What is Fiat and can crypto be an alternative and be the new ‘gold standard?’

Before the 20th century, money was mostly commodity-based – which means that the currency is backed by a commodity like gold. For example, both the US and UK currencies were once based on the Gold Standard, yet both made the switch to fiat currencies in the 20th century.
Fiat money is not backed up by a physical commodity and the value is instead derived from the government and the relationship between supply and demand. Fiat is issued by the government and is then controlled by the banks, which can decide to print more in an attempt to control inflation. The side effect of this can be that the banks end up printing too much money, which can lead to hyperinflation and consequently economic destruction.

Because fiat is not backed up by a physical commodity, they usually lose value over time and as mentioned fall prey to inflation. Fiat is also dependent on the ongoing belief of the populace that it is worth something. It lacks the intrinsic value of commodity-based currencies and derives its legitimacy from the controlling authority alongside the belief that it holds value.

The reasons why fiat has been accepted in the 20th century is because the banks have much more control. They can control the supply of the fiat since it is not a scarce resource like gold – they try and control economic variables and try to control inflation. Therefore, fiat offers flexibility for the banks to attempt to control the economy.

As mentioned, the downsides of fiat are inflation and the risks of bubbles since the supply is potentially unlimited. Crypto offers solutions to fiat currencies since it is meant to be anti-inflationary and many compare Bitcoin to digital gold. Bitcoin is designed to be deflationary – there is a limited amount, so the demand will eventually outstrip supply, and the price should increase. Crypto can be used as an alternative to fiat currencies and be the new ‘gold standard'.