Many of us take the existence of our money for granted, but modern currencies are actually underpinned by a complex "fiat" system that is controlled by the government.
In cryptocurrency circles, the term "fiat" is used to distinguish these government-issued currencies from digital currencies like Bitcoin.
Where fiat currency is centralised and has no supply cap, cryptocurrencies are decentralised, open source and often have a fixed supply.
If that makes sense to you, great. If not, read on to learn more about how fiat currencies work, and how they compare to cryptocurrencies.
A fiat currency is simply any money that is issued by a central government and not backed by another asset or commodity (such as gold).
This includes all the major currencies in the world. The US dollar, the Euro, the British pound and the Japanese yen are all examples of fiat currencies.
In contrast to commodities, fiat currencies have no intrinsic value. Instead, their value comes from the faith that people have in the stability of the government that issues the currency.
The word "fiat" literally means "let it be done" in Latin, but in modern usage means an authoritative command or official decree.
As such, "fiat" currencies are those officially issued under a government's legal authority.
Yes, the Australian dollar is a classic example of a fiat currency. It's issued by the Reserve Bank of Australia (RBA), backed by the Australian government and serves as the official currency of the country.
Like other fiat currencies, this means the supply of AUD is not fixed, and more Australian dollars can be "printed" over time.
The value of the Australian dollar is therefore derived in part by the trust people have in the Australian government.
Here are some of the key intrinsic differences between fiat currencies and digital currencies like Bitcoin:
Unlimited supply. New fiat currency can be issued at any point, increasing the money supply over time. In contrast, there will only ever be 21 million Bitcoin.
Centralisation. Fiat currencies are issued and backed by a central bank or government, who have total control over the supply, liquidity and use of the currency. By comparison, Bitcoin is an decentralised, open source digital currency that is not controlled by any one central body or authority.
Trust. Fiat currencies are built on the trust instilled in the issuing government. if the government collapsed, so too could the currency. Bitcoin is considered "trustless" in the sense that it can continue to function without the support of a controlling body. The trust is instead place in the computer code that runs the Bitcoin network.
Of course, there are other practical differences between fiat currencies and digital currencies, including volatility, availability, legal status and the fact cryptocurrencies exist only in digital form.
No, Bitcoin is not a fiat currency. It is not issued or controlled by a single government and more Bitcoin cannot be created.
In fact, Bitcoin was specifically created as an alternative to fiat currencies.
When Satoshi Nakamoto, the pseudonymous creator Bitcoin, launched the Bitcoin network, he inscribed it with the message "the Times 03/Jan/2009 Chancellor on brink of second bailout for banks," quoting that day's front-page headline in the Times newspaper.
This was a direct reference to the extensive money-printing that was carried out by central governments to prop up banks following the global financial crisis of 2008.
While the ability to print new money is a crucial part of a fiat monetary system, it has the consequence of devaluing existing money.
This was something Nakamoto was keen to avoid with Bitcoin.
There are arguably 4 major advantages of fiat currencies, but even these are a matter of debate.
Many crypto advocates would consider the centralised nature of fiat currencies to be a significant flaw, and this was one of Satoshi Nakamoto's central motivations when creating Bitcoin.
Liquidity
The monetary supplies of fiat currencies are closely controlled by the central bank or issuing government, so there's no real risk of a supply crunch.
Government-backed currencies facilitate commerce and are part of the reason why modern economies function so efficiently.
Fiat currencies like AUD are also obviously accepted everywhere and can be easily traded for goods and services. The same can't be said for most cryptocurrencies or asset-backed currencies.
Stability
In comparison to cryptocurrencies and other assets such as stocks or commodities, fiat currencies are relatively stable.
While the value of fiat currencies can rise and fall against each other, they're not subject to the same level of volatility that has become a signature of the cryptocurrency markets.
Regulation
As government-issued currencies, fiat money is highly regulated. While counterfeit money does exist, fiat currencies are tightly-controlled and fairly immune to the type of manipulation you can find in the crypto markets.
There's plenty of factors that can impact the value of fiat currencies including political instability, inflation, interest rates, monetary supply, global trade and the national economy, to name just a few.
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Please how do I get a bitcoin?
Hi Bona,
Thanks for your question.
If you want to buy bitcoins, you can do it through a cryptocurrency broker or exchange. You may want to check our comprehensive guide on how to buy bitcoins to help you get started.
Kindly note that if you buy bitcoins, you’ll also need a wallet where you can save your coins if you do not intend to sell them right away. You may compare cryptocurrency wallets using our comparison table to help you find the one that suits you.
When you are ready, you may then click on the “Go to site” button to be redirected to their website where you can sign up or get in touch with their representatives for further inquiries you may have.
I hope this helps.
Cheers,
Anndy