What is Fiat Currency?
If you are starting to learn about cryptocurrencies, you may hear the term “fiat” a lot. Fiat money is currency that a government has decided is legal tender such as USD, GBP & AUD. This means that people have to accept this currency as payment for debts and other things.
The Fiat Money System Explained
Fiat money is currency that is not backed by gold or silver, but by the government that issues it. This type of money can be dangerous because governments have a tendency to print too much money, which can lead to inflation. Fiat currency allows governments to control things like supply, liquidity and interest rates.
Fiat Money Supply Classifications
There are four types of fiat money supply. The most liquid type is called “M’s” in economics:
- M1 – These are the physical coins and notes that people use to buy things in your country. There is also money that people can use without having to carry any physical money. This is done by using things like debit cards and checking accounts.
- M2 – This includes different types of investments, such as savings deposits and mutual funds, which can be converted into cash relatively quickly.
- M3 – This includes money in your bank account, investments such as CDs and institutional money market funds, and also large time deposits.
- M4 – M4 includes all the money you have in cash, as well as all your money in the bank.
Fiat Currency vs Cryptocurrency
Cryptocurrency is different from fiat currency because it is not controlled by any country or monetary authority. Cryptocurrency exists only in digital form and is not legal tender in most countries. This means that you cannot use it to pay for things in many places.
Difference Between Fiat Money and Cryptocurrency
The main differences between fiat currency and cryptocurrency are listed here:
- Fiat currency is controlled by a central entity, like a government. This type of currency is used for all business and personal transactions.
- Cryptocurrency is a digital asset that is not owned by any government. It is a global currency that anyone can use. Cryptocurrency is not backed by any government and its supply is controlled by an algorithm.
Digital Fiat Currency vs Cryptocurrency
Central bank digital currencies are a new kind of currency. They are different from cryptocurrencies like Bitcoin because they are centralized. That means the government controls them. Their value is still controlled by the government’s monetary policy.
Is Cryptocurrency Better Than Fiat?
Cryptocurrency can replace fiat currency in all its uses. Cryptocurrency can be used as a store of value, medium of exchange and unit of account. This way, cryptocurrency removes the need for expensive and inefficient intermediaries such as banks. Additionally, the value of a cryptocurrency isn’t determined by a government as is the case with fiat currency. Instead, it replaces antiquated record keeping with an immutable and trustless ledger that every user has access to.
However, there are some problems with cryptocurrencies like transaction speed and high energy usage. But the new technology is quickly advancing to cover these problems. This creates a system of finance that is better than fiat in every way.