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What is Fiat Money?

admin,February 27, 2018

What is Fiat Money?

Within the crypt
ocurrency space you will often hear the term “Fiat Money”. Fiat money is an official currency which is operated by the Fiat system, regulated by the Government and has declared to be legal tender but not backed by a physical commodity.

Rather than the value of the material that the money is made of, the value of Fiat money is obtained from the relationship between supply and demand. Fiat money is not linked to physical reserves and therefore has a risk of becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, like the U.S. dollar bill, the money will no longer hold any value. This is what makes Fiat Money different from gold, which historically, has been used in jewelry and decoration and has many modern economic uses including its use in the manufacture of electronic devices, computers, and aerospace vehicles. Fiat money is inconvertible and cannot be redeemed.

Advantages and Disadvantages of Fiat Money

Fiat money has been used for a quite long time. It serves as a good currency if it can handle the roles that an economy needs in regard to its monetary unit. Foremost the uses of Fiat money are for storing value, providing a numerical account, and facilitating exchange. Fiat money also has advantages that it’s very practical to use, available in many different currencies, and is rather stable.    

There are three major disadvantages of Fiat money. First is the unlimited ability of governments to “print” money whenever they want.

Fiat currencies will always lose value over time. Every year, a bunch of new money is printed in order to replace all the bills that have been taken out of circulation due to the bills having been destroyed or lost, but they usually will print more than what is actually needed, and thus the available currency constantly expands.

Fiat money always has the potential to drop to zero value. Since the paper has no value in itself, the paper can and inevitably will lose all value. This means that if you save up money for retirement, the purchasing power of that many will have decreased significantly by the time you retire, forcing you to invest, even if you have little or no experience in the field.

Critics of Fiat money argue that the limited supply of gold makes it a more stable currency than Fiat money and that cryptocurrency in particular Bitcoin is the new “digital gold”.