Fiat Money Vs Bitcoin Functioning: Similarities and Differences


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Fiat money is a currency that has been made legal tender by a government decree. It is backed and regulated by the government for the land where it is a legal currency. The government and the main financial institution have control over the issuance and circulation of fiat money to visit at:

Fiat Money Vs Bitcoin Functioning

On the opposite side, bitcoin is a virtual currency or a cryptocurrency that is present digitally and employs cryptography to verify and secure transactions. It facilitates peer-to-peer exchanges that enable anyone to send and accept payments anywhere in the world. Unlike fiat money, the maximum number in case of bitcoin’s production is limited to 21 million.

History of fiat money

This currency is believed to have first been used in the 10th century in China. It started with metallic coins made with copper. But, a scarcity of this money resulted in converting it. After that, private notes had been issued that are called fiat money. This paper money is considered the first money that became legal tender in any country. Paper money was first used in the West in the 18th century when the American settlements, the Continental Congress, and France started using bills of credit as payments. Earlier, one troy ounce of gold was equivalent to 35 U.S. Dollars but in 1971, the direct convertibility of dollars into gold was stopped. Nearly all governments across the globe have adopted fiat currency that is accepted within the geographical boundaries of their country and is exchangeable with other currencies.

Functioning of fiat money

Fiat currency functions by the virtue of a government decree and the belief that the people using the currency have in its value. It is no longer supported by a physical entity like gold and silver. Fiat money acts as a storage medium that provides people the purchasing power where they can buy goods and services in exchange for this currency.

The main functions of fiat money are:

• Store of value

Fiat money has storage value as the value remains constant. However, though it is an effective and standard store of value, its purchasing power may diminish over time due to inflation.

• Unit of account

It can be described as the device that we use to measure the value of the item being sold or bought in a transaction as it is the standard measure of value used in an economy.

• Medium of transaction

Fiat money is the accepted form of payment for goods and services. The statement on the U.S paper money that says that it is the legal tender for all types of public and private debts is proof that the U.S government assigns me the right to pay for all my transactions with the U.S dollar.

History of Bitcoin

The 2008 Great Recession resulted in a need for an alternative financial system where banks and other financial institutions’ roles in financial transactions could be curtailed because people lost their hopes in those institutions. In 2009, Satoshi Nakamoto introduced Bitcoin, the first virtual cryptocurrency that could be used to conduct transactions without the intervention of a third party. Instead of a centralized regulatory body, the cryptographic proof was used for the verification of transactions based on the decentralized blockchain technology.

Due to the novelty of its concept, while there were advocates of Bitcoin, there was widespread skepticism among economists, finance pundits, traders, and investors about its ability to survive. This resulted in a tepid start to Bitcoin but with its price skyrocketing in 2021, the increasing number of people willing to invest in it has grown tremendously in today’s times.

Functioning of Bitcoin

Bitcoin’s functioning is based on a diversified ledger or data storage that is known as a blockchain. All transactions in the bitcoin network are stored on this ledger but before that, they are verified by the dedicated persons known as miners. Each transaction once verified is stored in a block. When a transaction within the block gets validated, a new block is formed and attached to the old one and thus forming a chain of blocks.

For the formation of a new block, the Bitcoin miners need to solve a complex mathematical algorithm. The particular miner among many competitors, who solves the puzzle first with the right answer, is given a coin as a reward. In the initial days, this was the only way to own Bitcoin. Today, the number of Bitcoin users is more than 100 million. One major reason for its popularity is that it has become easily accessible to people through several platforms like crypto exchanges and trading apps. You too can join now the thriving crypto market and start trading.


Fiat money and Bitcoin were created with the same objective, making transactions easier and more convenient but both their functioning is varied. It can be safely said that our global economy can thrive where both these currencies co-exist.


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