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“The Gold Standard” is a term often used by economists (and the public) when referring to the backing value of government-issued currencies. Countries that utilized this standard agreed that paper money could be converted into a pre-determined amount of gold. This is equivalent to fixing the price of gold to a value at which it could be bought or sold. For countries that backed their currencies in this way, a stabilizing and self – regulating effect on the value of the currency could be observed (so long as the country had enough backing reserve gold.) This also discouraged governments from spending deficits and accruing debt, since they could not issue more currency than their gold supply would allow.
When Nixon did away with the vestiges of The Gold Standard in 1971, the US Dollar officially became a Fiat Currency. Investopedia defines Fiat Money as, “government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.” The value of Fiat Currencies is derived from a combination of supply/demand and the stability of the government that issued it. In other words, the Dollar is backed by “faith in the United States government.” Nearly all modern government issued paper currencies are fiat.
Inflation could be redefined as the rate of value erosion. If you’re in the UK, next year your savings will be worth 2% less than it is this year. Of course, the bank statement won’t reflect this – but what you can buy with that savings will.
People need to wake up to the fact that their money is worthless and that the government is not trustworthy. There is nothing trustworthy or faith – inspiring about the level of debt that the US and other governments have accrued. At some point, that debt will need to be paid. And if the supply of dollars increases to pay that debt, the law of supply and demand will run its course.
There are countries that have already undergone hyper-inflation – such as Venezuela, whose inflation rate reached 344,000% in 2019. Yes, you read that correctly. Their fiat currency, the Bolivar, is inflating faster than they can print them. In countries such as this, non-fiat currencies such as Bitcoin are replacing the government issued paper fiat.
Technically, Bitcoin is not a fiat currency because it is not government issued. Instead, it is issued by the Bitcoin network to miners who expend work processing the blockchain. It also breaks the mould by not being a physical, tangible currency. But Bitcoin is certainly a currency, and can be used as an electronic form of payment to buy and sell goods and services.
Bitcoin’s history is a blip compared to Gold, but its gains in a relatively short period of ten years are undeniable. Both assets have a limited supply, and have been used as havens and hedges against government inflation. Ironically, both assets are also mined – one with machinery, and one through network computing power. There are even strong price correlations between the two assets:
Bitcoin’s decentralization combined with its deflationary model and limited supply make it a valuable hedge against world governments, with many calling it the “safe haven of the digital age.”