What is fiat coin?

Fiat currency is simply money whose value is guaranteed by the government that issues it, not by physical goods like gold or silver. The power and credibility of the issuing government determine how much this type of money is worth. Nowadays, almost all countries use this system to buy out, invest, and save, leaving behind old systems like the gold standard.

Origins and evolution

It all began in China centuries ago. In the 11th century, the province of Szechuan was already issuing paper coins that could initially be exchanged for valuable goods. When Emperor Kublai Khan came to power in the 13th century, he established a true fiat currency system. Ironically, many historians believe that this money contributed to the fall of the Mongol Empire due to excessive spending and the hyperinflation it caused.

In Europe, countries like Spain and the Netherlands tested this system in the 17th century, while Sweden quickly abandoned it after it failed. The United States experimented with different monetary models until in 1972, Nixon definitively ended the gold standard, driving the global adoption of the fiat system we know today.

Trustee vs. Gold Standard

Under the gold standard, each bill represented a specific amount of gold held by the government. This limited the creation of money to the physical reserves available. In contrast, the fiat system does not require conversion to any physical asset, giving governments greater control over their currency.

Gold standard advocates insist that a system backed by something physical is more stable. Those who support the fiat system argue that the price of gold also fluctuates and that this system offers more flexibility during economic crises.

Advantages and disadvantages

Among the advantages of fiat currency are:

• It is not limited by physical scarcity.
• It is much cheaper to produce
• Facilitates international trade
• Does not require storage or physical protection

However, it presents serious problems:

• Lacks intrinsic value, allowing governments to create money out of nothing
• Historically, these systems have caused financial collapses.

Comparison with cryptocurrencies

Although neither cryptocurrencies nor fiat money are backed by physical goods, that is where their similarities end. While fiat money is centrally controlled by governments and banks, cryptocurrencies are decentralized thanks to blockchain technology.

Bitcoin and most cryptocurrencies have a limited supply, unlike fiat money that can be created according to perceived economic needs. Cryptocurrencies also have no physical borders, making global transactions easier, although their market remains smaller and more volatile.

The future of both systems is uncertain. Cryptocurrencies face many challenges, but history shows that fiat currencies are also vulnerable. Bitcoin was not necessarily born to replace the entire current monetary system, but to offer an alternative that could potentially create a fairer and more efficient financial system.