Fiat money is currency that works in the traditional financial system. Central banks pull the strings behind the scenes, deciding how much of it should circulate, when to increase or decrease the supply, and whether or not to take steps to boost its value. The stability of a fiat currency like the US dollar rests on a national government, in this case the US government.
This may be the form of money that’s most familiar to us, but it’s possible for money to takea variety of other forms. In the past, livestock, shells, and metal have been utilized in much the same way.
For something to function as money, there must be a large-scale acceptance of its power to hold value. If your plumber sends you an invoice for $200, he is relying on the probability the US dollar will retain its approximate value within the next month. If it were likely the dollar would lose three-quarters of its value within the week, his invoice wouldn’t help him very much.
If we accept something as currency, we rely that it’s effective in setting the values of goods and services in a consistent way. In addition, it will be divisible in the way the US dollar can be divided into pennies, nickels, dimes, and quarters.
In 1998, Wei Dai explained his idea for a new kind of money that would use cryptography and be entirely decentralized, (meaning that it wouldn’t rely on a central authority for its management). In 2009, Satoshi Nakomoto wrote about the concept in more detail, elaborating on its digital nature, which would give it the power to facilitate payments with a high level of security.
From this foundation, sprang the cryptocurrency, which has experienced a tidal wave of popularity in the last few years. Aside from facilitating payments, bitcoin took to flight as a trading instrument, and a world of cryptocurrency trading opened up on online exchanges. Let’s discuss how it measures up to fiat currency.
Central banks decide when it’s time to mint fresh fiat money, so there is, theoretically, no maximum number of US dollars. When it comes to cryptocurrencies like Bitcoin or Ethereum, the blockchain networks that house them use consensus mechanisms, called either proof-of-work or proof-of-stake, to mint new currency.
“Mining” is the term used for the process by which bitcoins are minted and bitcoin transactions are validated. Other cryptocurrencies work differently and issue their total supply at the outset, following which, they slowly withdraw them from circulation.
Many cryptos, including Bitcoin, work with a protocol that sets a cap on the number of coins that can exist. There won’t ever be more than 21 million bitcoins in circulation. Once a Bitcoin is successfully minted, it can be bought on an online exchange, used to pay for things, or kept in the hope that it will appreciate in value.
The main headwind crypto has faced in its goal of earning widespread acceptance is its lack of stability. Cryptocurrency values are propped up by factors like their utility and company leadership, but also by their sheer popularity. Dogecoin’s value has soared in the past, despite its apparent lack of distinguishing or useful features, chiefly due to social media hype. With this factor at work, we’ve witnessed cryptocurrencies’ values shoot up, and then down again, in very short time periods.
Stablecoins were created to solve the problem of crypto volatility. These cryptos peg their values to assets like fiat money or commodities, and so aim to shield themselves from the volatility of crypto markets. Popular examples of these include Tether, Dai, and USD Coin. Each of these is supposed to hold a steady value of $1, but they cannot claim to be as stable as fiat currency. Stablecoins have, in fact, been known to unpeg from their foundation assets and then collapse.
It’s certainly true that fiat is the universally accepted form of money, even twenty-two years into the twenty-first century,but don’t forget that crypto can do things fiat can’t. Fiat currency transfers can beset you with troublesome fees and take days to complete. Crypto transfers, by contrast, usually take less than a minute and will hardly set you back at all, costing about $0.01.
Also, there are some countries whose banking systems are unreliable, and whose fiat currencies struggle to find solid ground. Crypto has the potential to function as a kind of democratic financial system for everyone, no matter their economic status or place of residence, to freely access.
As we await the gradual spreading of crypto as an accepted payment method, it continues to be driven by its status as a trading instrument. Cryptocurrency trading is a very dynamic arena which is accessible to people all around the world, provided they have an appropriate device and an internet connection. CFD crypto trading is also done online, and offers you the opportunity to trade in the price movements of cryptocurrencies, whether up or down, without having to actually purchase them.