Bitcoin vs fiat money: when will cryptocurrencies take over the world?

Reading time – 8 min.

We deal with fiat every day. Unfortunately, the term, which has long been registered in the financial industry, is not familiar to everyone. Today we will talk about it as simply and accessible as possible, and also recall the historical and modern alternatives to the banknotes we are used to.

Why is this needed? The fact is that it is precisely a clear understanding of the advantages and disadvantages of fiat money that allows you to make competent financial decisions and avoid annoying mistakes.

What is fiat money?

What do most people mean by the word “money”? For sure, national or foreign banknotes and coins, as well as funds on a credit or debit card. This is what fiat money is. Dollars and euros, Japanese yen and British pounds sterling are the familiar representatives of fiat.

Why are they called that? The term comes from the Latin fiat, which means “decree” or “instruction”. And this is logical, because the state, using its power, issues decrees (decrees or orders) on exactly what types and types of funds citizens are required to use for settlements within the country.

In principle, fiat money has no objective intrinsic value that encourages people to exchange real goods and services for paper banknotes or numbers on electronic accounts. The role of intrinsic value is played by state guarantees and the status of legal tender. These factors are so convincing that we use fiat every day without thinking about anything.

By the way, there is another term – “fiduciary money”. It implies the possibility of exchanging state-issued banknotes for gold or silver. Unfortunately, no country provides such an option today.

We will discuss the main advantages and disadvantages of fiat below, but one disadvantage that needs to be mentioned right now is inflation. Traditional money has a steady tendency to depreciate, and even the most conditionally stable currency in the world – the US dollar – has lost more than 8% of its value over the past year. But are there any alternatives, you ask? Yes, they were and are, and they should be carefully studied.

Gold and bimetallic standards

It must be admitted that initially money was not connected with the state. Most likely, they appeared long before the formation of any state formations. Exchange of goods and services directly (i.e. through barter) is inconvenient and costly.

Therefore, people have long been interested in the emergence of some kind of universal product that could be used to exchange for other goods and services. But, as the Austrian economist Ludwig von Mises proved, in order to become money, such a commodity must have additional (non-monetary) value.

History clearly shows that it was gold that emerged victorious from the competitive struggle of commodities claiming the role of money. Why did it happen? The supply of the main precious metal is strictly limited, and its extraction requires a lot of time, effort and material costs.

Gold has always been used as jewelry, and therefore initially had a rather high cost. This product does not deteriorate over time, does not cause allergies, and it can also be easily melted into bars or coins without losing its primary properties. Many countries and peoples have independently come to the same conclusion that gold is the ideal money.

At one time in some states there was a bimetallic standard – this is the practice of using silver along with gold – for example, for small transactions. But it is possible to successfully combine different metals only in a free market that determines their price and optimal proportions of use.

For example, the ratio of gold to silver was 15:1 for most of the 19th century. But in practice, states often set their own fixed exchange rate for these precious metals. As a result, one of them invariably turned out to be relatively undervalued and the other overvalued. People preferred the overvalued metal, and the undervalued metal disappeared from circulation (in accordance with Gresham’s law).

Transition to fiat

In the second half of the 19th century, the gold standard allowed for the highest rates of economic growth and technological innovation. Moreover, all effective currency systems of that time implied the use of 100% gold backing.

Thus, the Amsterdam Bank for several centuries was famous for its exceptional reputation in maintaining a full backing of its florins in gold or silver. But after providing loans to the government of the Netherlands, the bank lost the ability to maintain 100% gold backing of obligations. The result is predictable – loss of reputation and customer confidence.

As time went on, the conflict between the interests of ordinary citizens (interested in a 100% gold standard) and governments (aimed at establishing control over the issuance of money) gained momentum. How can one not recall the common misconception that the economy cannot develop sustainably in the presence of deflation (a decrease in the general price level), and inflation at the level of 2-3% is the best option for it. Nevertheless, the realities of economic development in the 19th century confirmed the possibility of rapid growth with falling prices. Moreover, this situation created additional motivation for increasing savings and investment inflows into various industries.

Deflation becomes a problem only when various forms of state control over pricing are established (for example, when setting minimum wages). Under such conditions, prices become more rigid, which serves as a basis for expanding the practice of state intervention in the financial system and economy.

The United States formally abandoned the peg of the dollar to gold only in 1971. But in fact, the refusal to convert banknotes into precious metals occurred much earlier. In particular, as a result of the First and Second World Wars, the states actively increased their spending, and in the post-war period there was no return to the gold standard.

Pros and cons of fiat money

Fiat benefits include:

  1. Ease of use and storage for the population.
  2. Very economical to manufacture.
  3. The ability to influence the economy through monetary policy (a solid plus for the state).

Their disadvantages include:

  1. They have no objective value.
  2. The risks of inflation and hyperinflation are high.
  3. Limited use (within the jurisdiction of this state and in other countries if they accept this currency).
  4. The concentration of power in the hands of the state apparatus.
  5. Violation of the privacy of user operations.
  6. The upward trend in the budget deficit and public debt.
  7. Restrictions and regulation related to the activities of central and commercial banks (the latter operate on the principle of partial reserve coverage).
  8. The emergence of financial and economic crises.

Fiat money has both a number of advantages and disadvantages, but the number of disadvantages clearly outweighs a small number of advantages. Therefore, dissatisfaction with fiat and the problems associated with it are observed in almost all countries of the world.

Bitcoin as an alternative to fiat

Even a clear awareness of the shortcomings of fiat money did not allow the world to return to the gold standard. The reasons were not only institutional, but also technological limitations. There have been repeated attempts to create electronic money independent of the state. But all of the early alternatives failed because they were highly centralized and provided no real advantage over the fiat standard.

The real breakthrough came in 2008-2009 when Satoshi Nakamoto developed and launched bitcoin.

The creator of the first cryptocurrency used the term “digital gold” to describe the functioning of a new decentralized peer-to-peer payment system. It did not require intermediaries to confirm transactions, which allowed banks and traditional financial institutions to be excluded from the chain of participation and control over financial transactions.

Moreover, bitcoin has a number of additional advantages: high divisibility (one BTC includes 100 million satoshi), high transaction speed, automatic verification of the authenticity of coins on the network, free storage and movement of funds, etc.

Seifedeen Ammous, author of The Bitcoin Standard: A Decentralized Alternative to Central Banks, admits there is a downside. These are the difficulties with using bitcoin in microtransactions (like buying a cup of coffee) due to transaction costs on the network. But with the advent of second-tier solutions (Lightning Network), even this problem has been removed: now small purchases can be made almost instantly and at a cost of a few cents.

But is bitcoin capable of becoming the dominant form of global money? For this, two conditions must be met. The first is leadership among cryptocurrencies based on the proof-of-work consensus algorithm. Why on PoW? Because it is he who provides maximum decentralization and can act as an alternative to the centralization of the modern fiat and banking system.

Bitcoin dominance among cryptocurrencies proofofwork: more than 93%. Source – BuyBitcoinWorldwide

Given the dominance rate of more than 93%, we can say that Bitcoin has no competitors among other cryptocurrencies in the struggle for the status of universal money.

The second condition is a sufficiently high market capitalization comparable to gold and other major assets. If it is fulfilled, then the level of acceptance and use of bitcoin will provide it with the status of universal money.

Today, BTC is ranked 16th in the global ranking of assets and companies by market capitalization. On the one hand, bitcoin is still significantly inferior to gold. But on the other hand, it already exceeds the capitalization of giants like Walmart or Chevron. While maintaining the current growth dynamics, bitcoin will be able to overtake gold in terms of capitalization after 3 halvings (i.e., approximately in 2032–2033).

Market capitalization of certain assets and corporations. Source – InfiniteMarketCap

So, it can be argued that Bitcoin has the potential to overtake gold over the next decade and, using its technological advantages, throw a real challenge to the dominance of fiat in the modern world.

What about other cryptocurrencies? They will certainly develop and occupy their niches in various segments (DeFi, NFT, Metaverse, etc.), but do not have the degree of decentralization and stability of the blockchain that is characteristic of Bitcoin. In addition, many of them have a non-fixed total coin supply and a different consensus algorithm (the most popular today is proof-of-stake), so they will not be able to play the role of money on a global level.


All modern people are familiar with fiat money. Reserve currencies (US dollar, euro, pound sterling, etc.) are the brightest representatives of traditional money. They are really convenient to use and very cheap to manufacture, but at the same time they provoke the accumulation of budget deficits and public debts, and also increase the risks of global financial and economic crises.

From the point of view of individual users, the excessive concentration of power in the hands of the state violates their privacy and leads to total control. Bitcoin is the only real alternative to fiat money at the present stage. And in the next 10 years, he is likely to be able to challenge their dominant position in the global economy.

Sources: BuyBitcoinWorldwide, InfiniteMarketCap, The Wall Street Journal, C. Ammus “Bitcoin Standard: A Decentralized Alternative to Central Banks”, L. von Mises “The Theory of Money and Credit”, M. Rothbard “State and Money. How the state took over the monetary system of society

Disclaimer. Investing in any financial asset carries the risk of losing capital. Nothing in this text can be considered an investment recommendation or an offer to buy/sell any financial instruments. For all their actions in the stock market, each investor bears full responsibility independently.


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