What is Fiat Currency?
The basic difference between crypto and fiat currency is the value of a unit. A fiat dollar has no intrinsic value; its worth is determined by government decision. A hat with a value of $20 is less valuable than a $500 mattress. A fiat currency is not convertible and loses its value over time. However, a cryptocurrency has a limited supply, is portable and has consensus mechanisms.
Fiat currency is the legal tender backed by a central government. It can be physical dollars or digitally represented by bank credit. A government controls the supply of fiat currency, which is why it is a popular way to purchase goods and services. However, the value of fiat currency is dependent on the country’s government and cannot be transferred to other countries. The value of crypto is not tied to a country’s national currency and must be verified by a bank.
A fiat currency is backed by a government and is issued in a limited quantity. A government can increase its supply to maintain its currency. One notable example was Zimbabwe’s 100 trillion dollar note, which was worth about 40 U.S. cents. Fortunately, most governments have procedures to prevent runaway inflation. As such, crypto currencies are a safer alternative to fiat money and are aimed at serving as a means of exchange.
How is it Different From Crypto?
Fiat currency is a monetary form controlled by banks and centralized authorities. The amount you authorize for a check or deposit is debited from your account, and credited to the merchant or person receiving it. These banks process the transaction, and provide a record to the buyer and seller. The value of a coin is controlled by its price and the amount it is worth.
A fiat currency is created by a central bank, which gives it legal legitimacy and the ability to print more money. It is linked to a central government and is a monetary unit of trust. In other words, you need to have a bank account in order to use a fiat cryptocurrency. If you don’t, it is unlikely that you can buy the cryptocurrency.
A fiat currency’s value is based on the supply and demand of the currency. A fiat currency can increase in value. For example, a Zimbabwean bank issued a 100 trillion dollar note that was worth 40 U.S. cents. While most governments have procedures in place to prevent runaway inflation, the purpose of a fiat currency is to serve as a medium of exchange.