What is Fiat Currency?
Fiat currency is money that a government declares to be legal tender, but that isn't backed by a physical commodity like gold or silver. The word "fiat" comes from Latin, meaning "let it be done" — the money has value because the government says it does, and because people collectively agree to use it. The US dollar, euro, British pound, and Japanese yen are all fiat currencies.
Why It Matters
Understanding fiat is essential to understanding why Bitcoin exists. Before 1971, the US dollar was backed by gold — you could exchange dollars for a fixed amount of gold at the Federal Reserve. When President Nixon ended that convertibility, the dollar became purely fiat. Since then, the US money supply has expanded dramatically. Every fiat currency in history has lost purchasing power over time through inflation — the dollar has lost over 87% of its purchasing power since 1971.
This is the core problem Bitcoin was designed to solve. While central banks can print unlimited fiat currency (and regularly do, through quantitative easing, stimulus programs, and deficit spending), Bitcoin's supply is mathematically capped at 21 million. You'll hear Bitcoiners refer to traditional money as "fiat" — it's not a slur exactly, but it's not a compliment either. It highlights the fundamental difference: fiat money is backed by trust in institutions, Bitcoin is backed by math.
How It Works
Central banks control fiat money supply through monetary policy. They can create new money by lowering interest rates, buying government bonds (quantitative easing), or directly funding government spending. This flexibility is considered a feature by mainstream economists — it allows governments to respond to recessions and manage economic cycles. But it comes with a cost: inflation. When the money supply grows faster than the economy, each existing unit of currency buys less. The US Federal Reserve explicitly targets 2% annual inflation, meaning they are intentionally devaluing the dollar by design. Over a lifetime, this compounds significantly — $100 in 1990 buys roughly $42 worth of goods today. Bitcoin offers an alternative: a monetary system where no one can change the rules or inflate the supply.