Fiat money is money that is in itself intrinsically valueless but that is accepted as money because the government says that it must be. It has nothing to do with whether or not it can be printed (or otherwise easily created).
If a government were to make a cryptocurrency like Bitcoin their legal tender and require that it be accepted as money, then that cryptocurrency would become fiat money.
Money has for the most part been a dichotomy: commodity money and fiat money. Bitcoin doesn't fit fully into either category, but it actually is closer to a non-government fiat currency than to commodity currency.
Commodity money was things that were valuable themselves, independent of their use as money. Gems and precious metals, for example, are useful for making jewelry and for other aesthetic purposes, and their rarity makes them useful as status symbols for upper classes.
In societies that do not use them for money, people still want them and use whatever is used for money to buy them.
Cryptocurrency doesn't really fit as commodity money because the demand for it is almost all for its use as money. If people did not accept cryptocurrency as money, I doubt many people would be interested in buying it.
As money, cryptocurrency is much more like fiat money: something worthless that has been declared to be money. The only difference from most other fiat money is that with cryptocurrency it is not a government declaring it to be money. It is a large group of people.
We probably need a new category, non-government fiat currency, to cover cryptocurrency as money.
Cryptocurrencies aren't worthless though. Computationally expensive, cryptographically useful numbers are a valuable commodity. They are valuable in virtue of the computational work that they make possible, the same way that electricity or silicon are valuable in virtue of the computational work that they make possible, i.e. successfully, verifiably lengthening the blockchain.
> Fiat money is money that is in itself intrinsically valueless but that is accepted as money because the government says that it must be...require that it be accepted as money (emphasis added)
There's the part where you say it.
> The only difference from most other fiat money is that with cryptocurrency it is not a government declaring it to be money. It is a large group of people.
And there's the part where you take it back. As you started to say, declaration is a necessary but not sufficient condition for fiat; it also requires forcibly maintaining the declaration. If a large group of people have that power then they're effectively a government, making "non-government fiat currency" an oxymoron.
Bitcoin, or the technology of Proof-of-work and immutable history that is based on it, is not like gold:
One can take the entire history, change specific parameters, and create a new coin (bitcoin cash for instance) that has the same history. Hence people that had bitcoins have the same amount in this new currency.
This is like taking all gold in existence, magically duplicate its exact quantity into say another chemical element which never existed before, and distribute the amounts to all the people that owned gold before; in the same proportions.
Would this make the scarcity property of gold less interesting for using it as a medium of exchange? You bet so! One could magically do this ad-infinitum, possibly creating infinite other chemical elements - what would then set gold apart from the rest?
Your argument would apply equally to any currency. What stops me printing jstanley dollars and claiming there is 1:1 parity with actual dollars? Nothing! And yet that doesn't devalue actual dollars.
If most people had legitimate reason to believe that your jstanley dollars would retain 1:1 parity with US dollars, and they would be able to be used interchangeably with US dollars for most financial interactions for the foreseeable future, then you might devalue the US dollar by printing enough jstanley dollars.
That is unlikely though - there is no reason to believe any of those things about your dollars.
Whereas if you believe in the model of bitcoin, why don’t you believe in the model of bitcoin2? The best answer I am aware of is “network effects”, but that isn’t a very good one.
We could get rid of almost all the bank default risk by making banks match the maturity of their deposits with the maturity of the loans they make. But with less risk, the bank would not be as profitable most years.
[1]http://encyclopedia-of-money.blogspot.com/2010/03/goldsmith-...
Hey, I appreciate this. As someone that doesn't like bitcoin, it became clear that the people shilling bitcoin we're not honest about their investments.
To me digital trustless and permissionless transfers are the most important features of cryptocurrencies.
That may be a bug, not a feature. See William Jennings Brian, "Cross of Gold" speech. Having a fixed currency and economic growth forces deflation, which is really tough on debtors.
Gold, like diamonds, is a promoted rarity. The gold industry's "World Gold Council" puts effort into into getting gold safely locked up in safe uses like jewelry and off the trading market.
- Its usage in black markets, like drugs and weapons.
- Its usage as a speculative commodity.
- Its usage as a hedge against hyperinflation.
Those are current uses - and any one of them could grow much bigger. Conceivably, a government may end up creating a new black market traded in bitcoin, which might then propel it to mainstream adoption.
Footnotes: Drugs are bad; don't do drugs. Guns kill people. Don't sell your house for Bitcoins. Etc.
- Its usage as a hedge against hyperinflation.*
FYI - those are both features that gold currently possesses.
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&...
For me this makes the real value zero, but I am already proven wrong for more then 10 years.
Can’t? Perhaps it is difficult, but not impossible. I can think of some examples of forking social consensus: x11-wayland, Debian-Ubuntu, star office - open office - whatever office it is now.
I think of Bitcoin as being a Gold 2.0. Reasons:
1. It's like gold, but it removes some of its technical shortcomings.
2. It's also not a fiat currency, because it's not possible to just print new money.
Those two properties are, I believe, its defining properties.
Not being able to print new money might be a good thing, or it might be a bad thing. It could very well be that the control that central banks have over the money supply might not be a good thing. Or it may indeed be a good thing. Who knows.
Krugman might think the control that governments exercise over the money supply is benign - but Krugman and his fellow economists are not scientists. There are equally compelling arguments that fiat currencies encourage people to put their money into fractional reserve banks, creating lots of risky debt. The banks themselves end up being too big to fail, needing periodic bailouts, creating moral hazards that result in future risk, and making ordinary people pick up the tab.
A bitcoin economy, in contrast, will presumably not have such cheap access to credit. It will probably be a "deflationary" currency, encouraging people to save up their money, rather than lend it out, avoiding needless debt. Whether or not this is a good thing is unclear.
Full disclosure: I have 200 GBP in Bitcoin. Treat these things like lottery tickets.