Ever since Bitcoin has surfaced as a disruptive force in the finance and commerce sector, there have been speculations about its role in the contemporary fiat-dominated economy. One of the most common questions that have made headway of late is whether Bitcoin is a fiat currency. Well, in one word- No. You can say Euro is a fiat currency the same way the American dollar is. But Bitcoin, although a valid currency, is NOT a fiat currency.
The imminent following question that comes is whether Bitcoin shares similarities with fiat currency. Well, despite some steep differences, Bitcoin does share a set of similarities with the traditional fiat currency.
The post below delves deeper into the fact that’s why Bitcoin cannot be termed as “fiat” currency.
Overview of fiat currency
Fiat money, essentially, is a type of currency that has been issued by a central authority, say the government of a country. It isn’t backed by any kind of physical commodity, say precious metals. A fiat currency is only backed by its issuer, i.e., the government.
It’s to stress here that fiat currency, at its core, is a form of legal tender. In colloquial use, “fiat money” usually refers to legal-tender coins or paper money that serves as both payment and investment vehicle. And as mentioned earlier, these legal-tender coins and paper money bills cannot be redeemed by any sort of commodity, like silver or gold.
Fiat currency is the most dominant mode of payment around the world. It is issued and accredited by the government and hence acknowledged universally across the mainstream economy. The American dollar (USD) is admittedly the most valuable fiat currency today as it’s issued and controlled by the biggest economy of the world.
Overview of Bitcoin
Bitcoin is the king of cryptocurrencies. In other words, it is a digital asset guarded by cryptography, developed on cutting-edge blockchain technology. The primary reason why Bitcoin cannot be termed as a fiat currency is because this crypto asset does not serve as a legal tender. Put simply, Bitcoin cryptocurrency is not issued by a central authority, say the government of a country. As a result, unlike the fiat currency, Bitcoin is not backed by the government of a particular country.
Similarities between Bitcoin and Fiat currency
The article has already mentioned that these two types of currencies do share certain similarities.
Fiat currency is the universally accepted unit of exchange in the modern global economy. In simple words, you can always use fiat currency as a form of payment while availing goods or/and services in the marketplace.
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Similarly, Bitcoin too can serve as a mode of payment. It’s true that Bitcoin has not experienced widespread adoption as a unit of exchange but the trend is only rising. A lot of big firms, say travel booking giant Expedia, have already started accepting BTC payments- along with fiat currency.
Both fiat currency and Bitcoin cryptocurrency can serve as viable investment vehicles. It’s because, like fiat, BTC too fulfills the condition of “store of value”- one of the major characteristics of a true “currency.”
However, the source of “value” for Bitcoin is different from that of a cryptocurrency. There will be more discussions on it in the latter part of the post.
Can be used as gift
Both fiat currency and Bitcoin currency can be offered to near and dear ones as gifts, especially when one is planning to present monetary gifts.
Dissimilarities between fiat currency and Bitcoin
Process of creation and availability
The fiat currency is printed and circulated by the government. Bitcoin is generated through a process of complicated mathematical calculation called “mining”.
Not controlled by centralized authority
Unlike fiat currency, Bitcoin is neither issued nor backed or controlled by some central authority. The digital asset is governed by a cutting-edge decentralized network that comprises independent computer nodes. The whole network operates on a consensus-based approach. It means, every transaction conducted through Bitcoin must receive approval from all the independent nodes forming the network.
Derivation of value
Why is fiat currency considered to be valuable in the global mainstream economy? It’s because the government has issued it as a “legal tender” and has acknowledged it as a mode of exchange and/or store of value. In simple words, it’s the backing from the government that brings “value” to fiat currency. Users of fiat currency use this specific form of currency because they believe and know that the currency is accepted both by government and general people.
Bitcoin is also considered to be valuable but it does not derive its “value” from the same place the fiat currency derives from. BTC is considered to be a valuable asset, especially for investment, because of its limited supply. There are only 21 million Bitcoins today. Once the whole amount has been mined out, there will be no Bitcoin left to mine. On the other hand, demand for Bitcoin is growing exponentially. This low supply-and-high demand factor has eventually accentuated the overall market value of Bitcoin by leaps and bounds.
Despite a bearish run throughout 2020, Bitcoin managed to reach All Time High in 2021 (second ATH), with the coin value surpassing a whopping $65,000 USD.
Besides, Bitcoin is also considered to be a valuable asset because of the underlying state-of-the-art blockchain DLT technology. Blockchain represents a shared and immutable ledger on a decentralized network. Since the technology is immutable, any transaction data that are recorded on blockchain cannot be manipulated. Also, the futuristic technology makes it next to impossible to duplicate Bitcoin.
On the other hand, fiat currency can be duplicated.
Fiat currencies are not as divisible as Bitcoin. 1 BTC can be micro divided into as many as 8 decimal places where the majority of fiat currencies only allow division into 2 decimal places.
As Bitcoin shows inclination to a rocket-high rise in price in near future, BTC users would be able to carry transactions with little fractions of the coin. This is one of the main areas where BTC scores over its conventional fiat counterpart.
As mentioned in the previous point, the supply of Bitcoin is limited. On the other hand, fiat currency can be printed by the government whenever needed anytime in the future.
Pros of Bitcoin over Fiat currency
- Assures security of transaction data, thanks to advanced cryptography protection
- Prevents risks of counterfeiting.
- Low supply and high demand has pumped up market value. BTC value is predicted to touch around $249,578 by the year 2025.
- Excellent investment medium for the current market given its exponentially high ROI possibilities, fueled by rising demand.
- Allows direct payment between two parties without intervention of intermediary
- Allows easy cross-border payment as Bitcoin is not governed by any particular central government.
Will Bitcoin surpass Fiat currency in future?
Well, Bitcoin is certainly poised to be a convenient and secured payment medium for the mainstream economy in near future. As of now, around 15,000+ major businesses have started accepting Bitcoin payments. In that light, Bitcoin does project a promising future.
However, Bitcoin might not be able to surpass or score over fiat currency in the long run. Given lack of regulation, the crypto world is highly volatile. Added to it, the “limited supply” quotient of BTC doesn’t make it a sustainable currency.
So, yes, although the world is at the threshold of witnessing increasing adoption of Bitcoin undoubtedly, fiat currency will always hold the throne in the global mainstream economy.