The difference between Bitcoin and fiat currencies

The difference between the Bitcoin and fiat currencies can be complex to understand. Bitcoin has radically reversed the way we think about money and challenges the traditional paradigm of money design. While trust in fiat currencies is guaranteed by the supply of money controlled by a centralized authority, such as the government or central bank, trust in Bitcoin is based on their underlying blockchain architecture.

In this article, we will examine the differences between Bitcoin and traditional fiat currencies. Recall that the terms “fiat” and “fiat” are often used interchangeably to describe a type of currency that is backed by trust and faith in the issuing authority, usually the state.

The characteristics of the currency

Throughout human history, money has taken different forms. From the barter system, where goods were exchanged according to their need and their value, to the use of shells and stones (see Stones of Yap), precious metals such as gold and silver, banknotes, digital money and finally cryptocurrencies like Bitcoin. But how do a piece of paper, a precious metal or other obtain their value in the eyes of individuals? For this, many authors have asserted that money must have certain characteristics:

• Divisible – Currency must be able to be divided into small units to make specific payments.
• Non-consumable and non-perishable – Currency cannot be used for any purpose other than the exchange of value.
• Portable – Currency must be able to be transported easily and easily transferred from one person to another.
• Secured – Currency cannot be counterfeited.
• Scarcity – Currency must have a limited supply to maintain its value.
• Fungible – Each unit of money must have the same value as its equivalent.
• Recognizable – Currency must be recognized and accepted as a means of transaction.

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The concept of fiat money was developed by the German economist Georg Friedrich Knapp in his book " The State Theory of Money » ("State Theory of Money") published in 1905. Knapp introduced the idea that the value of money was not intrinsic, but rather based on the trust (fiduciary) that individuals had in the authority issuing the money, usually the state.

While gold and silver are considered commodity money because of the value of their underlying asset, fiat currencies have no intrinsic value. Fiat money is government-issued money that is not backed by any commodity and whose value is based solely on the government's declaration that it is a legal tender. In fact, the origin of the word fiduciary comes from the Latin word "fiducia" which means "trust" and "faith."

Thus, fiat currencies refer to a form of money whose value is based on trust rather than an underlying tangible value.

Fiat currencies give the 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 that fiat currency is prone to inflation because more money can be injected into the economy when needed.

Bitcoin

Bitcoin is an electronic currency that allows people to make peer-to-peer (P2P) payments through a highly secure and cryptographic distributed network called blockchain. Unlike fiat currency, Bitcoin has no legislative value per se, as its value simply depends on what people are willing to pay. Bitcoin thus responds to the law of supply and demand which will determine its price.

However, Bitcoin is a form of digital currency that relies on a consensus mechanism called “Proof of Work” that requires high computing power. This process, while crucial to securing the Bitcoin network, consumes a significant amount of electricity. Thus, the energy cost associated with producing Bitcoin can be considered a sort of “intrinsic value” for this digital currency.

Main differences between Bitcoin and fiat currencies

There are several major differences between Bitcoin and fiat currencies:

• While cash is issued, backed and managed by the government, Bitcoin is managed by a decentralized network where transactions cannot be altered, manipulated or deleted.
• Fiat currencies can be counterfeited and the only way to store them safely is to deposit them in a bank or other financial institution. When it comes to Bitcoin, you can either hold them yourself in a cryptocurrency wallet, in which case you are entirely responsible, or trust a third party with your holdings. When it comes to Bitcoin, there is no organization to protect against your losses and there is no way to recover lost cryptocurrencies.
• Much of the value of fiat currency is created from debt and on the system of fractional reserve. If no loans were taken out by consumers or banks, there would be no money in circulation. In contrast, Bitcoin does not rely on a system of debt, its value coming down to its effectiveness as a medium of exchange and the trust of its community. While fiat currencies are prone to inflation, Bitcoin has a limited supply of 21 million tokens, making it even rarer than gold.
• There are clear and well-established rules and regulations surrounding fiat currencies. On the other hand, regulations regarding Bitcoin and cryptocurrencies are still being developed. Cryptocurrency regulations also vary depending on legislation around the world.
• To transfer money to someone in another country, you will need to exchange it for the local fiat currency, which may affect its value, and the recipient will need to have a bank account or ID government to receive payment. In contrast, Bitcoin can be received by anyone, anywhere, at any time, without the need for a bank account or ID. The network is censorship resistant and anyone can access it unlike fiat currencies which require going through a bank.

Conclusion

Bitcoin has certainly revolutionized the monetary system by forcing us to rethink fiat money and the traditional financial system controlled by government and central banks. While Bitcoin has advantages over debt-based fiat currencies, without adequate rules and regulations, its use as a currency continues to grow.

It is important to note that at least at present, Bitcoin and fiat currencies have intrinsically different properties but are not substitutes for each other.

See as well:

• Who is Ludwig von Mises and what is his connection to Bitcoin?