Please click the link below to listen to the 37th episode of my weekly crypto podcast ‘Two Minute Crypto.’ These are intended to be short, single-topic ramblings on some aspect of the cryptosphere. Comments and critiques welcome.
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Two Minute Crypto: Key Concepts 5 – How is Crypto different to State Issued Currency (Fiat)?
Welcome to Two Minute Crypto. Today’s episode marks the fifth installment of the ‘key concepts’ series. The goal is to explain foundational crypto concepts in a jargon-free simple manner. I’ve taken my inspiration from Richard Feynman, a renowned physicist, and well-loved educator. His core technique focused on stripping all unnecessary complexity from the explanation of a topic to the benefit of both the learners and the teacher.
Today’s topic - How is a cryptocurrency like Bitcoin, for example, different to state-issued currency or fiat?
Though a topic of immense complexity, at the core the difference between state-issued currencies and bitcoin may be explained in terms of creation, control, permission, value.
Both systems deal with value and exchange. State currencies are created by the central bank of that country. The issuing of new currency is guided by state policy but it is essentially inflationary in nature. Every year more currency is issued and every year the value of the money already in existence devalues. There is no maximum supply.
Bitcoin is a math governed currency that is issued at a set pace at set times. The rate of issue is known and at some point, no more Bitcoin will be created. There is a maximum supply.
State issued currencies are controlled by the government that prints them. The terms of exchange for that money are subject to change if the government chooses to do so.
Bitcoin has no governing body and no-one controls the coin though the code underlying it can be changed if enough support can be gathered from those who secure the network.
You require permission to transact in a state’s currency particularly if you want to engage in cross border transactions. For example, through the intermediary of a bank. This control extends to how much you can spend or send.
With Bitcoin, you can transfer and receive funds as you see fit. How much, to whom, where, and when – it is all you up to you.
Vastly over-simplifying -state currencies derive their value from the relative purchasing power of their money. The US dollar’s global reserve status gives it high trust and value relative to other currencies. It is in demand and its value is supported by that demand. The Venezuelan Bolivar, in contrast, has lost trust and trades at a massive discount relative to other currencies.
Bitcoin’s value also derives from trust and supply and demand. The general, year by year rise in the value of Bitcoin, reflects trust in its security and store of value going forward. The greater the demand the higher the value. Bitcoins key proposition as a store of value has yet to be firmly established as it has only been in existence for 10 years.
Thanks for listening.