Bitcoin and fiat currency: Why are they destined to take different paths?

In the wave of cryptocurrency enthusiasm, many claim that Bitcoin and fiat currency are equal competitors. But is that really the case? Today, we’ll take a deep dive into these two completely different monetary systems and see exactly where they differ.

What exactly is fiat currency?

Let’s start with fiat money (Fiat-Geld). Simply put, it’s something that the government declares as “money,” and everyone accepts. Unlike gold and silver, which have intrinsic value, the value of fiat currency comes entirely from our trust in the issuing country—trust in its economic strength, political stability, and responsible management of the money supply.

This system truly took shape in 1971. Before that, the US dollar was linked to gold (the Federal Reserve promised a fixed exchange rate of 35 USD per ounce), which meant it was backed by real assets. But as US gold reserves declined and investor confidence wavered, the US government decisively cut this link, fully entering the modern fiat currency era. Since then, the value of money has been purely based on national credit and market expectations, with no physical backing.

How does the fiat currency system work?

The fiat currency system is an ecosystem involving multiple roles:

Key participants:

• Government: establishes which currency is legal tender
• Central bank: controls money supply and interest rate policies
• Commercial banks: create additional money through lending (called “credit money”)
• Ordinary users: use these currencies to keep the system running

The central bank acts as the “guardian” of the system. It adjusts the benchmark interest rate to control the money supply—printing more money when the economy needs stimulation, tightening when overheating, aiming to maintain price stability and avoid extreme inflation or deflation. Meanwhile, commercial banks are not passive; they create more money by issuing loans, further increasing liquidity.

This flexibility is a core advantage of fiat currency. Unlike the gold standard, which is limited by physical quantities, the total amount of fiat money can be adjusted at any time. The central bank has room to respond to economic crises or promote growth.

Trust and stability: the lifeline of fiat currency

Since fiat currency isn’t backed by hard assets like gold, how does it hold value? The answer is: trust.

To maintain this trust, three conditions must be met simultaneously:

1. The central bank must keep prices stable — not print money recklessly. Excessive money printing leads to inflation, which directly destroys currency credibility.

2. The government must be disciplined — fiscal policies shouldn’t be reckless. Excessive borrowing and wasteful spending can damage national credit.

3. The system must be stable — the legal and political environment must be reliable. Investors need to know that the rules of the game won’t suddenly change.

Major currencies like the US dollar, euro, and yen are stable because the issuing countries or regions perform well in these three areas. The US dollar is especially unique—being the global reserve currency, about 88% of international financial transactions are settled in USD.

How does cryptocurrency break the rules?

Bitcoin and other cryptocurrencies represent a completely different approach. Instead of relying on central authorities, they depend on mathematics and technology.

Core differences:

The key difference lies in control. USD is centrally managed by the Federal Reserve, with policy changes enacted at a single command. Bitcoin, on the other hand, requires consensus among most network participants to change rules—ensuring no one can manipulate it at will.

Another difference is supply. USD can be increased endlessly, which is an advantage (central banks can respond flexibly to crises) but also a risk (easy inflation). Bitcoin will always have only 21 million coins, unchangeable by anyone—attracting those worried about inflation, but lacking the crisis management capabilities of a central bank.

Real-world scale comparison

Data speaks volumes. In 2022, the Eurozone’s non-cash transactions reached 126.6 billion, while Bitcoin’s total network transactions that year were only about 100 million. That’s a huge gap.

What does this tell us? Although cryptocurrencies are growing rapidly, their share in the global financial system remains tiny. Fiat currency still dominates economic activity, and this reality is unlikely to change in the short term.

Are they really mutually exclusive?

Interestingly, Bitcoin and fiat currency actually share a common point—their value is derived from user trust, not intrinsic material value. The difference is in what they trust: the former trusts governments and economies, the latter trusts technology and networks.

Both can be used for transactions and storing value. The difference lies in their application scenarios: fiat currency is the main driver of daily economic activity, while Bitcoin plays more of an investment and hedging role.

In the foreseeable future, these two systems are likely to coexist rather than oppose each other. Fiat currency handles daily transactions and national economic leverage, while cryptocurrencies like Bitcoin offer options for those seeking to hedge against central control risks. The key is understanding their respective advantages and disadvantages, rather than choosing one over the other.

In summary, fiat currency and Bitcoin represent two fundamentally different trust models—one relies on institutions, the other on code. The former is more stable and widely accepted; the latter is more autonomous and transparent. Which to choose? It depends on what you value most.