Key highlights:
- Fiat foreign money is just not backed by a real-world commodity and is as an alternative backed by the federal government that is issuing it
- Governments can print arbitrary quantities of fiat foreign money relying on their objectives
- Cryptocurrencies have predictable provide dynamics
In case you’re thinking about cryptocurrency and Bitcoin however haven’t actually engaged a lot with economics beforehand, you is perhaps operating into the time period “fiat foreign money” usually and questioning what it means. Nicely, the simplest clarification is that fiat foreign money is the cash you’re utilizing each day, whether or not that’s the US greenback, the euro, the Mexican peso or some other nationwide foreign money.
Fiat currencies are currencies that aren’t backed by commodities, however are as an alternative backed by their issuers (governments). These currencies have worth as a result of they’re acknowledged as authorized tender by a authorities – for instance, the US greenback is used to pay taxes owed to the US authorities, and the greenback can also be acknowledged by the nation’s authorized system because the technique of cost for settling money owed and obligations.
Nonetheless, the currencies utilized in our day-to-day lives weren’t at all times fiat currencies. Relying on the period and placement, currencies had been backed by real-world commodities, most notably treasured metals like gold and silver.
Fiat foreign money and cryptocurrency
Fiat foreign money began to emerge because the dominant type of cash globally within the 20th century, and one of the crucial notable occasions on this transition got here in 1971, when the USA deserted the gold commonplace underneath president Richard Nixon. Between 1944 and 1971, the U.S. authorities would assure that one troy ounce of gold may very well be exchanged for 35 {dollars}. After 1971, the worth of the greenback was now not tied to the gold reserves held by the U.S. authorities.
Fiat cash offers governments way more flexibility relating to increasing or limiting the availability of the foreign money. Nonetheless, fiat currencies are typically much less secure than currencies backed by commodities and will be affected by hyperinflation (a drastic rise in costs/devaluation of the foreign money) in excessive instances.
Many cryptocurrency advocates say that Bitcoin can present a greater different to fiat currencies. Though Bitcoin, identical to fiat foreign money, can also be not backed by any real-world commodity, the speed at which the availability of Bitcoin grows is totally clear and extremely predictable. There may be additionally a tough cap on the utmost provide of Bitcoin that may ever exist (21 million cash), which is seen by some as a useful characteristic.
The speed at which new BTC enters circulation every day can also be slowing down over time, because the block reward for miners will get slashed in half each 4 years with each Bitcoin halving.
