In a blog post dated Thursday, June 18, 2020, Michael Lee and Antoine Martin, economists with the New York Federal Reserve stated that Bitcoin is “just another example of fiat money.” Other Bitcoin skeptics like Peter Schiff soon chimed in on Twitter in agreement. Is this assertion true?
How Bitcoin is Like a Fiat
Fiat money gets its value from a government declaring that it is legal tender. The word “fiat” comes from the Latin and means “let it be done.” Since fiat money has no value outside of this government decree that it does, it is said to have no intrinsic value. This is in contrast to commodities, which have utility. One example is oil, which is needed for manufacturing, construction and transportation among other things. Another example is gold, which can be used for jewelry, wiring, medicine and several other applications.
Bitcoin and other cryptocurrencies, like fiat currency, act as money. They are a store of value. Two parties can exchange this value in the form of a transaction. The fact that fiat currency and Bitcoin are stores of value and they can be used to transfer that value to other parties is about the extent of the similarities between fiat currency and cryptocurrency.
How Bitcoin is Not Like a Fiat
Unlike fiat money, which gets its value from a government decree, Bitcoin gets its value from the utility of its ability to store and transfer value. This value can be transferred or stored without even a bank or a government present. Bitcoin can be sent or received by anyone at any time anywhere throughout the entire world.
Fiat money is created when consumers borrow money. This is why the interest rate is such a vital metric for manipulating fiat currency. When the interest rate goes down, more people borrow money. This increased borrowing of money increases the money supply. When the interest rate goes up, fewer people borrow money. This keeps the increase in money supply more or less constant unless other central bank activities like quantitative easing or stimulus increase the money supply.
If you wondered how central banks can just print more money and keep the money that’s in your pocket the same value as before, the answer is that they can’t. As the money supply increases, there is more money out there chasing the same amount of goods and services. Supply and demand always meet at an equilibrium point. The increased supply of money combined with the same or a lesser amount of goods and services means that prices will go up.
If you like this article, check one of our previous in-house articles, “Stablecoins: The Money 2.0“
Bitcoin has a strict supply schedule. One of the founding principles of Bitcoin is that it is decentralized. This means that it cannot be controlled by any one authority; power is distributed amongst the nodes that make up the Bitcoin blockchain network.
Since no central authority can gain control of Bitcoin, it cannot be manipulated to suit a particular party, such as the governments, big banks and similar interests. Bitcoin was conceived around the time of the Great Recession and the bailouts and currency manipulations of that period weighed heavily on the economics of the world during that period.
Immutability is another key concept that is a big part of Bitcoin’s philosophy. Once a transaction is made, it cannot be altered. Consider that you are a merchant and you sell goods to a customer. They pay with a credit card. If the customer decides to tell their bank that the transaction was fraudulent or that they just refuse to accept the purchase as legitimate, you could face a charge-back.
If the customer paid with fiat money in the form of cash, this would not happen since the cash is physical and cannot be subject to a charge-back. But the financial system that revolves around fiat currency makes its own rules about what is acceptable between merchants and buyers.
Bitcoin transactions are not alterable, and therefore not subject to a charge-back. The only way a sender of funds will get a refund on a previous transaction is for recipient to voluntarily enter into a new transaction.
Bringing the Benefits of Cash and Cryptocurrency Together
Making the transition from fiat currency to cryptocurrency can be challenging. This is especially true for those who appreciate cash. The Census Note is a cold hardware wallet that mimics the user interface of cash. It is the size of a payment card, which makes it easy to carry around. The Census Note is easy to interact with as the Census app allows you to send or receive funds from any smartphone. This allows you to combine the simplicity of cash with the power of cryptocurrency.
The opponents of Bitcoin like to emphasize that cryptocurrency is just another fiat. But this ignores the utility of Bitcoin and other cryptocurrencies. Without the government power backing fiat currency, fiat currency is intrinsically devoid of value.
Bitcoin differs from fiat currency in a number of ways. Fiat currency is regularly manipulated by central banks as a means to control the behavior of consumers. Reducing the value of fiat money forces more economic activity, while keeping the value the same helps to slow an economy down. Bitcoin’s supply is regular and free of manipulation. The decentralized design of the Bitcoin network ensures there will be no central authority to tilt the game to their advantage. And immutable transactions ensure that transactions that have occurred do not get changed for any reason, allowing for balance between senders and recipients.