Fiat vs Bitcoin
In the context of crypto, the word "fiat" has been thrown around a lot in recent years, especially in relation to Bitcoin. But what exactly is fiat? And how is it different from Bitcoin?
What is Money?
A store of value: An asset or currency that can be saved, retrieved and exchanged at a later date while predictably holding its value over the long term. The most common stores of value are precious metals like gold, real estate (typically), and government bonds. On a smaller scale, some collectables, like art and wine, can also serve as a store of value.
A medium of exchange: You can use it to buy goods and services from other people. The US dollar, for example, serves as a common medium of exchange in the US. To be a reliable medium of exchange, a currency must be accepted by all parties involved in a transaction. When you buy an oat milk latte, for example, both you and the barista are happy to use US dollars as a means of exchange.
A unit of account: A way to measure the value of goods, services and other assets. A unit of account provides a common denominator that everyone can use to value a good or service. For example, that oat milk you buy might cost $4, agreed upon by both you and the barista. The basis of that agreement stems from the US dollars serving as a unit of account.
Fiat is a government-issued currency that is not backed by a physical commodity, while Bitcoin is a decentralized cryptocurrency that is backed by electricity. While fiat currencies are more widely accepted as a unit of account, Bitcoin has shown to be a reliable store of value and an effective medium of exchange.
What is Fiat?
Fiat is a type of currency that derives its value from government decree or law. The word fiat comes from the Latin fiat, meaning "it shall be" or "let it be done." Fiat currencies are typically not backed by any physical commodity, such as gold or silver. Instead, fiat money is based on the faith and credit of the issuing government. The most common fiat currencies in use today are the US dollar, the euro, and the Japanese yen.
How Bitcoin is Different
Bitcoin is notably different. While fiat currencies are centralized and regulated by governments, Bitcoin is decentralized and not subject to government control. There's no "government decree" that gives Bitcoin its value. Bitcoin is also backed by a physical commodity, namely the electricity used to power its network through mining. This makes Bitcoin more similar to gold than fiat currencies. Additionally, Bitcoin has a hard monetary cap of 21 million BTC, whereas fiat currencies can be printed trivially, increasing the money supply with ease. Most proponents of Bitcoin see it as a hedge against fiat, as it is not subject to inflationary pressures.
Is Bitcoin Considered Money?
With the adoption of the Lightning Network, Bitcoin can now be used to buy goods and services with near-zero fees at near-instantaneous speed.
The US Dollar serves the three primary functions of money, but what about Bitcoin?
It's important to note that just because a technology does not satisfy expectations for a particular use does not mean that it never will. That’s a commonly used fallacy when talking about disruptive technology. The Internet was considered a passing fad by many in its early days, unable to support itself as a commercial platform. We all know how that story turned out.
Bitcoin's adoption and recognition by governments, investment firms, and retailers — while not proof it will necessarily meet expectations of money — it's at the very least an indication that it has the possibility to do so.
Over the long term, Bitcoin has shown to be a reliable store of value. While its price is volatile in the short term, it has held up remarkably well since its inception over 10 years ago. In fact, Bitcoin has outperformed fiat currencies and many other asset classes over the last decade.
Bitcoin is also an effective medium of exchange. With the adoption of the Lightning Network, Bitcoin can now be used to buy goods and services with near-zero fees at near-instantaneous speed. While fiat is still more widely accepted, this is changing rapidly as Bitcoin becomes more mainstream. And that’s exactly what we’re trying to do at NOAH.
What Bitcoin lacks most prominently is wide recognition as a unit of account. This is largely due to its volatility, as prices can fluctuate wildly from day to day. For this reason, it's difficult to price goods and services in Bitcoin. However, as adoption reaches critical mass, volatility is likely to quiet down, and we may see more businesses begin to price goods and services in Bitcoin (most likely in satoshis).
The differences between fiat and Bitcoin are quite clear. Fiat is a government-issued currency that is not backed by a physical commodity, while Bitcoin is a decentralized cryptocurrency that is backed by electricity. While fiat currencies are more widely accepted as a unit of account, Bitcoin has shown to be a reliable store of value and an effective medium of exchange. However, it's important to remember that fiat and Bitcoin are not mutually exclusive. In fact, they can exist quite happily side-by-side. While fiat may be the primary currency for now, there's no reason to think that Bitcoin can’t be a dominant currency in the global economy. Only time will tell.