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What Is Fiat Money & Why Is It the Enemy of Crypto?

Fiat money is legal tender that is backed by the country’s government and is not backed by a physical commodity. In other words, fiat money is currency that has no intrinsic value.

Cryptocurrencies are digital assets that are not backed by any government or physical asset. In other words, cryptocurrencies are currency that has intrinsic value. Cryptocurrencies are not legal tender and cannot be used in everyday transactions in the same way as fiat money. However, many people are choosing  to use cryptocurrencies as a store of value and some people will choose to use them in everyday transactions. If a person decides to use cryptocurrencies as a store of value, they should be prepared to accept the potential risks and rewards of doing so.

What Is Fiat Money?

 Fiat money is a currency that has no intrinsic value. It is a form of money that is not backed by any commodity. The value of fiat money is derived from its relationship with the economy. The value of fiat money is also based on the authority of the government that issues it. The government has the  power to determine the value of the currency through supply and demand. While the value of fiat money is predetermined, the value of commodities is determined in free market forces.  Fiat money is not that rare since it is printed by governments all over the world. In fact, many governments consider it their right to monopolize money creation. Commodities are useful as they can be used to fulfill basic human needs. The scarcity of commodities is the reason that they are in demand.

What Led Us to Fiat Money?

Fiat money is a currency that is backed by a government’s promise to pay as opposed to a commodity like gold. The first fiat currency was the IOU that was issued by the Bank of Amsterdam in 1660. This was a way for the bank to pay its customers after the city was seized by the Spanish. The  bank promised to exchange the IOU for gold. The invention of the IOU was a significant step forward for capitalism. It marked the first instance of capital not tied to a physical commodity. This is why capitalism needed gold. How could capital be given value if it wasn’t backed by a physical commodity? In other words, how could you buy a product that didn’t exist yet with a piece of paper that could be printed at will? What gives the piece of paper value? Its value lies with the promise of the state. When the IOU was declared worthless, the Bank of Amsterdam raised its interest rate from 3% to 8% to attract investors. This demonstrated that the “subjective theory of value” was true- it was demonstrated in practice that a currency doesn’t need to be backed by a commodity in order to maintain its value.

The Problem With Fiat Money

Fiat money is not the problem. The problem with fiat money is that it is only backed by the government. The problem with fiat money is that the government can print it out of thin air. The problem with fiat money is that the government can print it out of thin air and use it to buy anything they want.  The problem with fiat money is that the government can print it out of thin air and use it to buy anything they want including everything that has appreciated in value. This allows the government to increase their holdings of real assets (i.e., increase their equity) although they did not have to work for it. If a government steals an item or a sum of actual gold from its citizens, at least it costs them effort and the risk of being caught to do it. A government with a printing press who can print out of thin air whatever it wants can steal at no risk and effort. Regardless of the morality of stealing, the probability is that a government that can steal at no risk and effort will not be satisfied with stealing just a little bit. And this is the problem with money backed by only the government. The money has value because the government says it has value. All that is happening is that the government is creating its own equity on a printing press. However, because the government is increasing the amount of fiat money in the economy, the value of that fiat money decreases because the government is increasing their equity at the expense of their citizens . The more fiat money the government prints, the more equity the government has, and the less equity the citizens have. In the end, because fiat money is backed by the government, the citizens lose. The citizens lose because the government increases their equity at the expense of the citizens.

Fiat Money as Crypto’s Nemesis

Fiat money is the nemesis of cryptocurrency. It is the traditional currency of the world, which is backed by the government. Fiat money is the enemy of cryptocurrency, which is digital and has no central authority.  Blockchain is the technology behind cryptocurrency, which is the database that records cryptocurrency transactions.  It is a form of digital ledger. Cryptocurrency was used for payment in cyber crime for illegal activities.

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