Crypto EDU

Fiat Currencies

  • August 16, 2021
  • Beginner
  • investing
  • money
Fiat Animation Delivery (0-00-03-05)

Fiat currency is money that has value because a central authority, like a national government, says that it does. The most popular example of a fiat currency is the U.S. dollar. The bills themselves aren’t worth anything, in terms of the materials they’re made from. But we can exchange them for milk or cars or Yoda costumes for our dogs because we’ve all agreed to value them in a certain way. 

So what kind of money isn’t fiat currency? There are commodity currencies, like gold coins, which have an intrinsic value derived from their actual material. Then, there are representative currencies, where the item traded represents an asset. For example, shekels in the Babylonian Empire were worth 180 grains of barley. Until the early 20th century, the U.S. dollar was actually a representative currency, since each bill in circulation represented a physical amount of silver or gold. 

Today, cryptocurrencies present another alternative to fiat currency. They are created independently of a central authority and are traded freely and transparently on their respective blockchains. Since most cryptocurrencies are not issued by governments, and most do not represent intrinsically valuable physical commodities, you might wonder what gives cryptocurrencies their value. The answer is simple: Cryptocurrencies have value because—as with fiat currency—both creditors and debtors agree that they do.  

The independence of cryptocurrencies is key to their appeal, but it also makes them volatile. The value of currencies like Bitcoin and Ether is dictated largely by supply and demand, which can lead to wild swings in the market. In recent years, however, a new category of cryptocurrencies has emerged called stablecoins. They are tethered to assets that have historically been more stable, such as fiat currency or gold.

Why should you care about fiat currencies?

Until cryptocurrency replaces all financial interactions (assuming it even can), you’re still going to need fiat currency to buy many of the things you need in life.

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