FIAT in cryptocurrency has the same meaning as of in the normal stock market. We will explore the exact meaning of FIAT here in this article. FIAT full form doesn’t exist as it is the single term.
What is Fiat Money?
Fiat Money is the currency that is declared to be a legal tender by the government. The currency is neither backed by any physical material nor is its value based upon the value of the material it is made of.
Its value is based on the demand and supply of the currency. If the currency is produced in more quantity but is not backed by the GDP of the nation, then it causes hyperinflation. Most of the today’s paper currencies are Fiat money.
It’s upon people and regulatory authorities to have mutual faith over the Fiat money. The control over Fiat money exchange is more flexible and comparatively easier than linking the money to some material like gold. The Fiat money or legal tenders are the things over which government assures nationwide acceptance for exchanges for other commodities still holding the fact that the Fiat money is having little to no intrinsic value of itself till government approves it.
Following World War I, Germany printed so much money that could be purchased for one mark in 1918 cost about one trillion marks in 1923. The government lost its credibility at the end so that it could not borrow to finance large budget deficits and hence had to pay its bills with a massive amount of newly printed fiat money.
Cryptocurrency on other hand is not backed by any government or regulatory authority. There is no organization which assures that it would accept the currency is no one else is ready to accept it.
So cryptocurrency is just there for the exchange. In one sense though it’s much like Fiat currency nowadays because:
- It is having no intrinsic value of its own.
- It is used just for exchange
- It is much trusted for its limited supply and just for exchange.
- It is not backed by any government so its value can’t be affected by the single organization.
But for the working and circulation of cryptocurrencies Fiat currencies play a major role:
- The cryptocurrency needs to be converted to some Fiat money or vice versa, while it is being bought for the first time or needs to be cashed out in hand in form of some fiat currency, as per the circulation mechanism on the location where it is being accessed.
- The high security, quality encryption, limited supply, ease of exchange, privacy and conversion mechanism makes cryptocurrency a viable option for exchange and investment in the easiest manner.
Cryptocurrency including famous bitcoins and other digital currencies are not legal tenders but still trusted and famous for some reasons:
- It is based on blockchain technology that is trusted to be more secure than other transaction mechanisms.
- The exchange is easy over digital medium using digital wallets.
- Exchange of digital currency into Fiat currency and the other way around is also safe and not much complex.
- The investment in cryptocurrency is quite trusted because of its limited supply unlike of fiat currency where supply can be unlimited as there is no set upper cap over its production. Though it is having its own drawbacks.
- The digital currency exchange works with high encryption and privacy.
- The exchange works on the most basic principle of traditional money exchange between two parties, but in digital currencies case, it is just free from the control of any regulatory authority rather under the control of the users that are connected to its network.
For example (Transaction with only Fiat money):
Company (Country A): Makes the efforts, pool in the resources and sets up a firm. The firm is now into production and is now a part of the overall money flow after setting up the price for the service or the object t it produces.
Intermediate: Now the central bank needs to make sure the demand to supply ratio be stable and below certain inflation rate by either generating more money or regulating the current money in circulation.
Person (Country B): As a consumer, has to pay the price set up by the company for the product that is having no price or demand history, and thus needs to be set up based on the current research of the market demand with future speculations and money in circulation, for recovering the cost of production and profits.
Conclusion: Complex and not much trustworthy as the money it involves is not having any intrinsic value and its real value is based on the regulatory authority based in the country where it is produced and the authority based in the country where it is consumed.
For example (Transaction with Cryptocurrency):
Company (Country A): Makes the efforts, pool in the resources and sets up a firm. The firm is now into production and is now a part of the digital currency network by pooling in a certain no. of tokens having some worth but still under the condition of limited supply only.
Intermediate: Now the central network of digital currency wallets will be having the option to trade in the newly launched tokens against the service or product.
Person (Country B): As a consumer, to utilize the service or product needs to buy the tokens using wallets having digital currency converted from some corresponding Fiat currency.
The currency flow and the price range will depend on the no. of customers getting connected to the company for its services/products. The more the demand rise, the more the cost of tokens based on a certain central digital currency running an algorithm. The tokens in hand can be cashed out as per the token value in the form of legal money into bank accounts.