- Traits Of Money
- What Is Fiat Currency?
- What Are Cryptocurrencies?
- What Are The Main Differences Between Bitcoin And Fiat Currencies?
As we all are aware, the relationship between Bitcoin and fiat currencies is a rather complex one. Cryptocurrencies such as Bitcoin seek to undermine the traditional method of using money.
While trust vested in fiat currencies is ensured through the money supply controlled by a centralized authority, such as the government or central bank, the trust vested in Bitcoin and other cryptocurrencies is based on its underlying blockchain architecture.
In this article, we will be discussing how Bitcoin is different from traditional fiat currencies. But before we continue down the line, we need to understand the concept of money and its traits.
Traits Of Money
Throughout human history, money has taken various forms. Starting from the barter system of exchanging items based on their need and value, then moving on to precious metals like gold and silver, bank notes, paper bills, digital cash, and finally cryptocurrencies.
But how is a paper bill, precious metal, or Bitcoin denoted its value? For this purpose, there are certain traits that money should have and they are the following:
What Is Fiat Currency?
While gold and silver are recognized as commodity money due to the value of their underlying worth, fiat currencies have no intrinsic value. Fiat money is a government-issued currency that is not backed by a commodity and its value is solely based on the government declaring it as legal tender.
Fiat money gives central banks, which issue them, greater control over the economy because these entities also control the money supply.
However, this level of centralized control means fiat money is subject to inflation as more money can be injected into the economy whenever required.
What Are Cryptocurrencies?
Cryptocurrencies like Bitcoin are digital tokens that allow people to make peer-to-peer (P2P) payments over a highly secure, cryptographic, and distributed network known as the blockchain.
Unlike fiat money, Bitcoin has no legislated or intrinsic value, as they are simply worth what people are willing to pay. Cryptocurrencies allow direct exchange of value between individuals without the intervention of intermediaries such as banks.
While fiat currencies are subject to inflation, Bitcoin has a limited supply of 21 million tokens, making it even scarcer than gold.
What Are The Main Differences Between Bitcoin And Fiat Currencies?
Bitcoin has surely revolutionized the monetary system but cash remains king as the global economy continues to be run under the traditional financial system controlled by the government and central banks.
Although cryptocurrencies can be used to purchase items, they are not considered legal tender but rather a store of value or an investment in most countries. While Bitcoin has its perks over debt-based fiat currencies, without adequate rules and regulations, its usage as money remains a hotly debated topic.
Most importantly, Bitcoin and cash have intrinsically different properties but are not substitutes for each other.