The term "fiat" is used to describe a currency that has no physical counterpart, such as gold or silver. Instead, a fiat currency is created based on its value through government authority and public trust in the currency.
When we utilize such currencies like the US dollar or the Euros, we assume that the government will continue to accept and utilize the currency as a means to exchange. The value of fiat currency is determined by the supply and demand of the market, and can be altered by government initiatives like interest rates and the monetary supply.
Examples of fiat currencies: the US Dollar (USD), the Euro (EUR), the British Pound (GBP), the Canadian Dollar (CAD), etc. These are just a few of the many potential fiat currency pairs that exist in the world. Every currency has a unique rate of exchange and a specific value, which is determined by various economic and political factors.
The difference between fiat and other currencies
The fiat currency is different from other currencies.
1. Fiat currency is not backed by a physical commodity. The monetary value of fiat currency is determined by the government, while the value of other types of currency is determined by the market demand for the physical product that supports it.
2. Fiat currency is typically more steady than other types of currency. The government that issues fiat currency has more influence over the value of its currency than it does over the value of other types of currency.
3. Fiat currency is the most common form of payment in most countries. Other types of currency, such as gold or silver, are typically employed as a store of value or investment.
4. Fiat may be susceptible to inflation. Since fiat currency is not backed by a physical asset, governments can issue more money to pay off debt or finance projects, which will increase the monetary supply and decrease its value.
5. A fiat currency may have political issues. If a government becomes corrupt or disregards the trust of its citizens, the value of its fiat currency can be dropped quickly, which will make it difficult to conduct business or store value.
Advantages and disadvantages of fiat currency
➕ Increases the flexibility. Governments have the ability to control the monetary supply as necessary to achieve economic objectives like inflation and unemployment.
➕ A fiat currency is not associated with any specific commodity, which diminishes its susceptibility to commodity price changes.
➕ Fiat currency is common and simple to utilize.
➖ It's not tied to any physical object, so it can be affected by inflation if the government prints too much of it.
➖ Some people lack faith in the currency because it is not backed by any physical component.
➖ It's susceptible to market analysis, manipulation and political influence, which can lead to significant changes in its value and financial instability.
The most popular fiat currencies
Today's global economy is characterized by the importance of understanding the most common currencies.
The U.S. dollar (USD) is the most popular currency in the world. It's the most recognized currency of the United States, as well as a reserve currency for other countries.
The euro (EUR) is the common currency of the European Union and is used in 19 of its member states. The euro is the second most frequently traded currency in the world and is highly valued for its economic importance to the EU.
The Ukrainian hryvnia (UAH), is the official currency of Ukraine. It replaced the Soviet currency (the ruble), and was introduced in 1996. The history of the hryvnia is characterized by instability due to the political nature of Ukraine, which has led to significant changes in its value.
The Kazakhstani tenge (KZT) is the national currency of Kazakhstan. It was introduced in the country in 1993 in order to replace the Soviet currency, the ruble. Recently, the tenge's rate of exchange has remained relatively constant as a result of Kazakhstan's steady economic growth.
The Uzbekistani sum (UZS) is the official payment method in Uzbekistan. It was introduced in 1994 to replace the Soviet currency, the ruble. UZS has experienced instability in its history due to political infighting and economic difficulties in Uzbekistan.
Each of the currencies presented above has its own unique history and value. You can find out more detailed information in the relevant articles in our blog.
The difference between cryptocurrency and fiat
Cryptocurrencies and fiat currencies are two different types of currency that are growing in popularity. Despite both being employed as a means of payment and exchange, there are significant differences between them.
Fiat currencies:
- They are issued by the government and not backed by physical products.
- They are used around the world and are the primary means of payment in most countries.
- They are controlled by central banks and governments.
- Fiat transactions are often subject to government regulation.
Cryptocurrencies:
- They are created and managed through a decentralized network using complex algorithms.
- They are not a universally accepted payment method and their application remains limited.
- They are decentralized and currently not controlled by any central authority.
- Cryptocurrency transactions are recorded on a public ledger - the blockchain.
While fiat currency is still the most common form of currency in the world, cryptocurrency offers unique benefits that attract people interested in financial freedom and greater control over their finances. Read more about cryptocurrency via the link.
Where can you buy fiat?
If you choose to purchase fiat currency, we advise you to utilize Kolo. Other than facilitating the most popular fiat currency, this platform also allows you to deposit to your fiat account, store fiat, and exchange it for cryptocurrency.
Conclusion
Fiat currency has its own benefits and drawbacks. Despite its advantages, it is still susceptible to inflation and lacks faith among some investors. When individuals are asked to choose between a fiat and a cryptocurrency, every individual must choose their own option and make a considered decision.
