By Hasan O. on December 26, 2021Summary
What is a Fiat Currency: A fiat currency is the legal currency issued, regulated, and controlled by governments.
Examples of fiat currencies: The most common fiat currencies are the US dollar, Chinese Yuan, Euro, Japanese Yen and British Pound.
Advantages of fiat currencies: The fiat currency has no intrinsic value other than the value given to it by the issuing government.
Disadvantages of fiat currencies: A significant disadvantage of fiat currencies is inflation, which occurs through mismanagement or overprinting of money.
What is a Fiat Currency?
A fiat currency is a legal currency that is issued, regulated and controlled by governments. The value of this coin, whether paper money or coins, does not depend on any physical commodity. Instead, it is determined by supply and demand and the stability of the government that supports it. The most dominant fiat currencies are the US dollar, the Euro, the Japanese Yen and the British Pound. However, this was not always the case; money went through many stages before it took its present form. History and Rise of Fiat CurrencyThree types of currencies
The need for money was born, mainly, from the need to have something. When man realized that he could not hunt/collect everything he needed, he started trading or bartering. They soon realized that different products or services had different values. A trade can only be completed if both parties have an item (of similar value) that they want. Commodity currency
Thus, items that were used as commodity currency or money appeared. This is based on the idea that some things have a certain level of intrinsic value for everyone. In different parts of the world, different commodities were used as currency. In colder regions, furs and hides were standard, while in warmer regions they were less likely to be as valuable as food or other minerals. It was not strictly scientific, and value tended to be based mostly on the necessity and availability of certain elements. Disadvantages of Commodity Money
One of the biggest problems with commodity money was maintaining its value over the long term. As a trader with very valuable goods, you may have received too much barley as payment. Unfortunately, barley, if it deteriorates before use, loses its value in a relatively short time. This peculiarity of commodity currency made it almost impossible to store wealth. Even if barley were made a product with a longer shelf life, such a change could cause it to lose its value as a currency.
Not all commodity currencies were perishable, of course. Precious metals are the best-known and long-standing commodity currencies, and some developing countries still use gold and silver today to support their national currencies. One problem with the use of metal is the difficulty of having to transport bulky and heavy materials. Instead, banks began using paper coupons to represent a certain amount of gold officially stored in their accounts. This is exactly what led to the birth of representative money. Representative Money
Representative money is a government-issued banknote backed by an actual commodity such as gold or silver.Representative Money vs. Fiat Money
One of the main differences between representative currency and fiat currency is that governments can only print money based on the actual amount of gold they have in their vaults. Technically, each of these banknotes could be redeemed for the amount of gold they represented at some point. This Gold Standard soon gained worldwide acceptance. Each country formed a different currency with a value determined by its own gold reserves and metal prices. When Did the Fiat Currency Appear?
In 1971, President Richard Nixon made it illegal to hide privately owned gold. This led to the end of the Gold Standard, which was the transition from representative currency to fiat currency. As we mentioned at the beginning of the article, remember that fiat currency has no real value other than the value given to it by the government that issued it. In other words, fiat money derives its value not from a commodity, but from the power of government. If the government supports this currency as a reliable payment method, most people will accept it as such. A significant disadvantage of this is inflation, which occurs through mismanagement or overprinting of money. In Venezuela, for example, the local Venezuelan Bolivar should be immediately replaced with USD in order not to lose value due to the hyperinflation plaguing the country. Cryptocurrency vs. Fiat Currency
The next step in the evolution of the currency is, of course, crypto! Bitcoin was the first widely recognized decentralized cryptocurrency and has led to the creation of countless altcoins and projects. Is Bitcoin a Fiat Currency?
Interestingly, one group sees Bitcoin as fiat currency because it is not backed by any commodity and instead derives its value from investors’ faith and, to some extent, from governments. The veracity of this statement is highly controversial.
Understanding Central Bank Digital Currencies: What is a CBDC?Can You Buy Bitcoin with a Fiat Currency?
Yes. The easiest way to buy Bitcoin is to buy it on an exchange. For example, Phemex is a secure crypto exchange where you can buy Bitcoin using your credit or debit card. You can also buy directly with your bank account.