China was the first country to use fiat currency, around 1000 AD. Today, fiat money has been in use in every corner of the world. Why is it so popular? Because we had been made to believe in its value.
In contrary to the popular belief, fiat money is not as stable as you think. Fiat money does not have intrinsic value and does not have use value either. What is printed on the bank notes is worthless, be it any large number or beautiful image. Fiat money derives its value purely because a government maintains its value.
Hard currencies such as the USD, the EUR, the JPY or the GBP are widely exchanged and accepted. This is because they are backed by powerful countries. People have trust in them.
However, most currencies in circulation in the world are soft currencies. It hardly has any value outside of the jurisdiction's borders. Don't think so? Try buying bread in Croatia with some kyat or togrog.
Fiat money exists only with the government regulation. Nation rises and falls and thus fiat money can collapse. History has witnessed a numerous hyperinflation events.
- Venezuela bolivar: In 2019, the IMF estimated the country's inflation rate would be 200,000%.
- Zimbabwe: the infamous one hundred trillion dollar (equal around 70 USD)
- Hungary pengo: between 08/1945 and 07/1946, the price doubled in every 15 hours.
- Yugoslavia dinar: between 04/1992 and 01/1994, the daily inflation rate was 64.6%. The highest monthly inflation rate is 313,000,000%.
- Vietnam dong in the 1980s: a woman opened a saving account of 270 dong in 1983 (worth 75 grams of gold). She withdrew it in 2014, the bank paid 4,385 dong (worth a loaf of bread) for all interest and principal.
It is argued that fiat money is a state sponsored ponzi scheme because the government is the only monopoly player who can print bank notes. A centralised model would result in collapse in the long term if the government is corrupt. In addition, economic downturn can lead to the devaluation of fiat currencies which makes people lose faith in it.
Fast forward to 2009, the Bitcoin network came into existence.
Bitcoin and many cryptocurrencies can solve the problem of the "centralised model". One of cryptocurrencies selling point is its decentralisation. It is mined all over the world and has thousands of nodes run by many people across the globe. Even if a government wants to shut it down, it will still exist.
Also, cryptocurrencies have scarcity characteristics. Unlike fiat currencies, which can be printed by a government (and cause inflation), the number of cryptocurrencies unit in circulation is finite. For example, Bitcoin is capped at 21 million.
In 2021, El Salvador became the first country in the world to make Bitcoin the legal tender. Various countries in Central America and Samoa also have some initiatives to adopt Bitcoin and cryptocurrencies. It will create the domino effect around the world. Crypto is here to stay.
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