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How is Bitcoin different from fiat currencies?

5 months ago

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While both currencies are intended to be used as a measure of payment, they have a major underlying difference between them - "Control".

         

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Fiat Currencies are often referred to as the traditional currencies in which are issued by governments and managed by central authorities like the central bank. These currencies are not backed by any physical commodities like gold or oil, however, contains value as it is a currency or means of payment designated by the government within that particular country. In other words, it holds value because the government maintains and controls it.

         

As the currencies are under control and have formed a belief over time that to be stable, the value of fiat currencies do not fluctuate dramatically. If the value of a currency in the current year is extremely different compared to the previous year, it will be very difficult for the government to finance the entire national economy. We can find real-life examples in Germany’s hyperinflation right after World War 1 or Venezuela’s hyperinflation after the year 2000. When the value of the currency doesn’t remain constant, the whole national economy will be devastated.

             

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To keep the monetary value stable and to ensure the smooth functioning of the currency, the central bank uses various policies to sustain and secure the value. For instance, if the economy overheats with the excessive liquidity in the market, the central bank raises the interest rate to reduce the liquidity, and in a case of the economic recession, the central bank lowers the interest rate to increase the liquidity in the market. Through these regulations and policies, the central bank keeps the currency value and the quantity stable. When the interest rate is too low like in the last global financial crisis, and the interest-rate control doesn’t seem to be effective, the central bank may take a quantitative easing policy, directly providing money to the market. The most recent example would be a large amount of quantitative easing after the recent COVID19 outbreak.

             

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As many are aware, the trigger for Bitcoin originated from the 2008 Global Financial Crisis (GFC) where Satoshi Nakamoto wanted to stand against the central authorities in having control over the country's entire economy. In the case of the GFC, the US Federal Reserve and the central banks from different countries went through quantitative easing in order to prevent economic depression and to stimulate economic growth during the financial crisis. As a result, they were able to avoid economic depression. However, these policy operations could not save the general public who were facing financial difficulties during the crisis. These policies and actions caused people to doubt the current economic systems controlled by the governments and central banks.

                   

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Bitcoin also faces critical downfalls as a currency as the value fluctuates largely each day. As Bitcoin is not controlled by any particular party, the value is purely decided on the community and network of Bitcoin holders and traders. Looking at it from a different perspective, the fluctuations have brought much interest in trading as an investment asset. The unpredicted price fluctuations have brought many traders from the forex and stock trading market to gain profit leveraging the changing prices and a non-stopping market. One key thing to note is that Bitcoin prices do not change when policies change, interest rates increase/decrease nor when quantitative easing happens. This is the major difference between the two.

         

                 

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Published 5 months ago