In this most recent edition of The Asset Comparison series (prior: Bitcoin vs Gold), we are diving into perhaps the most revolutionary financial debate of our time: Bitcoin versus fiat currency.
As traditional monetary systems face increasing scrutiny, Bitcoin emerges as a compelling alternative to the established order. Let's explore why Bitcoin isn't just competing with fiat currencies—it is potentially rendering them obsolete.
Definition in economics and currency: fiat currency refers to government-issued currency that isn't backed by a physical commodity like gold or silver. Instead, it derives its value from the government that issued it and the public's trust in that government. For example, the US Dollar, Euro, Australian Dollar are all fiat currencies.
The Fiat System: A House of Cards?
The Australian dollar, like all fiat currencies, derives its value purely from government decree and public trust. While the AUD has historically been relatively stable compared to other currencies, it shares the same fundamental weaknesses as the US dollar, British pound, Euro, and Japanese yen: infinite supply potential and centralised control.
Since the Reserve Bank of Australia abandoned the gold standard, the AUD has lost over 90% of its purchasing power. This isn't unique to Australia—all major fiat currencies have experienced similar devaluation. The US dollar, often considered the world's reserve currency, has lost nearly 97% of its value since the Federal Reserve's creation in 1913.
Feature Comparison: Bitcoin vs Fiat Currency
Bitcoin: The Hard Money Alternative
Enter Bitcoin. Unlike the theoretically infinite supply of fiat currencies, Bitcoin's supply is mathematically capped at 21 million coins. This scarcity isn't just a feature—it is a fundamental characteristic that makes Bitcoin the hardest form of money ever created.
Key Advantages of Bitcoin Over Fiat:
Absolute Scarcity The AUD, USD, GBP, and other fiat currencies can be printed at will. During the 2020 global crisis, central banks worldwide engaged in unprecedented money printing. The RBA's balance sheet expanded by hundreds of billions of dollars. Bitcoin, meanwhile, maintained its predetermined issuance schedule, highlighting its role as an inflation hedge.
Decentralisation While the RBA and other central banks control their respective currencies, Bitcoin operates on a decentralised network. No single entity can debase its value through monetary policy decisions. This removes political influence from money—a revolutionary concept in modern finance.
Global Accessibility Unlike the fragmented fiat system, Bitcoin operates seamlessly across borders. Whether you are in Sydney, London, or Tokyo, Bitcoin transactions settle in minutes, not days, without exorbitant international transfer fees.
Transparency Every Bitcoin transaction is recorded on a public ledger. Compare this to the opaque operations of central banks and commercial banking systems. The RBA, like its global counterparts, can make monetary decisions behind closed doors that affect millions of Australians.
The Australian Context
The Australian dollar, while relatively stable among fiat currencies, faces unique challenges. As a commodity-linked currency, it's particularly vulnerable to global economic shifts. Let's examine how Bitcoin offers Australians protection against specific economic vulnerabilities:
1. AUD Depreciation Against Major Trading Partners
The Australian dollar's value has historically been volatile against major trading partners' currencies, particularly during economic downturns:
- Against the US Dollar, the AUD has fluctuated between 0.48 and 1.10 USD over the past two decades
- During the 2008 financial crisis, the AUD plummeted from 0.98 to 0.60 USD in just months
- The Chinese Yuan's influence on the AUD has grown significantly, with Australian exports becoming increasingly dependent on Chinese demand
Bitcoin's non-correlation with traditional currency pairs offers Australians a way to protect purchasing power regardless of AUD performance against major trading partners. Unlike the AUD, Bitcoin's value isn't tied to any single country's economic policies or trade relationships.
2. Property Market Volatility
Australia's property market presents significant risks to the national economy and the AUD:
- Household debt-to-income ratios exceed 190%, among the highest globally
- Property prices in major cities have increased over 500% since 1990
- The RBA's interest rate decisions are heavily influenced by property market concerns, potentially at the expense of other economic factors
Bitcoin provides Australians with an alternative store of value that:
- Isn't tied to the local property market
- Offers liquidity without the high transaction costs of real estate
- Provides exposure to global technology adoption rather than local property speculation
3. Resource Sector Dependencies
Australia's economy and currency are heavily influenced by commodity prices and resource exports:
- Iron ore price fluctuations directly impact the AUD's value
- The mining sector represents over 10% of Australia's GDP
- Economic slowdowns in major resource-importing countries (particularly China) can rapidly devalue the AUD
Bitcoin's value proposition is independent of:
- Commodity price cycles
- Resource demand from specific countries
- Traditional mining sector performance
4. Regional Economic Instability
The Asia-Pacific region's economic dynamics significantly impact the Australian dollar:
- Asian financial market volatility often triggers AUD selloffs
- Regional geopolitical tensions can rapidly affect trade relationships
- Natural disasters or pandemic-related disruptions in the region directly impact Australian exports
Bitcoin offers Australians protection against regional economic instability through:
- Global price discovery independent of regional events
- 24/7 liquidity regardless of regional market closures
- Borderless transactions during times of regional financial stress
The Bitcoin Advantage for Australians
Bitcoin's unique properties make it particularly valuable for Australians seeking to:
1. Diversify Currency Exposure
- Reduce dependency on AUD-denominated assets
- Access global markets without currency conversion fees
- Hedge against regional currency devaluation events
2. Protect Against Monetary Policy Risks
- Shield savings from RBA quantitative easing
- Maintain purchasing power despite negative real interest rates
- Avoid bail-in risks in the banking system
3. Access Global Opportunities
- Participate in global digital economy growth
- Invest in technological innovation
- Reduce exposure to local economic cycles
As we witness the continued debasement of fiat currencies worldwide - from the Turkish lira's collapse to the Argentine peso's chronic inflation - Bitcoin's value proposition strengthens. Even traditionally stable currencies like the AUD and USD face unprecedented challenges in a world of negative real interest rates and massive government debt.
Conclusion
While fiat currencies represent the past - a system of monetary control and artificial stability - Bitcoin represents the future: a transparent, decentralised, and mathematically sound monetary system. As Australians grapple with economic uncertainty, Bitcoin offers not just an alternative investment but a fundamental upgrade to our concept of money.
The choice between Bitcoin and fiat isn't just about investment returns - it's about choosing between a system designed for control and one designed for freedom. As the world's fiat experiment approaches its limits, Bitcoin stands ready as the next evolution of money.
This article is part of The Asset Comparison series, examining traditional and emerging asset classes for the modern investor.
Prior comparisons: Bitcoin vs Gold
