And how is Bitcoin different?
Once you start looking into the world of cryptocurrency, you’ll begin to see people talking about fiat money. Sometimes it’s compared with cryptocurrency, especially Bitcoin, and many Bitcoin enthusiasts seem to have disdain for fiat money.
But what exactly is it, and how are they different?
The Gold Standard
According to Investopedia, “Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.” Most currencies across the globe are fiat currencies. However, historically, governments used to value currency based on the gold standard. For over 5,000 years of human history, gold was used as a monetary unit and a measurement of wealth.
In the United States, the price of gold used to determine the value of the dollar. So if gold was worth $500 an ounce, the dollar would be valued at 1/500th of an ounce of gold. People could literally take their paper currency and exchange it for a like measure of gold. That standard began to be dropped in the U.S. in 1933 and was completely abandoned in 1973.
Replacing the gold standard was what we currently have today, and that is fiat money. The word “fiat” is derived from the Latin “fieri” which is an arbitrary act or decree. Fiat money is arbitrarily worth whatever the government says it’s worth. And as long as other nations around the world agree, then paper money has whatever value governments assign to it.
Is Fiat Currency Better Than Gold?
The U.S. dollar, the Euro, and many other world currencies are fiat currencies. The value is based on the strength of the government that issues it. While some people look at fiat currency as not having actual value because it’s not backed by a tangible commodity, others point out that the value of gold has not been stable or reliable over the years either. When you look at the price of gold over the past 40 years as compared to the S&P 500, if you had purchased an ounce of gold in 1980, it would have cost $595. And today that ounce of gold would be worth $1,866. It has more than tripled in value. If you had invested $595 into the S&P 500 in 1980, it would be worth over $53,000 today.
Why Bitcoiners Are Critical of Fiat Money
The bottom line is that fiat money’s value is determined by the governments that issue it. It is regulated, it seems arbitrary, and they just print more of it whenever they want to. It’s an unlimited supply, basically. It has no intrinsic value. Bitcoin, however, is produced and distributed through digital mining and is not controlled by a centralized authority. Bitcoin transactions are secure and cannot be reversed, cancelled, or charged back. The trust factor in Bitcoin is due to the blockchain technology, not the authority of a bank or government institution. Bitcoin’s fixed supply of 21 million units makes it more scarce than gold.
Bitcoin can be spent and received anywhere in the world without the need for a bank or a government. Since you can transfer money digitally over the internet with bitcoin, and it is controlled by a decentralized network (the blockchain) it is more efficient than central-bank controlled fiat money.
Will Bitcoin Replace Fiat Currency?
Coinbase Co-founder and CEO Brian Armstrong predicts that Bitcoin could replace the U.S. dollar by 2030. For that to happen, however, it would need to make progress in several important areas, according to various economists, investment managers, and venture capitalists. It would need to serve as an effective medium of exchange where individuals and companies can trade it for goods and services. It also has to be able to function as a store of value. In other words, the value of Bitcoin would need to be stable. And finally, it would need to function as a unit of account; able to quantify the value of other goods and services.