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What Backs Bitcoin? Is Crypto better than Fiat Currency?

Every jurisdiction operates using fiat currencies because everyone highly accepts it as a store of value and a means of payment. However, people accept Bitcoin as a means of payment, but only in some parts of the world. 

The fact that the government backs fiat currencies poses some concerns and limitations to its users. They include inflation, deflation, theft, to name a few. On the other hand, Bitcoin is backed by blockchain technology. The technology creates room for the network to offer outstanding possibilities and reach significant milestones like mainstream adoption. In particular, Bitcoin managed to reach an all-time high above $63,000 in April 2021. So, if Bitcoin can reach such highs by being backed by blockchain technology, is it better than fiat currencies backed by governments?

What is Bitcoin?

Bitcoin was created in 2009 as a form of digital currency by Satoshi Nakamoto. It is entirely decentralized, and it stores its balances on a public ledger that is transparent to everyone. The potential of verifying Bitcoin transactions using massive amounts of computing power has triggered the launch of multiple cryptocurrencies, called altcoins.

Bitcoin isn’t backed by any commodity and is completely decentralized, making people believe it doesn’t have any value. That’s not true because Bitcoin has a unit value of almost $45,000 currently. By May 2021, it had a total market capitalization of $653 billion U.S. dollars. Nonetheless, Bitcoin isn’t backed by anything other than its underlying blockchain technology and controlled supply. In particular, a specific 21 trillion bitcoins will be in existence, limiting the supply of Bitcoin. In addition, blockchain technology backs Bitcoin and endows it with characteristic values like the ‘gold standard for crypto.

What is Fiat Currency?

Fiat currency is a paper currency issued by governments and is not backed by anything physical other than the government issuing it and its confidence. The centralized nature of fiat currencies maintains their value. However, since governments back them up, they might lose their value due to inflation.

Until the last century or so, many nations worldwide used to redeem currencies and coins directly for gold. That’s because many of those wealthy countries operated under a monetary system known as the gold standard. It had those governments set up a fixed exchange rate for their national currency and gold. For this reason, many jurisdictions had to ensure that they had sufficient reserves for gold in their vaults to 100% back their circulating currency supply. In addition, it ensured that anyone could opt to exchange their currency for gold at any given time.

Nonetheless, after many years, many countries opted out of the system. It was because they couldn’t simply source more gold to expand their money supply and stimulate their spending. Instead, fiat money completely replaced the gold standard, and people accepted it as a means of payment. Although fiat currencies are not backed by anything, people tend to use them with the confidence that they will accept them elsewhere in exchange for goods and services. 

Is Bitcoin Better than Fiat Currency?

In answering this, whether Bitcoin is better than fiat currency requires you to understand the disparities between the two.

  • User Inclusion

First, Bitcoin is fully decentralized, which means that there is no central authority governing it. Anyone can send and receive Bitcoins from anywhere in the world at any time. Bitcoin’s underlying blockchain technology has no bureaucracy. As such, it allows its users to have full control of their money. On the other hand, fiat currencies are backed by intermediaries. It means that your money is in control of the government, banks, and any other central authority. Fiat currencies limit how you spend your money – offers zero freedom.

  • Security

Secondly, Bitcoin offers outstanding security capabilities with irreversible transactions, and it does not require a customer’s sensitive or personal information. That means that Bitcoin is free from fraud that happens with fiat currency payments. You can transact bitcoins worldwide without tying your personal information to the transaction. Unlike fiat currencies, where anyone familiar with your personal information or signature can fake a transaction, Bitcoin offers strong protection against identity theft. In addition, you can use Bitcoin to protect your money with backups and encryption.

  • Transparency

Thirdly, Bitcoin offers transparency to all its users because all Bitcoin transactions are readily available on the blockchain for anybody to verify and use in real-time. Moreover, since Bitcoin works under cryptography, no one can control or manipulate its protocol. That makes its users trust it for being completely neutral and transparent, unlike the fiat currencies.

  • Inflation Vulnerabilities

Fourthly, fiat currencies are vulnerable to inflation – a rise in the price level of an economy over a while. It means that inflation causes a reduction in the purchasing power of money. Contrary to Bitcoin, which is decentralized, its prices are not prone to price inflation. However, cryptocurrencies prices are highly susceptible to high volatility caused by small events, business activities, news, etc. Unlike Bitcoin, fiat currencies can experience inflation and hyperinflation, which might ruin an entire economy. For example, the Zimbabwean dollar experienced periods of significant inflation and later hyperinflation in 2009. Such incidences of inflation are rare, if not improbable, in the Bitcoin realm.

Bitcoin has been around for more than a decade now, and it has had a turbulent history of several cycles of boom and bust. The sudden rise and fall of Bitcoin’s price – also known as volatility – has caused some undisputed results for the Bitcoin community. Some have managed to profit big from its volatile price, while some have lost a lot too. Bitcoin’s volatile nature poses a risk to its users regarding investing as a store of value and as a means of exchange.

Conclusion

For cryptocurrencies, Bitcoin, in particular, has had a rough ride since its inception. The main goal was pushing for mainstream adoption. Consumers globally have confidence in the U.S. dollar and its purchasing power in the foreseeable future. You can spend it almost anywhere. 

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Moreover, many merchants worldwide use Bitcoin as payment for goods and services. However, it’s still clear that the level of confidence seen in Bitcoin is far from reaching the mainstream. That’s because many people are still unaware of the technology and its capabilities. Nevertheless, some businesses have established the use of Bitcoin in their activities. Nonetheless, the list remains small and still needs to expand for everyone to benefit from Bitcoin’s perks.

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