What Exactly is Fiat money? And Why is it Good for Crypto?

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Thomas Jefferson

In order to really understand cryptocurrencies, you must first understand fiat money. For anyone who is unfamiliar with the term, this is the paper money that most every country on Earth uses as a means of transaction every day. Fiat money, at one point in history, had its value tied to commodities such as Gold and Silver. This kept paper money somewhat intrinsically valuable because it could be redeemed for those commodities at any time and after World War II, the American dollar became the reserve currency for the entire world.

However, in August of 1971, President Richard Nixon of the United States decided to part ways with the traditional financial system of backing fiat with Gold and the Gold Standard became a thing of the past. Ever since this point in time, money was able to be printed on demand and the devaluation of currencies all around the world increased while price stability decreased.

For the longest time, inflation was kept somewhat in check, only increasing a small percentage every year so that the average person couldn’t plainly see themselves becoming poorer and poorer with time. However, since the beginning of this COVID-19 Pandemic which started in 2020, the rates of money printing around the globe has increased exponentially. Allow me to share a few graphs showing the increase in fiat money supply in countries all around the world:

The Canadian M1 Money Supply
The Australian M1 Money Supply

As you can see, the printing of fiat money has rapidly increased in recent years which will inevitably lead to complete devaluation of the currencies over time and a new system will be needed to replace the old and broken fiat currencies. Inflation rates over the next decade could be the most severe they’ve been since the Great Depression or World War II. Most governments are trying to delay the inevitable by increasing social benefits and giving away free money while they look for a life raft to save everyone from the old system. Thus, Central Bank Digital Currencies have gained traction in many countries as a possible means of converting the system, however, it is unclear at this point whether they will be able to protect against political corruption, inflation and the other numerous problems that affect our money supplies today.

On the other hand, the failure of fiat currencies have led to more and more adoption of major cryptocurrencies such as Bitcoin which have unchanging decentralized protocols with a hard cap on the amount of coins which will ever come into existence and which acts contrary to modern fiat money by decreasing its supply brought into existence every 4 years. This process is called “the halvening” and it is what leads cryptocurrency into new bull cycles every 4 years with strong media coverage and retail interest. Basically, demand increases while supply decreases, making it an unstoppable beast for growing in value. This is why many people call Bitcoin a “store of value” rather than an alternative currency. It is digital gold.

Here is the Bitcoin’s supply chart, compare this to the fiat charts above and try to spot the differences between the two:

Hint: Inflation decreases year after year since its creation

As you may have noticed, the inflation spikes most rapidly from the dawn of its creation and rapidly decreases as it grows over time. This is what Bitcoin was programmed to achieve, and many other cryptocurrencies share this same deflationary trait. This is what makes them so appealing, because as long as you trust the protocol, the decentralized and open-source code which creates the system, then rest-assured you never have to worry about a major drop in your purchasing power 5, 10 or 50 years from now. And the beautiful thing is, that the more fiat money devalues itself, the more cryptocurrencies increase in value against it.

Now, demand is necessary in order for cryptocurrencies to maintain their value, and that’s why the larger the Market Cap’s on cryptos, the safer they are to place your hard earned money into. Twelve years ago, Bitcoin was worth a penny a pop, and today it’s over 50,000 USD. Bitcoin is still not finished growing and increasing in value, far from it, and the centralized world is beginning to notice. However, there is not much that they can do about this because Bitcoin has no central entity which can be destroyed, sued or manipulated in any way, so they will need to learn to live with it. The same logic applies to other cryptocurrencies such as Ethereum and Cardano. They are very difficult projects to censor and control, because the computing power is supplied by a vast ecosystem of computers from all around the world – and as long as one survives, so will the protocol.

Photo by Markus Spiske on Pexels.com

I hope that you found this post helpful and have learned something new today!

Feel free to leave a comment down below, ask a question or share your thoughts

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