An article on the St. Louis Federal Reserve’s blog site earlier this week argued that Bitcoin and fiat currencies share some important characteristics. The post, published on Wednesday, identified three key areas of similarity: the lack of intrinsic value, the defined and limited supply, and the lack of a middleman.
The post’s author, Christine Smith, cited an article by economists Aleksander Berentsen and Fabian Schar that appeared on the St. Louis Fed Review . That article, A Short Introduction to the World of Cryptocurrencies, asserted that Bitcoin’s value is based on the “expectations of market participants” – but alleged that other currencies have no intrinsic value either:
“However, Bitcoin is not the only currency that has no intrinsic value. State monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system.”
Smith also notes that fiat currencies have limited supplies, determined by the central authorities charged with governing a nation’s monetary supply. For the United States, that governance is managed by the Federal Reserve, which has the authority to reduce or inflate the monetary supply to address various economic concerns. For Bitcoin, that supply is capped at 21 million units.
Finally, she acknowledges that digital currency transactions require no middle man. Instead, any two parties can make a cryptocurrency transaction directly, without relying on banks other third parties. Smith says that this is similar to cash in a fiat currency system:
“Cash requires no intermediary to process a transaction. Unlike paying with a credit card or an app, no third party adjusts your account.”