What is Fiat Currency?
Fiat currency is money not backed by a physical commodity, such as gold or silver, but rather by a government issuer. Fiat money derives its value from the supply and demand relationship and the stability of the issuing government. Most fiat money appears as coins or paper bills, used throughout the world. Like the US Dollar, Euro, Japanese Yen, or the Pound Sterling, the most commonly used currencies are fiat currencies. Almost all fiat currencies are issued by different governments, and none are backed by physical commodities.
Fiat money only has value because the issuing government maintains that value and the communities involved give it value. Historically, governments would create currency using a valuable physical commodity, such as gold or silver, or print paper money that people could redeem for a set amount of a physical commodity.
Because fiat money is not backed by physical reserves, like a national stockpile of gold or silver, it risks losing value due to inflation or even becoming worthless in the event of hyperinflation. If the market loses faith in an issuing government, the currency will no longer hold value. That differs from currency backed by a commodity. For example, commodity-backed currencies have intrinsic value because of the demand for gold jewelry and its use in the manufacture of electronic devices and other valuable goods.
Advantages of fiat currency
- Store of value, providing a numerical account, and facilitating exchange
- The ability to manage economic variables such as credit supply, liquidity, interest rates, and money velocity
Disadvantages of fiat currency
- Central banks of the issuing government alone control the money supply
- Inflation
- No Intrinsic value
Fiat money vs. Cryptocurrency
While fiat currency is still the dominant form of money globally, cryptocurrencies and the blockchain technology that underpins them appear to represent the next step in the evolution of money. Digital assets or cryptocurrencies rely on the intrinsic value of the blockchain network and the market’s confidence in that network. Central banks control the supply and demand of fiat money while digital assets are decentralized by nature. Another critical difference between these two currency systems is how they are created. Bitcoin, like most cryptocurrencies, has a limited supply and must be created or “mined” using Proof of Work or Proof of Stake mechanisms that validate the network and maintain its resilience and decentralization. In contrast, central banks could “print” any amount of fiat money at any time, based on their judgment of a nation’s economic needs and their monetary policy decisions.
As a digital form of money, cryptocurrencies have no physical counterpart, are decentralized and borderless, making them easier to transact with globally. Furthermore, transactions on a blockchain are irreversible, and the nature of cryptocurrencies makes tracking their origins considerably more difficult when compared to the fiat system.
Although the cryptocurrency market is still tiny compared to the traditional fiat market, new data shows that more and more people are converting a portion of their fiat into cryptocurrency. As the crypto-economy grows in size, sophistication and acceptance, volatility could possibly decrease as well. AscendEX provides an easy way for users to convert their fiat currency into cryptocurrency.
AscendEX users can convert their Fiat currency to digital assets HERE.
