What is fiat money in simple words?
The world of cryptocurrencies has its own language. One of the frequent terms is fiat and fiat money. We have already written about the slang of crypto traders. Now let's talk about what fiat currency and fiduciary money are and what people mean when they use this term.
What is fiat currency?
Fiat is a form of money that is issued by the government. It has been declared legal tender. This type of currency is not tied to any valuable asset, it is simply printed at the discretion of the central government. That is why this form of money is called fiat or fiduciary: the first means the agreement “So be it", and the second is trust. When we use public money, we trust the government that the currency has value.
However, governments must be careful to avoid over-circulation, as this will lower the value of money.
In general, fiat is any legal currency of any state. cu, dollar, euro, yen, yuan – their list is huge.
What determines the value of money?
The price of a currency is based on what it can be used for, not because the cash has any value: its material is worth less than the denomination. This money can be used in the state, because it is based on trust between the issuer, the holder and those who receive it. Supply and demand can be freely regulated by the government and the market.
If confidence in the currency (and the state behind it) is lost, it will lose demand, leading to a drop in value. The value of a fiat is not directly tied to a physical asset such as a precious metal or an item that someone needs.
For example, when the Zimbabwean government began issuing more money, the situation led to hyperinflation. The state was unable to support the course. Or the situation with the fall of USD: the difficult geopolitical situation is reflected in its price. In comparison with the currencies of other countries, c.u. loses value.
What is fiat used for
Almost no explanation is needed at this point, because this is exactly the money that we use every day. Fiat currency comes in the form of cash, coins, credits, loans, or bonds.
Fiat is used for currency exchange. International money transfer services allow people to take one form of fixed money.
Difficulties with money
One of the benefits of fiat is its ubiquity. It is supported by payment networks and currency exchanges around the world. Governments control the money supply and are independent of the commodity.
But this is also a disadvantage, because if too much money is printed, the currency faces hyperinflation.
Because money must be constantly printed, its value is constantly declining in the long run.
Here are some of the key differences between fiat and cryptocurrencies:
Fiat is available, the rules for its use have long been established. To abandon it, you need a strong infrastructure for accepting cryptocurrencies. This is not beneficial for the government, and someone sees an economic and security threat in the popularization of cryptocurrencies.