Why Bitcoin is different from fiat currencies - questions and answers.

This is an email conversation that I thought might be interesting for some...

Hi Joe and hope you're as OK as can be.
I'll reply by inserting my answers.

Hi Lennart:
As always I trust all is well. Your latest re BTC was awaiting me when I logged onto the kiosk a bit earlier. I'll dive right into it.
"Once you're 'in' and have your BTC you don't have to go back to your fiat currency unless you want to..."
That statement seems, to me at least, weighted with presuppositions that need to be unpacked.

BTC, etc., is not (cannot be?), per se , created ex nihilo. I.E., I cannot wake up in the morning and magically say, "I am the owner of 10 BTC valued at %$$$&*." I first have to get "in", i.e., I have to exchange or convert something that, at least on its face, has acceptable value for the BTC (digital currency). I assume that the variously accepted "legal tender", e.g., U.S. Dollar, can be used to buy into the BTC digital currency framework.
If that is the case, then my newly acquired BTC is, essentially, backed by a fiat currency. "Fiat currencies are backed by nothing of substance, just trust in a government, a central bank, or other bank. Due to the fact that fiat currencies are all created by creating corresponding debt and crypto currencies are not, trust in fiat currencies is waning..."
Words cannot alter facts. Is a fiat currency by any other name still not a fiat currency? If I take my current fiat currency, a currency backed by nothing of substance...and created by creating corresponding debt, and exchange its value for BTC, what has actually changed? Who determines the exchange rate, and what/who actually defines the actual exchange rate itself?
Lennart:
You are right in that cryptos aren't backed by anything but its utility.
What I mean by being "out" is that I can go on and receive and send without being in any way depending on state issued fiat currency.
The other question is important.
Who determines the exchange rate and perhaps more important, who determines the the purchasing power? That's a key point. It's demand and supply. Since there is no interference by central banks and the amount of cryptos issued is limited, cryptos are harder to manipulate. In the present system debt is the other side of the coin. The state issues liquidity by borrowing, issuing bonds and by other means. There is interest to pay. The end payer of interest is the citizen. Cryptos don't work that way.

Joe:
"Fiat currencies are created in unlimited numbers whereas most crypto currencies are limited 'AND' can't exceed a predefined number. For BTC it is 21 million..." That 'AND' seems fairly cocky to me. Originally, paper currency was not to exceed a predetermined number, i.e., if I had a gold bar valued at a certain amount, I could receive paper currency that signified no more or less the amount of my gold bar. Bankers learned to manipulate that system, etc., and, longer story short, we wind up with fiat currency as legal tender.
Lennart:
Well, the limit is in the source code, which is open source and can be changed. Who decides about changes? The miners do and a discussion is going on right now this minute. The miners are those who run the copies of the ledger and their number is in the tens of thousands. The discussion is about a "fork" that is going to be implemented soon. The reason is scalability. So different technical solutions are being discussed to improve the functionality of BTC.
The difference again is that one central bank can take away the limit like the Fed did under Nixon in 1971. The US government printed dollars to finance the Vietnam war. The French president De Gaulle challenged Nixon and demanded gold for the French trade surplus in dollars, the so called Euro dollars. Nixon simply changed the rules and dropped the dollar peg to gold.
No single entity can make that decision about BTC, like the Fed or European Central Bank.

Joe:
I get that BTC is a new currency, i.e., digital currency. But is it, nonetheless, still not a fiat currency, only in digital form?
Now, let's say one buys in: one has X amount of U.S. Dollars and exchanges/converts that for X amount of BTC. Who have I made that initial transaction with, i.e., who becomes the "holder" of the U.S. Dollars? E.G., let's say I have $10,000 on account in my local bank, who do I transfer that to so that the BTC transfers into my digital wallet? How does that initial transaction go down?
Lennart:
Digital currencies is old technology. In Sweden 97% of Swedes have and use cards. Public transportation of various kinds no longer accept cash.
What is new about bitcoin is the blockchain, the ledger that is accessible for everyone and where nothing can be changed without verifications by a community.
Buying BTC is easy. There are exchanges for this. You pay for your BTC with your card. As soon as the BTC is in your account in the exchange you transfer your BTC to your digital wallet in the blockchain. To do that you can use the digital wallets that are available free of charge or you can store it on a Hard wallet, a device, that is virtually impossible to hack.
After doing that you can start sending and receiving payments in BTC.

Joe:
Once I become the owner of, say, 100 BTC, and that is duly noted in the open source digital "Ledger", I notice somehow/where that you have a boat for sale, cost 75 BTC. We make the online digital transaction, etc., 75 BTC is transferred from my digital wallet to yours & you transfer title (ownership) of boat to me, etc. We have eliminated the middleman & associated fees (the same could be accomplished by my simply handing you a cash payment in the paper fiat currency of your choice. Though I would have to had withdrawn the same from my account at the local bank incurring any fees attendant to that transaction). I get the boat and you get 75 BTC that is backed by X amount of U.S. fiat currency (backed by who/held by who & where? Is not the BTC only as good as that which backs it?). What am I missing here? Am I just being obtuse?
Lennart:
First off, BTC is not backed by fiat currency. That's a serious misconception that will thwart any subsequent conclusions. Just as US dollars aren't backed by Yen or Euro. You can exchange BTC for fiat currency which isn't the same thing. "Backed by" implies a promise by the issuer. There is no such thing for any currency.
The value of BTC is arrived at in an open market. Supply/demand. This is not the case with fiat currencies that are manipulated by central banks. That is partly why crypto currencies are volatile. Any fiat currency showing such volatility would create serious crises in the issuing country. So you can choose to call this bad. Others say the volatility of the present monetary system is contained by central banks' manipulation of fiat currencies and this volatility shows up in the free crypto currency market.
Kadhaffi in Libya had a plan to set up an African Central Bank to issue gold backed Dinars to facilitate trade between African countries and not be dependant on US dollars for international trade within Africa. Sidestepping Bretton Woods. He was killed.

Joe:
If BTC is limited, i.e., can't exceed the predefined number (an arbitrary number?), of 21 million, how does it not run into the same obstacles that all original currencies encountered, and resulted in their falling into the fiat money hole?
What if major governments refuse to recognize BTC or, any crypto currency, as legal tender? Legal tender only exists via force of government, does it not? The U.S. Dollar is nothing more than a "Federal Reserve Note" (an IOU) made "Legal Tender" by virtue of Government decree/fiat.
Lennart:
That is of course a risk. That governments won't accept crypto currencies. It would slow down acceptance. On the other hand crypto currencies don't need government approval to function. Governments realize this.
We who live in the Western world have much less use for alternative to present payment methods than Third World citizens who, many of them, don't even have a bank account. Maybe one in the family has a cheap smart phone. They can be up and running in no time and make transactions in small amounts of money with anyone on the planet. It's not necessary to use an exchange and a bank account. You can meet someone in person and buy BTC using a public computer. You pay the person in cash, the transfer is made, you both wait to see the transaction verified and you will see it in your smart phone wallet.

Joe:
In the digital age, etc., I surely see the needed for a standard, safe, user friendly, digital currency. It can reduce cost, save time, lessen the human foot print, eliminate middlemen to a great degree, it can be upscaled & get past some of the limitations that are endemic to paper & metal currencies: but, I don't see how it escapes the fundamental flaw inherent to fiat currencies. crypto currencies do not do away with fiat currencies, they appear, to me at least, to be a classier fiat currency in digital drag.
What am I missing, i.e., not getting?
As a form of currency I can see how one might be able to speculate & play exchange rates to make a small profit. I can also see someone loaning BTC out for interest via personal contract transactions via individuals. In other words, an open source system, is no guarantee that various types of speculation & manipulation will not occur, just as they do with other currencies.
Lennart:
As I said earlier, what's new about cryptos is not that it is digital, it's what the blockchain entails. It is open source and anyone with the necessary skills can create a copy of Bitcoin. One such copy is Litecoin. Limit for LTC is much higher. It's faster and not as big as BTC. Some say BTC/LTC is what gold is to silver. Then there is a whole different creation done in late 2013 by Vitalik Buterin a Russian/American teenager.
Wikepedia:
Ethereum is an open-source, public, blockchain-based distributed computing platform featuring smart contract (scripting) functionality, which facilitates online contractual agreements.[2] It provides a decentralized Turing-complete virtual machine, the Ethereum Virtual Machine (EVM), which can execute scripts using an international network of public nodes. Ethereum also provides a cryptocurrency token called "ether", which can be transferred between accounts and used to compensate participant nodes for computations performed. "Gas", an internal transaction pricing mechanism, is used to mitigate spam and allocate resources on the network.[2][3]
Lennart:
Ethereum is a computing platform. This could have huge implications and it's just starting. It's even harder for me to wrap my head around. I've got this much. Even if the the crypto space hype reminds us of the dotcom bubble one has to consider that the hype resulted some of the world's biggest companies such as Google Amazon Verizon Apple Facebook etcetera.

Joe:
Okay, I've cast my marbles around enough for this go around.
Peace, Joe
Lennart:
This was fun!
Take care!
Lennart