Lesson 2: All About Fiat Currency

Welcome to lesson two in Kriptomat Academy’s guide to investment concept. This lesson is about fiat currencies.

It’s clear that Bitcoin, Ethereum, and Shiba Inu are cryptocurrencies.

• If you’re using these digital assets to buy something, you’re paying with cryptocurrency.
  
• Just as cryptocurrency is the generic term for all cryptos, “fiat currency” is the generic term for all government-issued currencies.
  
• U.S. dollars, euros, pounds… they’re all fiat currencies.

The term “fiat” has a long and colorful history.

• A “fiat” is a decree – a “make it so” statement from someone with authority to set policies.
  
• The term “fiat currency” has been used since the abandonment of the gold standard to criticize currencies that have value only by government decree, not because the currency can be exchanged for gold from the country’s reserves.
  
• Today, euros and Bitcoins are valuable as a result of the same supply-and-demand dynamic. They’re both worth what people are willing to pay for them at exchanges.

Let’s look at how money has evolved over the years.

• People began trading by the barter system in about 6000 BCE.
  
• Over time, valuable goods  like animal hides, salt, and spices began to serve as standards. You could trade a kilo of salt’s worth of animal hides for a kilo of salt’s worth of glazed pottery.
  
• Gold coins began to appear in the sixth century BCE. The coins had many advantages over salt.
  
• Paper money appeared in China during the Tang Dynasty, which lasted from the 7th to the 10th centuries AD. The first paper notes were simply receipts for gold deposited in early banking institutions or as letters of credit for traveling merchants. 

• Paper money didn’t find much use in Europe until Sweden printed its first national bank notes in 1661.
  
• Within a few years, the first currency exchange market was established in Amsterdam. Exchange rates were pegged to Dutch imports and exports.

For a few centuries, Europe’s paper currencies were backed by national gold or silver reserves

• Each country set a standard for its currency. For example, the Dutch gulden was worth about 3.5 grams of gold.

• The local value of gold might be low, but if you carried it with you outside the country, it could be worth much more.

• The gold standard remained in place, with refinements, until the costs of two world wars required European countries to print more money than their gold reserves could support.

• The U.S. finally abandoned the gold standard in 1970, bringing the era of the gold standard to a close. 

That’s how the era of floating exchange rates began

• Today, no nation backs its currency with gold. Crypto users say countries issue “fiat currencies,” while economists say that their relative values are “free-floating.”
  
• What they mean is that pounds and euros have no inherent value. Their values are determined in relation to other currencies by supply and demand in the foreign exchange market or forex.

So – what have we learned?

• Fiat currency is what the crypto community calls government-issued euros, dollars, francs, and so on.
• “Fiat” was originally used as a disparaging term to describe currency that wasn’t based on the gold standard.
• Today, both fiat currencies and cryptocurrencies establish their value through exchanges with other currencies.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

What is the everyday meaning of the word 'fiat'?

Decree

Worthless

Unsupported

Inflationary

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Where did paper money first appear?

Trading routes in the Middle East.

China.

North America.

Amsterdam.

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How has the phrase 'fiat currency' been used disparagingly throughout history?

To suggest that the currency's value will rise and fall with the price of gold.

To suggest that the currency is suitable only for unsophisticated people in frontier towns.

To suggest that the currency is counterfeit, printed by an enemy to ruin the economy.

To suggest that the currency has value only because the government says it does, with no reserves of any kind to establish value.

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What establishes the value of a fiat currency?

Market exchange rates arrived at by supply and demand.

Market exchange rates arrived at by fiscal policy.

The price of gold.

Government tax policy.

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What did the Bretton Woods Agreement accomplish?

Established copper reserves as an alternative to the gold standard for backing national currencies.

Defined the value of every national currency in terms of pounds sterling.

Pegged many national currencies to the U.S. dollar, the only major currency still backed by gold reserves.

Instituted international rules of cooperation for fighting inflation and recession.

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