DeutschThe cryptocurrency Bitcoin was created as a response to the fiat money system. But what is it actually? In this article, we give you an insight into what fiat money is and what it has to do with cryptocurrencies.
Fiat Money Definition & Explanation
By definition, fiat money is something that initially has no intrinsic value. Despite the lack of intrinsic value, fiat money serves as a medium of exchange and you can buy goods in return. The classic counterpart to fiat money is so-called commodity money, which has existed for centuries and has a long tradition. Commodity money has an intrinsic value. Especially in the past, but sometimes still today, the following tangible assets are used as classic commodity money, for example:
- Coins made of precious metal, for example silver coins
- Tobacco
- Alcohol
- Gemstones
What is Meant by Fiat Money Today?
When people talk about fiat money today, they primarily mean central bank currencies. For example, the Swiss franc falls into the category of fiat money just like the euro or the US dollar. Since the vast majority of central bank currencies are no longer backed by gold, they meet the classic requirement for fiat money, namely not having any intrinsic (material) value. Nevertheless, central bank currencies naturally serve as a means of exchange and are even, as a rule, the only legal tender that is permitted in the corresponding country or currency region.
Fiat Money and Cryptocurrencies
You may be wondering at this point what fiat money actually has to do with the topic of cryptocurrencies? The answer is relatively simple, because the term appears particularly frequently on crypto exchanges (cryptocoin exchanges) and exchange offices when it comes to how digital currencies can be acquired and what they are exchanged for. At some crypto exchanges, for example, you can only trade digital currencies with each other. So you sell Bitcoin, for example, to buy Ethereum in return. On other exchanges, however, it is common to be able to buy cryptocurrencies for fiat money, for example for Swiss francs. This is therefore the connection between digital currencies and fiat money.
