Cryptocurrency in simple details.

[BrianSoddingBoru4]

To paraphrase Lewis Black, nobody knows how the fuck economics works, so explain this to me: what is the advantage of a commodity-based currency over fiat currency?

Boru

For a currency to work, it has to have a limited supply, or people won't value it (or you get inflation).

For fiat currency, the limit is placed by the government.  Bitcoin has a hard limit.

There are problems with both.  With fiat currency, a government can be tempted to print too much.  With bitcoin, the limited supply incentivizes treating it as an investment and not a currency.

For any currency to work, people have to believe that it will have similar buying power a year from now that it has today.  If it goes down too much, it becomes worthless to hold, and if it goes up too much, it becomes risky to spend.

I wasn’t thinking specifically about Bitcoin - why is ANY commodity-based currency ‘better’ than a fiat currency? In the former, the value is determined by the amount of the commodity in existence. In the later, the value is determined by government decree (at least initially).


I fully understand that over-printing money can lead to inflation or even hyperinflation, but it doesn’t always. If a country has its currency tied to a commodity, an increase in the amount of that commodity will devalue the currency.

So, what’s the advantage of one over the other?

Boru