The​ difference between Bitcoin and fiat money

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The​ difference between Bitcoin and fiat money
2019-01-29 in CRYPTOPEDIA

Bitcoin has many protagonists and antagonists around the world. Some people claim that Bitcoin will bring the world to an ecological disaster, while others believe that it is one of the best things ever created.

What is Bitcoin?

If Bitcoin is so inefficient, as many critics say, how come that it has been successfully functioning for more than 10 years? Moreover, the Bitcoin infrastructure is constantly evolving, and its market rate is still at the level of several thousand dollars. Why Venezuela prefers Bitcoin, rather than government-imposed “oil-secured” El Petro?

Discussions about Bitcoin often begin with the assumption that fiat money exists against the will of society.

Bitcoiners are usually proponents of a “stable currency”. In other words, they prefer money that cannot be created or destroyed by a single center, the supply of which is limited or at least predictable.

While sovereign money is undoubtedly fraught with abuses, including hyperinflation, confiscations, and capital controls, etc., lack of control also creates problems. Looking at the euro, you can see how countries entered into a monetary union without creating a fiscal union. The result is that the currency benefits the export-oriented countries, such as Germany, and damages importers like Greece or Portugal.

Fiat money is extremely useful if society wants their country to have monetary sovereignty. The transfer of control over the money supply to an international institution makes it impossible to pursue an independent monetary and economic policy.

The advantages of fiat currency

Supporters of fiat money can say that each country has its own economic problems that require unique solutions. Monetary sovereignty has certain advantages for countries:

  • the government can more effectively finance major social projects and benefit from the issue of money
  • the state is able to easily depreciate or freeze assets, which is good for fighting crime
  • the state can regulate the monetary proposal to stimulate the economy
  • when it is necessary to smooth out the influence of business cycles
    authorities can keep the currency stable in relation to the basket of goods and services
  • countries can devalue their currencies to stimulate exports and reduce the trade deficit.

Inflation

Money depreciates over time in relation to real assets. And since the release of new money does not create new wealth, seignorage should be considered as a hidden tax for all who use fiat funds.

On the other hand, central banks are currently working hard to keep inflation low. Inflation encourages firms and households to invest in manufacturing enterprises. It also makes it easier for governments to fulfill future obligations, as monetary units gradually lose part of the purchasing value, and debts expressed at current prices are partially repaid by themselves.

Inflation is also a great way to tax the shadow economy. This is true for countries where it is difficult to collect taxes and where the level of compliance with laws is low (India, most African countries and South America).

Fundamental issues

Although the fiat system has many positive aspects, in recent decades some of its fundamental problems have to be solved.

Modern central banks and governments have transferred a significant part of the authority to create and destroy money to commercial banks. To fulfill obligations to their customers, financial institutions need to keep in reserve only a small part of the deposits.

If too many borrowers do not fulfill their loan obligations, this may lead to a situation where the government will have to save banks that have run into problems due to their risky activities. The realization that potential losses are limited encourages banks to act even more risky.

National cryptocurrency

If the goal of issuing traditional money for all states is the same – maintaining the amount of money required for the country’s economy, in the case of cryptocurrency, different countries see the benefits from its release differently.

For Venezuela, national cryptocurrency is a way to overcome the financial crisis and improve the economic situation in the country. President of the Republic Nicholas Maduro said that during the preliminary sale of the national cryptocurrency managed to attract several billion dollars. Venezuela also plans to issue a cryptocurrency, based on the value of gold. So the country is trying to circumvent the US sanctions imposed on it, which make it impossible to attract investors money to the state budget, for example, through the placement of government bonds on world financial markets.

Despite statements by the authorities that the tokens are provided by the country’s oil reserves, in fact it is not. According to the published white paper, the exchange of Petro tokens for Venezuelan oil is not envisaged. The government of Venezuela plans to accept tokens as payment for government payments (for example, taxes, duties), and the official price of one token will be determined in bolivars by a formula that takes into account the price of oil and the Petro market rate. Given the extent to which the official exchange rate of the bolivar differs from the real one, one can say that the Petro tokens are not provided with anything. At the same time, the Petro rate is tied to the cost of oil. In this way, you can call Petro a harder currency than a bolivar. But in general, the issue of tokens is more correctly considered as Maduro’s desperate attempt to attract currency liquidity to the country and give citizens a stronger national currency.

CRYPTOCURRENCIES
  • bitcoinBitcoin$5,063.77
  • ethereumEthereum$164.24
  • rippleXRP$0.324456
  • tetherTether$1.00
  • eosEOS$5.35
  • stellarStellar$0.113992
  • litecoinLitecoin$78.44
  • cardanoCardano$0.083486
  • tronTRON$0.026520
  • moneroMonero$66.67
  • iotaIOTA$0.317059
  • nemNEM$0.065680
  • dashDash$121.30
  • neoNEO$11.24
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