A fiat-backed cryptocurrency is a type of stablecoin pegged 1:1 to a government-issued currency (e.g., USD, EUR) and backed by reserves held in bank accounts or cash equivalents. Unlike traditional cryptocurrencies like Bitcoin, which derive value from scarcity, decentralisation, and market speculation, fiat-backed cryptos are designed for price stability. They maintain their peg through collateralization, meaning each token is redeemable for a unit of the underlying fiat currency. Examples include Tether (USDT) and USD Coin (USDC).

Key differences from Bitcoin include:

Volatility: Bitcoin’s value fluctuates wildly based on supply-demand dynamics, while fiat-backed cryptos aim for minimal price variation.

Decentralisation: Bitcoin operates on a trustless, decentralised blockchain, whereas fiat-backed stablecoins rely on centralised issuers to manage reserves.

Use Case: Bitcoin serves as "digital gold"—a store of value and speculative asset—while fiat-backed cryptos function primarily as mediums of exchange in crypto trading and DeFi.

Transparency Risks: Bitcoin’s supply is auditable via blockchain, but fiat-backed cryptos require regular audits to verify reserve backing, exposing them to potential mismanagement (e.g., Tether’s past controversies).

Fiat-backed cryptocurrencies bridge traditional finance and crypto, offering stability but introducing counterparty risk—a trade-off absent in decentralised assets like Bitcoin.