a bank deposit. This causes trouble for the user in some circ*mstances:

• You want to buy or sell cryptos fast during price corrections
• You want to avoid the worst effects of cryptocurrency volatility

If, for example, your crypto assets drop steeply in value overnight, you may have to wait about 3 business days for your fiat currency to be deposited. This is sometimes fine, but in this scenario, you would certainly lose out on an opportunity to buy at an advantageous price. If you had a fiat wallet, however, the transaction would be instantaneous, and you would be able to benefit immensely from the speed.

This describes a situation many crypto traders and investors find themselves in from time to time. However, the benefits provided by such speed can be applied in a wide variety of situations. Speed very often equals greater profit in the cryptocurrency market, and sluggish transactions can be very costly.

Are Fiat Wallets Safe?

Fiat wallets are a part of a larger infrastructure (the cryptocurrency exchange). As a rule of thumb, a fiat wallet is as safe as the platform hosting it.

There is little difference in the safety of the crypto and fiat wallets of the same platform. The fiat and crypto segments of an exchange’s storage infrastructure are not necessarily very different.

Regardless, safety should always come first. Therefore, common-sense security measures such as encryption, multi-factor authentication, and strong passwords should be employed to protect all your digital assets.

The Difference Between a Crypto and Fiat Wallet

The obvious difference between these two wallet types is what they store inside them. You cannot hold any cryptos in a fiat wallet. But you can use your fiat wallet to transact on your choice of exchange faster, making them a partial replacement for your bank account. When you want to transfer money back to your bank, you can set up a transfer, which should take a few days. But you don’t need to worry about issues related to long wait times for crypto transactions.

You do not need a fiat wallet to take part in the crypto economy in any way. However, it’s a tool that often makes it easier to do efficiently.

Pros and Cons of Fiat Wallets

Fiat wallets provide many benefits, but they have a few drawbacks. Therefore, it’s essential to understand all the pros and cons of fiat wallets to avoid any confusion after you start using one.

Pros of a Fiat Wallet

• Scarcity: The scarcity of any crypto, commodity, or other individual asset has little to no effect on fiat currency.
• Flexibility: Fiat currency offers greater flexibility for both individuals and institutions.
• International Commerce: It makes sense to hold fiat currencies in a fiat wallet in an exchange for liquidity’s sake. Fiat currency is universally accepted around the world. Faster access and transaction times make it easier to benefit from cryptos and fiat currencies simultaneously.
• Cost Implication: Fiat money costs far less to make than any other asset class. This is particularly relevant and true of fiat currencies vs. cryptocurrencies.
• Convenience: Fiat wallets also provide convenience for all crypto investors. Fiat money doesn’t require the same security and other infrastructure as crypto, gold, and other assets.

Cons of a Fiat Wallet

• Inflation: Since the early days of crypto, there has been an understanding that cryptocurrencies offer an additional hedge against inflation. Fiat currencies are the source of that risk in the first place.
• Financial Institutions and Government Dependency: Dependence on traditional financial institutions is antithetical to the original philosophy behind the cryptocurrency revolution. Should the use of fiat wallets become too ubiquitous, it could start to undermine the “decentralized” nature of crypto.

How to Set Up a Fiat Wallet

Setting up a fiat wallet requires finding a platform that offers one. Once there, you can typically access one quickly and start using it once you transfer money. The key is simply finding the platform that makes it easy to set up and use a fiat wallet.