What is fiat money and how does it differ from cryptocurrency?
If you have been into cryptocurrency then you must have heard about Fiat money. This article is going to cover the main differences between these new digital currencies and the traditional currency. What are they benefits and demerits of using Fiat to Cryptocurrencies .
What is fiat money?
Fiat money is a currency that has been distributed by a country’s government. This type of money has been declared as a legal tender for various debts but its not yet backed by any type of commodity. For example Gold.
The value of this Fiat currency stems from the relationship of demand and supply and also the faith the users has for the currency to maintain its value and to the the relationship it has with the country where it originate.
Though Fiat money can be useful , still the issue of a currency with no proper value can be wary or uncomfortable to many users.
How was fiat currency created?
Fiat currencies were created in order to make trade more easier and to allow for the storage of wealth. It must have a face value.. US dollars was originally printed and redeemable for its face value in gold.
The relationship here was eventually severed To control inflation and deflation, there was disintegration. which were issues with the previous gold backed system, and now the US government controls it , US dollar is purely backed by reputation and the monetary system which the US government controls.
This model helps to make the currency more reliable , keeping the system in order and in a place well balanced but another thing is that it does not mean that the currency cannot change in value. Fiat currencies all over the world changes in value. This is the major reason people engage in forex trading which allows them to make money during this fluctuations in currency.
Fiat money example
The Nigerian naira is an example of Fiat currency. Another one is the US dollar . All these currencies not backed by any kind of physical commodity, and its value depends on the government that originates it. Actually it has to do with the way government manages its economy that determines the value of the currency which is subject to change. Now the value of one fiat money to another is the exchange rate.
United States dollar was at sometime backed by gold standard. But its not in use now. Fiat money is now backed only by government who has issued it which balances its value from underlying supply and demand.
Many people opposed to this approach as they objected the abandonment of the gold standard because of no safeguard of value as the government may not meet up wither promises assuming there is a sudden big problem.
Fiat money advantages
That not withstanding, Fiat money has some advantages . Even though its not tied to gold , its easier to control the value and stop disasters. For example, the United States government chad control over the value of the US dollar to keep disastrous events, like the 2008 recession, from crashing the value of the currency.
The redeemable value of US dollar is constant this makes it easier for storage and trade purposes that currencies that whose value fluctuates often.
Fiat money disadvantages
There are some disadvantages to fiat money as well. Despite the system checks in place, there are still some disadvantages of Fiat money. Inflation can affect Fiat money, corruption in government of the day, A corrupt government can cause the devaluation of its currency. Some countries are faced with this problem and its really a big threat to the economy and if government uses its power to go into printing of more money then the country will be faced with hyperinflation.
Fiat money versus cryptocurrency
Cryptocurrency functions differently from Fiat currency. It looks like democratic and Autocratic government. Cryptocurrencies are more democratic in their approach with a decentralised system where no one is in absolute control. and while the system is not controlled by intermediaries. it does make it much harder for one centralized entity to ruin the system since all participants must agree on any changes. Fiat money is centralised and controlled by government.
In Cryptocurrencies supplies are limited, this tends to control or resist inflation. Unfortunately, crypto assets still have trouble holding stable values, and that can make it difficult for someone to depend on them for day to day expenses and businesses where even small price variances can cause profit margins to vanish, leaving merchants at loss.
Can cryptocurrency replace fiat money?
Of course it can as many institutions and government are gradually working on issuing their own cryptocurrencies. Some private companies are already on it. The basic thing is for these crypto to keep the model of decentralisation. For it to replace Fiat currency as a decentralised cryptocurrency, it has to be reliable first and also likely to be a pegged asset capable of performing similar tasks to US dollar as well as providing the benefits of crypto to the consumers.
Fiat currency and inflation
The value of fiat money carefully rest on the balance of supply and demand, but there is no control as to the amount of fiat money which can be printed. Meaning that it’s up to the government to control this supply and demand.
A corrupt government may just decide to keep printing new money since they are in control, this could cause inflation if not well managed which will ultimately ruin the value of the currency As there are no commodity backing it or supply limitation in the case of cryptocurrency this situation can spark up hyperinflation and to control these situation was one of the main reason for the creation of cryptocurrency to address the situation.
Future of fiat currency
It seems more likely that in the future governments will want to issue their own cryptocurrencies even as some private institutions are gradually adopting it by creating their own crypto. New fiat currencies which are digital. Though a decentralized currency seems unlikely, but a government-issued crypto coin would still provide superior tracking capabilities. All credits goes to the blockchain technology
Paper money will most likely be long gone, Fiat principals will remain, even as paper money may likely go , as government will still want to have complete control of it. Traditional cryptocurrencies will still function right next to them as usual.
Credits: Wikipedia, Financial Watch, bitcoinke.ioJOIN OUR COMMUNITY