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How is Bitcoin Different From Fiat?

How is Bitcoin different from Fiat? First, let’s talk about what Bitcoin is. Bitcoin is a new form of currency called ‘cryptocurrency’ that is not backed by any government and can store value. Crypto currencies use blockchain technology which acts as a public ledger to confirm and validate transactions. Above all Bitcoin is finite, only a limited amount can be mined and will ever be in existence. Therefore, Bitcoin has properties that make it comparable to gold.

What is Bitcoin?

  • A way to digitize and store wealth
  • Immutable
  • Decentralized & Distributed
  • Finite, in both production and supply
  • Provides a high degree of privacy
  • Portable, in small and large amounts you only need to remember your keys
  • Divisible, you can own a fraction of a Bitcoin or thousands
  • Mineable 
  • Peer-to-Peer Transactions

Fiat currencies can be digitized by online banking and credit card transfers. For that reason many often get confused between traditional digital currency issued by banks and decentralized Cryptocurrencies like Bitcoin (BTC). To have a full understanding of the different characteristics of Fiat currency vs Bitcoin and Cryptocurrencies, it is important to understand the historical context and progression of our monetary system.

Gold Standard

Historically, the gold standard was the dominant monetary system. Gradually through war and deficit spending by governments. Ultimately countries abandoned the restrictive gold standard and migrated to a new monetary system known as “fiat”.

The fiat system enabled the government to issue more currencies at will to fund various spending. The increase in money supply is dramatically exacerbated by banks through fractional reserve. More currency supply means inflationary pressure and increased prices.

Typically, wages and income increase at a slower rate than price. Certainly that means many had to borrow in order to continue funding their daily spending, governments and individuals alike. This leads to the debt based economy we are in today.

The U.S. national debt is over US$23.4 trillion. The U.K. national debt is over GBP$2.3 trillion currently in March, 2020.

You can see the U.S. and U.K. national debt live at the links below:

U.S. National Debt Clock

U.K. National Debt Clock  

As these figures suggest – this is not sustainable. As governments print more fiat currency, the currency is worth less and it decreases purchasing power. Most notably this has a detrimental effect on the public. As the purchasing power or value of their savings is being eroded overtime until it reaches a systemic breakdown. The government’s solution to this, is to raise the debt ceiling and further increase the fiat currency supply through means like quantitative easing.

How is Bitcoin Different from Fiat?

Fiat currency isn’t a good way to store value, many are losing faith in governments and the fiat monetary system. Consequently people have been turning to alternatives such as precious metals and Crypto Currencies like BTC and Altcoins.

1. Money Supply

Fiat’s supply is infinite, whereas with Crypto currency we know the rate of supply and the total is finite (e.g. BTC Max supply is 21 million with current circulation of around 18 million).

2. Centralised 3rd Party Trust vs Decentralised Encrypted (Crypto) Currency

Fiat currency is a centralized system where banks issue currency. Any transfer of funds will need to go through an intermediary (a 3rd party you ‘trust’). Whereas crypto currency transfers are done directly peer to peer, each transaction is recorded on the blockchain , and are confirmed by miners .

3. Privacy of wealth

As we migrate towards traditional digital fiat (online banking and credit cards), this empowers central authorities furthermore to monitor public wealth and the ability to freeze your account and funds. Cryptocurrency enables people to transfer funds privately themselves and store wealth in a way which is under their direct control.

In summary, Bitcoin and altcoins provide an alternative to fiat currency and the traditional monetary system. Above all digital tokens allow users to store monetary value in a decentralized medium. Additionally they can act as their own bank with a higher degree of privacy. Bitcoin also has a finite supply which provides transparency of supply for both existing and future tokens.

Secrets of Money

For more detailed explanation of how this works and how it impacts you, this video provides a great overview: