What is fiat money? How is it related to cryptocurrency?

Have you ever heard of fiat money? This is the term used to refer to currencies issued and legally recognized by the government of a country. In other words, this is the currency issued and used by the government of a country.

Do you want to learn more about fiat money and its relationship to cryptocurrency? If so, please follow the following content from AZcoin.

What is fiat money?

Fiat money is the term used to refer to currencies issued and legally recognized by the government of a country. Accordingly, these currencies have no intrinsic value but are determined by the power of the government.

So where does the value of fiat money come from? It comes from the relationship between supply and demand along with stability from the government that issues it. In other words, this currency has a value determined by the government or central bank without depending on the value of any other real asset.

At present, fiat money is used very commonly in many different tasks such as trading, buying and selling goods, services, etc. With many benefits, this type of currency has gradually changed. It completely replaced the old gold standard and commodity money system.

How does fiat money work?

As mentioned before, the value of fiat money does not depend on any fixed commodity but will depend on the trust relationship between subjects. Here are the issuers, owners, and those who accept their use.

In other words, if confidence in the value of money is lost, demand is also lost and this leads to a decrease in value. On the other hand, if many people trust and use it, causing demand to increase, it will lead to an increase in value for that currency.

Another factor that also greatly affects the value of fiat money is the production capacity of a country. Accordingly, when a country’s production capacity increases, the value of that country’s fiat money exchange increases and vice versa.

How is fiat money managed?

The government has a monopoly on printing fiat money, so the government has full control over the monetary system. They are also the units that can make monetary policies or apply related tools when major financial events and crises occur to ensure the country’s financial stability.

Monetary policies used can be divided into two types:

• Loose monetary policy: A policy in which the Central Bank will buy government bonds or other securities in the market, reduce interest rates, and lower the required reserve ratio to increase the money supply and develop the economy. international.
• Tightening monetary policy: In contrast to the loosening policy, with the tightening monetary policy, the Central Bank will sell government bonds or other securities, increase interest rates, and increase the required reserve ratio. to reduce the money supply, and curb inflation and economic bubbles.

From here it can be seen that if a country makes wrong decisions on monetary policy, that country’s fiat currency is at risk of losing value due to inflation or even becoming worthless in the event of hyperinflation.

Advantages and disadvantages of fiat money

Advantages

• Gives the government flexibility to address issues related to the economic crisis.
• Creating fiat money is more affordable than commodity-based money.
• Eliminate scarcity compared to fixed resources such as gold, diamonds,…
• Used in countries around the world, making it the accepted currency for international trade.

Disadvantages

• There is no intrinsic value because the government creates money solely from its reputation, which is the main cause of the currency’s lack of stability, inflation, and collapse of the economic system.
• The government has full control over supply and demand, so if not controlled properly, it will lead to increased inflation and an economic crisis.

The relationship between fiat money and crypto

At present, crypto has appeared and exists in parallel with fiat money as well as complementing each other in the circulation process. This process can be described by users often buying crypto to speculate or invest for profit and then exchanging crypto for fiat currency to buy goods.

In other words, the existence of crypto at present is still only seen as an investment channel rather than a new form of currency. Therefore, at this time, it is difficult for fiat currencies to be completely replaced by cryptocurrencies, but in the future, this is very difficult to say.

Maybe in the future crypto may or may not completely replace fiat money, but it will certainly open up a new, more potential financial system. Many countries have also seen this potential and have issued their electronic currencies called Central Bank Digital Currency (CBDC).

Talking a little bit about CBDC, this is simply digital fiat money issued and managed by the government of a country like regular currencies.

Besides, if you are interested in cryptocurrency and want to learn more, please take a look at the best crypto exchanges here.

How to use fiat money to buy crypto?

Currently, you can conduct crypto transactions with fiat currency through P2P (peer-to-peer) trading platforms or the world’s leading exchanges. With this method, you will directly own crypto and have full authority to decide whether to buy or sell it.

Besides investing and directly owning crypto, you can also own them through participating in ETF organizations specializing in cryptocurrency investment. Although it is said to own, with this method you will not completely own crypto but only a part of the investment fund for that crypto.

Both of the above methods can be considered as the two main ways at present for you to use fiat money to buy crypto.

Conclusion

So we have come to the end of all the overview content we can share about fiat money and its relationship with crypto. Hope this content will be useful to you and see you again in other content from AZcoin.