With all of the different types of cryptocurrency and terms floating around, the world of cryptocurrency can be easy to get lost in. One of the terms that pops up quite frequently is fiat currency \u2014 but what are people talking about when they use this term?<\/p>
Fiat currency is a form of money that’s issued by a government and declared to be legal tender. This type of currency is not linked to any asset of value and can be printed at will by central governments. However, governments must be careful to avoid over-circulation, as this would cause a drop in value.<\/p>
The value of the currency is based on what it can be used for, not because the coins or cash have any particular value. It’s money that can be used because it’s based on a trust relationship between the issuer, the holder and those that receive it \u2014 in turn, the supply and demand can be loosely regulated by the government and market.<\/p>
If trust in the value of a currency is lost, it will lose demand which will lead to a drop in value. The trust of currency is ultimately based on members of the economy believing it’s worth something. The value of fiat money isn’t directly held in a physical asset like a precious metal or an item that’s of use to someone.<\/p>
For example, when the government of Zimbabwe started issuing more money, the situation eventually snowballed into one where no-one trusted the value of the currency \u2014 so, it collapsed as a form of fiat currency.<\/p>\n\n\n