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The difference between a cryptocurrency and fiat money


In contrast, the value of representative money depends on the asset’s value it is backed by. The value of fiat money is determined by supply and demand, and it was created as a substitute for commodity money and representational money in the early 20th century. Because it has not been recognized as legal tender by the government, as opposed to fiat money, individuals are not obligated to accept it as a form of payment under the law as a result. Instead, if the bearer demands it, the issuer of fiduciary money offers to swap it for a commodity or fiat money at the issuer’s discretion.

Of course, after the start of the Covid-19 pandemic, the price of Bitcoin increased rapidly, but it may not continue. Since Bitcoin cannot be spent, it must be sold to convert it into fiat currency. Few businesses accept Bitcoin for payment and few people use Bitcoin for payment because it is too volatile. Volatility complicates accounting, which is why most businesses would not want to have most of their transactions in Bitcoin. A good hedge against inflation rises with inflation, such as real estate.

National Cryptocurrencies

Recently, however, there are more and more mentions and even actions from governments. All attempts thus far were trying to address real or imagined issues. Nevertheless, they prove that the cryptocurrency phenomenon now raised the attention of governments. In such economies, the first welfare theorem might not hold, competitive equilibria might not be Pareto optimal. One may achieve a Pareto improvement by giving resources to the current old from the current young, who in turn receive resources, when they are old from the next young generation, ad infinitum.

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The Indian rupee, US dollars, British pound, and other fiat currencies are examples of fiat money. Commodity money, on the other hand, is exchangeable money that is linked to the value of the commodity it is made of. Commodity money is made by extracting raw materials and then transforming them into a finished product that can be used. Gold, silver, copper, tea, salt, alcohol, and other commodities are examples of commodity money. Extraordinary profits existed in the former case, while normal profits prevailed in the latter.

Commodity Money and Inflation

Since https://www.beaxy.com/ are relatively new, much of their value is from people buying and holding them hoping that they will appreciate in value, as opposed to using them to buy things. Please note that CMC Markets doesn’t offer cryptocurrency trading; this information is for general purposes only. To view forex prices, open our Next Generation trading platform and click on ‘Products’, then ‘Currencies’. The Bretton Woods Agreement was an international agreement negotiated in 1944 by 44 allied countries at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. Currency itself is perfectly liquid; you can always change two $5 bills for a $10 bill.

What is fiat money?

Fiat money is a medium of exchange that is only backed by the government. Its value is derived from its official recognition as a medium of exchange from government legislation.

fiat vs commodity money-issued fiat money banknotes were used first during the 11th century in China. Since President Richard Nixon’s decision to suspend US dollar convertibility to gold in 1971, a system of national fiat currencies has been used globally. Fiat money is an alternative to commodity money, which is a currency that has intrinsic value because it contains, for example, a precious metal such as gold or silver which is embedded in the coin. Fiat also differs from representative money, which is money that has intrinsic value because it is backed by and can be converted into a precious metal or another commodity.

Fiat money and examples

Bank A can keep $100 aside XRP and use the rest to lend it to another client, John. John then uses the $900 to purchase an iPhone from another customer, Betty. Prices rose rapidly and consumers were forced to carry bags of money just to purchase basic staples. At the height of the crisis, one U.S. dollar was worth about 8.31 billion Zimbabwean dollars. Which of the following are money in the United States today and which are not?


A government needing to raise revenue should then optimally tax both liquidity and wages. To equate the marginal value of cash balances with the marginal social cost of creating additional fiat money, which is effectively zero. Steady deflation, not price stability, is therefore optimal, and the rate of deflation should equal the real rate of interest. We will now continue this discussion by examining how a rudimentary bank can evolve from a goldsmith, and how this leads to a theory of fractional reserve banking. According to this theory, regulation is an almost inevitable outgrowth of fractional reserve banking. Although it is a strong indicator of opportunity costs in the economy, it is a cautious tool for hyperinflation.

During the 1960s, production of silver coins for circulation ceased when the face value of the coin was less than the cost of the precious metal it contained . In the United States, the Coinage Act of 1965 eliminated silver from circulating dimes and quarter dollars, and most other countries did the same with their coins. The Canadian penny, which was mostly copper until 1996, was removed from circulation altogether during the autumn of 2012 due to the cost of production relative to face value.

D. Fiat money has no value except as money whereas commodity money has value independent of its use as money. B. Commodity money has no value except as money, whereas fiat money has value independent of its use as money. Linguistic and Commodity Exchanges Examines the structural differences between barter and monetary commodity exchanges and oral and written linguistic exchanges. Business CycleThe business cycle refers to the alternating phases of economic growth and decline.

The History of Money, From Fiat to Cryptocurrency

The USD, for example, was previously backed by a specific amount of gold, and people could convert one into the other. The word “fiat” is Latin in origin and refers to an arbitrary order issued by a government or other authoritative figure. When applied to paper money, fiat currency refers to the scary notion that our dollar has value only because the government says it does. Being able to create and destroy money is required to stabilize the value of that money, because supply and demand for money continually fluctuates. On the other hand, the creation and destruction must be done by a central authority that is not exposed to the whims of politicians or where such influence is limited. Moreover, if money cannot be created, then a deflationary spiral will occur as the economy grows and requires more money to operate.

The fractional reserve aspect of banking is similarly vexing in that it seemingly involves sleight of hand. Fractional reserve banks fund themselves with liabilities that are convertible into cash on demand, but they hold only a fraction of such liabilities in the form of cash assets. Thus there is always some probability that withdrawals will exceed the available cash. Modern banks produce fiat money on the basis of fractional reserves.

Other are to serve as a unit of account and as a store of value. The exchange of goods and services in markets is among the most universal activities of human life. To facilitate these exchanges, people settle on something that will serve as a medium of exchange—they select something to be money.


Checkable deposits are almost perfectly liquid; you can easily cash a check or visit an ATM. It can be converted to money only by selling it, a time-consuming and costly process. Consider a $20 bill that you accidentally left in a coat pocket a year ago. Value has, in effect, been “stored” in that little piece of paper. We can understand the significance of a medium of exchange by considering its absence.

  • The difference between fiat money and representative money is that fiat money’s value depends on its demand and supply.
  • Most people are satisfied with fiat currencies and while financial transactions can be tracked, most people who are not criminals will not worry so much about that.
  • Money made specialization practical; otherwise, it was more efficient for people to perform all the activities that they needed to survive.

For fiat currencies, value is determined by authorities like national governments and central banks. Unlike commodity currencies, which could be affected by the discovery of a new gold mine, the supply of fiat currencies is regulated and controlled by the respective currency’s government. There is less risk of an unexpected devaluation caused by the supply of fiat currencies, as any increase in supply is a pre-empted decision made by a fiat currency’s government. As you can see in this graph, Bitcoin does not hedge inflation. Since 2012, Bitcoin has dropped in price, sometimes substantially, even as the consumer price index continually increased.


Commodity money has many proponents who believe it is the best form of money, and we should move back toward that style of money. Fiat money has none of those characteristics and doesn’t peg to any tangible value; rather, it is only as valuable as the people’s faith in the money. In the early years of the Americas, the only physical coin finding widespread use was the Spanish Dollar, which was the unofficial currency of early America from the early 1600s to 1700s.

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