Fiat currency is money that is backed by a government. Up until 1972, the U.S. currency was tied to the amount of gold. However, President Nixon removed this restriction and the government began to print more paper money that was not based on a physical commodity. The United States’ currency is now solely based on faith and trust in the government’s creation of it. In other words, U.S. money (and fiat money in general) is only money because the government says it is.
One of the dangers of fiat currency is that it “relies on the confidence people have in the currency and in the nation backing it,” says Joseph Carducci, a writer for the Outsider Club. Once that confidence is lost—as has happened previously in countries such as Rome, China, France, and Argentina—the system begins to deteriorate. Financial and economic collapse is usually imminent once the fiat currency has been devalued.
There is also some belief that fiat currency is, or can be, easily rigged. This rigging comes from traders and large organizations, and it affects everyone. Carducci explains: “Basically, what many traders do to try and influence these rates are concentrate their orders. By waiting until right before and during these times that are used to calculate and determine the rates, they have the chance to manipulate the market itself.”
So, not only is fiat currency determined solely on what the government declares it as, but there are also individuals which can play this rigged system to their advantage. Where does that leave the average person’s faith in their money’s worth?
Alternatively, Bitcoin and cryptocurrency are not fiat monies because they are not backed by any government. Since U.S. currency is only based on faith and trust in the government, you may be interested to know that cryptocurrency is strictly regulated. These digital “coins” are limited as to how much are released into circulation at any time. They are also backed by actual digital assets that are acquired via software mining, the profits of which can be secured in a digital wallet. You have more power and control over your cryptocurrency than the government would ever allow for their fiat currencies. However, Carducci warns: “Unfortunately, it is difficult to say whether this will survive, since typically governments are not very friendly to new monetary systems that challenge or work better than their own.”