Cryptopedia
Fiat Currency
Fiat money is legal tender in circulation, issued by governments and authorities.
To know more about Fiat Money, one should know what money is. In the early stage of human civilization, there was no such thing as “money.” With low productivity, people could only produce items for personal use. However, thanks to increasing productivity, unnecessary items were produced. Based on reciprocity, people started to trade these items with others, which gave birth to barter-based economies. With a wide range of products, it was difficult to carry out barter trade. As a result, a universal equivalent, an object that was the measure by which all items were compared and exchanged on the market, came into being. In China, seashells were regarded as the earliest universal equivalent. People could buy things with seashells. As time passed, paper money has gradually become a universal equivalent.
Being a universal equivalent, paper money is easy to carry in daily life. It has no intrinsic value. Different countries have different paper money in circulation. For instance, the Renminbi is the official currency of China. Member states of the European Union adopt the Euro as their currency. As for the US dollar, it has become a global currency. Before paper money went into circulation, governments had adopted currencies with intrinsic value. In ancient times, gold, silver, and copper were adopted by the Chinese government. Western countries chose gold, jewelry, and coins as their fiat money.
Fiat Money VS Cryptocurrency
Like fiat money, cryptocurrency can measure the value of products and be circulated on the market through trading.
The Differences between Fiat Money and Cryptocurrency:
1.Issuance
Governments and authorities issue fiat money. Therefore, its total supply is not fixed as the government will regulate its issuance based on the domestic market.
As for a cryptocurrency, it is often issued by a decentralized mechanism with pre-set rules. Therefore, it usually has a limited total supply.
2.Ways and Scope of Circulation
Within the border of a nation, its fiat money can be circulated freely with the endorsement by the state. Nobody nor an organization can refuse to accept fiat money as a means of payment. Examples of trading with fiat money include offline transactions with paper money and online trading through Paypal, a platform that allows paying fiat money for items in online shops.
Nevertheless, the fiat money of a country must be exchanged into other currencies to trade with people from other nations. Therefore, buyers or sellers can refuse to accept other nation’s fiat currency.
In an intangible form, cryptocurrencies are traded only online. Common ways of trading include the exchange between different cryptocurrencies and the exchange between cryptocurrencies and fiat money. Nevertheless, few tangible products can be bought directly with cryptocurrencies. Thus, cryptocurrencies must be exchanged into fiat money to buy the products.
With a web-connected device, cryptocurrencies can be traded at any time anywhere due to their global circulation.
3.Risks
The risk of holding fiat money is low, given the endorsement by a state. However, the value of fiat money may suffer from hyperinflation. For example, the Zimbabwean dollar witnessed rapid depreciation in its value in 2009.
Compared with fiat money, holding cryptocurrencies will bring tremendous risks as their value is subject to huge fluctuation.
Conclusion:
The birth of Bitcoin did not take place with the intent to replace fiat money. Instead, it proposed a new form of a digital economy that could contribute to a better financial for the future.
Despite that, the future development of both fiat money and cryptocurrency will be shrouded with uncertainties. In comparison to the former, cryptocurrencies need more time to develop with a mixture of opportunities and risks.
To know more about Fiat Money, one should know what money is. In the early stage of human civilization, there was no such thing as “money.” With low productivity, people could only produce items for personal use. However, thanks to increasing productivity, unnecessary items were produced. Based on reciprocity, people started to trade these items with others, which gave birth to barter-based economies. With a wide range of products, it was difficult to carry out barter trade. As a result, a universal equivalent, an object that was the measure by which all items were compared and exchanged on the market, came into being. In China, seashells were regarded as the earliest universal equivalent. People could buy things with seashells. As time passed, paper money has gradually become a universal equivalent.
Being a universal equivalent, paper money is easy to carry in daily life. It has no intrinsic value. Different countries have different paper money in circulation. For instance, the Renminbi is the official currency of China. Member states of the European Union adopt the Euro as their currency. As for the US dollar, it has become a global currency. Before paper money went into circulation, governments had adopted currencies with intrinsic value. In ancient times, gold, silver, and copper were adopted by the Chinese government. Western countries chose gold, jewelry, and coins as their fiat money.
Fiat Money VS Cryptocurrency
Like fiat money, cryptocurrency can measure the value of products and be circulated on the market through trading.
The Differences between Fiat Money and Cryptocurrency:
1.Issuance
Governments and authorities issue fiat money. Therefore, its total supply is not fixed as the government will regulate its issuance based on the domestic market.
As for a cryptocurrency, it is often issued by a decentralized mechanism with pre-set rules. Therefore, it usually has a limited total supply.
2.Ways and Scope of Circulation
Within the border of a nation, its fiat money can be circulated freely with the endorsement by the state. Nobody nor an organization can refuse to accept fiat money as a means of payment. Examples of trading with fiat money include offline transactions with paper money and online trading through Paypal, a platform that allows paying fiat money for items in online shops.
Nevertheless, the fiat money of a country must be exchanged into other currencies to trade with people from other nations. Therefore, buyers or sellers can refuse to accept other nation’s fiat currency.
In an intangible form, cryptocurrencies are traded only online. Common ways of trading include the exchange between different cryptocurrencies and the exchange between cryptocurrencies and fiat money. Nevertheless, few tangible products can be bought directly with cryptocurrencies. Thus, cryptocurrencies must be exchanged into fiat money to buy the products.
With a web-connected device, cryptocurrencies can be traded at any time anywhere due to their global circulation.
3.Risks
The risk of holding fiat money is low, given the endorsement by a state. However, the value of fiat money may suffer from hyperinflation. For example, the Zimbabwean dollar witnessed rapid depreciation in its value in 2009.
Compared with fiat money, holding cryptocurrencies will bring tremendous risks as their value is subject to huge fluctuation.
Conclusion:
The birth of Bitcoin did not take place with the intent to replace fiat money. Instead, it proposed a new form of a digital economy that could contribute to a better financial for the future.
Despite that, the future development of both fiat money and cryptocurrency will be shrouded with uncertainties. In comparison to the former, cryptocurrencies need more time to develop with a mixture of opportunities and risks.
