Fiat money derives its value from trust in governments, similar to cryptocurrency. Fiat has a poor track record as a store of value due to inflation, while Bitcoin's performance varies. Fiat is currently more convenient for everyday transactions. However, the future of fiat is uncertain, as it relies on human behavior and trust, making it vulnerable to instability. Bitcoin, as a digital asset, offers an alternative if trust in traditional currencies falters due to political turmoil or economic instability.
Investopedia states that “Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it.”
Yet in layman’s terms, it means “currency has value because we say, and everyone agrees, that it does”. This is crucially important when discussing the value differences between cryptocurrency and FIAT currency, and why the future for FIAT is bleak. If anyone ever tells you that cryptocurrency has no intrinsic value; well neither does the dollar, or any other major currency for that matter. It is the extrinsic value that we place on it that matters.
A store of value
The above shows that the purchasing power of the USD has fallen by 96% (from a consumer’s perspective) since 1913. Why is this important? It shows that FIAT is a terrible store of value. Most of you can relate to these last few years when inflation has been high and our savings are being eaten away.
Yet is cryptocurrency (I am using Bitcoin as it is the best example) a better store of value? It depends on when you started utilizing it. If it was at a time when the price was above $26,000 you would argue it isn’t, as you have lost value. Looking at the bigger picture, if you had bought up in the $60,000 range, you would see it as a bad investment and definitely not a store of value. Would you move all of your savings into Bitcoin right now? I know I wouldn’t.
Medium of exchange
I don’t need to argue this point fiercely, but as of today, FIAT is a better medium of exchange than Bitcoin. It is easier to give someone paper cash than to transfer Bitcoin and, in Europe at least, some payment methods rival the speed of Bitcoin and some other cryptos. The biggest difference is international transfers, or transfers involving different currencies.
Based on these points I have made FIAT has a bright future, right? The single biggest factor for FIAT failure is that it relies on human behaviour. We have seen times when humans have manipulated currencies for their personal gain. Resulting in hyperinflation, poverty, corruption, or massive debt. Bitcoin is the first asset that can be transferred over the internet without any specific third party having to approve the transaction or being able to deny it. If politics start to divide nations, or corruption becomes more apparent or if wars start, this “trust in FIAT” can quickly disappear, and I think it will be Bitcoin that picks up the pieces
