## What is fiat currency? Why are countries using it

**Simply put, fiat currency is money that a government or central bank declares to be valuable, and it is considered valuable.** It is not backed by gold or other physical assets, but the credit and authority of governments make it a legitimate means of payment. Most countries worldwide use a fiat currency system to facilitate goods transactions, investments, and savings. This seems obvious, but if you look back into history, you'll find that it was actually a revolution.

## How fiat currency rules the world

The story of fiat currency begins in Sichuan Province, China, in the 11th century. At that time, people started issuing paper money, which could be exchanged for silk, gold, and silver. But the real turning point came in the 13th century when Kublai Khan took power and established a complete fiat currency system. Historians point out that this system ultimately led to the decline of the Mongol Empire—excessive spending and hyperinflation overwhelmed the entire empire.

European countries, after observing the experiments in the East, began to imitate in the 17th century. Spain, Sweden, and the Netherlands all tried fiat currency, but Sweden eventually abandoned it and returned to the silver standard. North America experienced similar shifts—from New France to the American colonies, and later to the federal government—oscillating between paper money and commodity money.

It wasn't until 1933 that the US government ceased the gold standard promise for paper currency. In 1972, President Nixon completely overthrew the gold standard, and the US fully transitioned to fiat money. This move shook the world, and since then, fiat currency has become the global monetary system.

## Gold standard vs fiat currency: which is more reliable

Under the gold standard, government-issued paper money could be exchanged for gold. In other words, all circulating paper money was backed by an equivalent amount of gold reserves. Governments wanting to issue new money had to first hold enough gold. It sounds very secure, but it also tightly constrained governments—making it difficult to quickly adjust monetary policy in response to economic crises.

The fiat system is entirely different. Money can be created out of thin air, and governments can flexibly adjust monetary policy based on economic conditions. Central banks can respond swiftly during tough times using tools like reserve requirements and quantitative easing. Advocates of the gold standard say it is more stable because it is backed by physical gold. But supporters of fiat currency argue that gold prices are inherently unstable and fluctuate. The key point is that fiat gives governments more flexibility, which is crucial during economic emergencies.

## The rules of the game for fiat currency: pros and cons

Supporters list the advantages:
- No reliance on scarce gold, supply is flexible
- Low production costs
- Governments have ample policy tools to respond to crises
- Widely accepted globally, facilitating international trade
- No need for physical storage and security, much more convenient than gold

Critics' concerns:
- No real assets backing it; governments can create money out of thin air, which can lead to hyperinflation and economic collapse
- Historical lessons are harsh—many fiat systems have led to financial crises

## Fiat currency vs cryptocurrency: old vs new

Both fiat currency and cryptocurrencies are not backed by gold or other physical assets, but that’s where the similarities end.

Fiat is controlled by governments and central banks, while cryptocurrencies operate on a decentralized distributed ledger technology called **blockchain**. This is the fundamental difference.

In terms of money supply, **Bitcoin** and most cryptocurrencies have a fixed and predictable supply, whereas central banks can print money at will. Cryptocurrencies are purely digital, borderless, and facilitate global transfers without barriers. Transactions are irreversible, and privacy is stronger—an advantage for some, but a headache for regulators.

However, the cryptocurrency market is still small and far more volatile than traditional financial markets. This is one reason it has not yet been widely adopted. But as the ecosystem matures, volatility may gradually decrease.

## What will money look like in the future

Honestly, no one can be certain. Fiat currency has thousands of years of inertia, while cryptocurrencies have only a little over a decade of history. The future path of Bitcoin and other crypto assets is still long and full of challenges. But looking at the history of fiat, this system is also quite fragile—financial crises and inflation collapses happen frequently.

That’s why more and more people are starting to explore shifting some assets into cryptocurrencies, at least to diversify risk. **Bitcoin was not created to overthrow the entire fiat system but to explore a new economic system built on peer-to-peer networks.** Its true value may lie in creating a better, more resilient financial network for humanity.