What is Fiat Currency?
Fiat currency is money that a government declares to be legal tender. Not backed by gold, silver, or any other commodity. "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. US dollars. Euros. British pounds. Japanese yen. All fiat.
Why It Matters
Understanding fiat is 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. President Nixon ended that convertibility. The dollar became purely fiat. Since then, the US money supply has expanded dramatically and the dollar has lost more than 87% of its 1971 purchasing power. See Bitcoin vs Gold for the full comparison.
This is the core problem Bitcoin was designed to solve. Central banks can print fiat currency without limit. They regularly do. Quantitative easing. Stimulus programs. Deficit spending. Bitcoin's supply is mathematically capped at 21 million. You'll hear Bitcoiners call traditional money "fiat." Not a slur exactly, but not a compliment either. It highlights the core 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 lower interest rates. They buy government bonds (quantitative easing). They fund government spending directly. The flexibility is considered a feature by mainstream economists because it lets governments respond to recessions and manage economic cycles. The flip side, as sound money advocates point out, is that the same flexibility leaves savers exposed.
The cost is inflation. When the money supply grows faster than the economy, each existing unit buys less. The US Federal Reserve explicitly targets 2% annual inflation, which means they are intentionally devaluing the dollar by design. Over a lifetime, that compounds: $100 in 1990 buys roughly $42 worth of goods today. Bitcoin offers an alternative: a monetary system where no one can change the rules, expand the supply, or print fresh units to fund deficits, because the supply schedule and the 21 million cap are enforced by the same code that every node on the network runs.