Bitcoins

Fiat Currencies and Bitcoins: Are They the Same Thing?

“We invented money and we use it, yet we cannot…understand its laws or control its actions. It has a life of its own.” – Lionel Trilling.

The answer to the title question is obvious to those of you who understand how currency works, but you stopped in to read this because you love reading everything and anything you can about cash, and understand that you can never know too much, right?

Those of you who understand nothing about money, other than it comes in the form of paper or coins and that you (really) like it, will definitely learn a thing or two in the following paragraphs.

Let’s start by changing the way you think about paper currency…

Essentially, all money is fiat money.

Who, you ask, actually determines its value?

We did…

Once upon a time.

There’s really no difference between Fiat money and the new digital Bitcoin. At one time, the USD and other global currencies were based on the Gold Standard. The Gold Standard (which was commodity-based) decreed that each dollar in circulation had to be backed by a pre-determined amount of gold bullion (the commodity) held in a reserve somewhere.

And who decided that gold was worth a damned thing?

We did, right?

Yes, we DID. However, the power we once had has now been taken away. The sad thing is that most of us really don’t even realize it happened.

At one time, there was a lot of perceived collusion, controversy and mistrust associated with the Gold Standard. In the 70’s we learned that there was way more US dollars in circulation around the globe than there was gold in Fort Knox to back it up. So, the US government abolished that monetary standard back in 1971, and all other countries quickly followed suit.

So, for those of you who still believe Fort Knox houses the commodities that back your dollars – it does not and has not for over four decades now!

It’s a good thing this happened too. The current state of Fort Knox, the world’s biggest gold housing facility, is steeped in so much controversy and so many conspiracy theories about how much gold is actually left, that the world public is worried about the state of the USD.

Now that you understand those dollars in your pocket are nothing more than paper, and not in fact a promissory “gold note,” hopefully you’re starting to look at Bitcoin just a little differently…

Pascal-Emmanuel Gobry talks about the myth that paper money is somehow linked to a commodity in the following Forbes article: All Money is Fiat Money. He makes some clever observations about currency: What it really is and how we (the public) still believe there’s a physical value to the dollars we spend; even though we’ve been on a Fiat-system for nearly a half-century now.

Now that you (sort of) understand that commodity-based paper money doesn’t really exist, it’s not too hard to see that Bitcoin and Fiat Currency are really no different – except for one BIG, massive difference that I’m going to tell you about right now.

Bitcoin – Power to the people!

Fiat Currencies and Bitcoins are in fact the very same thing – at their core.

But keep reading though, it isn’t quite that simple. And that’s what makes Bitcoin so promising and so very confusing!

The main difference with Bitcoin is that it’s a “cryptocurrency” – a digital medium of exchange. Actually, it’s the first of its kind, and is the only global currency that’s protected from any sort of government intervention or regulation.

Money’s value isn’t determined magically, as you’ve already learned. It’s assigned a value, by a world government. Most of that value is based on the USD – the current global standard that determines the value of all other currencies.

The USD is strong because the United States has (presumably) the strongest economy on the planet. That’s why its money is so influenced by global perceptions about the states and their current events: war, balance of trade (imports vs exports), credit balance, Obama’s reputation, terrorism, policies, budgets, taxes, spending, inflation – etc, etc.

So the USD, the global currency standard, has more to do with perception that the commodities that drive its economy.

In reality, it’s all a farce. It’s fiat money, and nothing more…

So, do you still think there’s any significant difference between a USD and a Bitcoin?

If you said “yes” then pat yourself on the back!

Bitcoin represents a hope that we can one day take back what was taken from us back in 1971, when “leaving the gold standard” took place. It is a Fiat Currency, but it’s a Peer-to-Peer monetary system.

We, like we once did, control how much it’s worth!

So now you can stop saying how silly it is to purchase/use Bitcoins because they have no value. Starting 2013 it was valued at $13 a coin; today, the value is at $550-ish a coin, and it’s rather volatile (it was at an all-time high at $1,200 in November 2013.) Since there’s a fixed cap on how many “coins” are available, there’s very little chance that inflation can ever destroy it’s value – which makes its future very interesting indeed!

You can learn more from the Bitcoin wiki: bitcoin.it.

Takeaway

If you asked me whether I am going to put (or bet) my money on Bitcoin, I’d say no. I still have my doubts in Bitcoins. Although it enjoys strong growth throughout 2013, its value is still highly volatile; it also has a not-so-good reputation (source.) It’s also highly targeted by hackers due to the alleged security flaws in the systems.

My investment strategy doesn’t include Bitcoins – yet – simply because, honestly, I am a total noob when it comes to Bitcoin. So, I’m not going to be a smartass here 🙂

Personally, in term of currencies, I’d better buy Norwegian Krone than Bitcoins; at least it’s the safest fiat currency in the world today.

However, if you love risks, perhaps Bitcoins can interest you. The figures you see in your USD (or any other currencies) current account is just, well, numbers anyway – so keeping USD is perhaps as risky as holding Bitcoins, so… considering the hype and growing interest in Bitcoins, I’d say, “Why not?”

So, what do you think? Is keeping – or investing in – Bitcoins a sound financial decision? Please have your say by leaving your comments on this post…

Cover photo credit

Ivan Widjaya is a wealth building/personal finance lifelong learner who is running an online marketing company and several business-related online magazines. He secures his hard-earned currency in real assets. He says no to paper assets and considers his house as a liability. Article disclosure

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2 comments

  1. Martin Lindeskog

    Ivan: I agree with your post and it is important to discuss the implications of cryptocurrencies in the future. We need an objective standard, e.g., gold or silver as a back-up for the financial transactions that are going around.

    Here is an excerpt from my post, Fed Up with the Fed after 100 Years:

    Do you think that BitCoin could be the solution to the fiat currency that we have today? I don’t see it as an alternative due to the fact that it has no real backing of an objective standard like gold or silver, but you could say that it is a declaration of no confidence in the federal reserve system.

    How many places could you use Bitcoin in your area? In Gothenburg you could buy coffee, hot dog and taxi ride…

    http://objectiveargentum.tumblr.com/post/71131444622/fed-up-with-the-fed-after-100-years

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