Bitcoin is often labeled as a kind of fiat money. Before reacting, pause for a moment, and take a deep breath. Is your pulse racing? If so, let’s try to understand this better.

So, what does fiat refer to? It’s an authoritative command or decision. Fiat currencies are valued based on government authority. Their value stems from a government’s decision to accept them for tax payments. So, how does Bitcoin fall into this category?

A sovereign typically gives value to fiat currency. But, there’s no ‘Bitcoin Monarch,’ is there? Incorrect. It’s actually us, the users.

It’s our collective choice to use Bitcoin that assigns it value. We bring it into existence through our mutual consensus. Despite popular comparisons of Bitcoin to digital gold, it isn’t a commodity. Bitcoin doesn’t have a unique use-value or exchange-value, nor is it a tangible material that can be transformed into something else. It is a digital ledger that exists on our computers.

Bitcoin is only recognized as one entity because we all agree to employ the same rules for validating its database modifications. Without this consensus, Bitcoin would merely be an infinite number of inconsistent databases scattered globally. In such a case, Bitcoin wouldn’t exist, hence it couldn’t have any value.

Its utility is its exchange-value. They are two aspects of the same entity, conceptualized exclusively through a joint fiat decision.

Bitcoin might be considered ‘hard money,’ it might have a limited supply, and it might possess the potential to alter economic incentives worldwide. But it is also a form of fiat. Every characteristic it possesses, its entire existence, is solely due to our unanimous and arbitrary decision to acknowledge it.

Bitcoin is the first-ever decentralized fiat currency.

This viewpoint piece is a personal take. The views expressed belong solely to the author and do not necessarily represent those of BTC Inc or Bitcoin Magazine.