Bitcoin and FIAT Money: The Past, Present, And The Future

The popular and most successful cryptocurrency to date, Bitcoin, has continued to gain prominence. Putting it in this perspective; it took just 10 out of its 11 years of creation for the President of the United States, Chairman of the Federal Reserve, Congress, Senate, and even the IMF to give a public statement on Bitcoin. Why is Bitcoin getting this attention?. This article covers a brief history, the philosophy behind Bitcoins’ creation and the role it plays now and in the distant future.

Bitcoin Creation

Bitcoin was created by the pseudonymous entity, Satoshi Nakamoto as the network went live on the 3rd of January 2009. With the successful mining of the genesis block (block zero) which had a reward of 50 bitcoins, the jive around the most successful cryptocurrency has been phenomenal.

Was this just another form of money created to add to the various forms already in existence? The importance of bitcoin as a form of currency is even more appreciated when it’s pitched against the rich and historically nuanced subject on the creation and use of Money.

Brief History of Money

Money has not taken a static form since its introduction for about 4000 years now. At about 9000 BC, humans began to grow crops and cattle this gave birth to “bartering”, where livestock and grain were exchanged for other items that were deemed essential or useful at the time.

But as civilization continued there came to the need for an easier form of exchange as the “double coincidence of wants” which the barter system heavily relied upon to remain successful proved inordinate.

With the ancient Babylonians standardizing unit of measurement and introducing the Shekel, it became easier for different amounts of goods ranging from barley to gold to be exchanged based on measurement.

The progression continued from Africa, Southeast Asia and Oceania where cowry shells dominated as the means of exchange, miniature bronze casts with hollows in the middle used in ancient China and the first-ever minted coin adopted as the official currency and issued by King Alyattes of Lydia which is modern-day Turkey by the year 687 BC.

The history of money would never be complete without recounting the impact of Gold on the evolution of money even till this modern-day. Gold as a precious metal and durable nature gives it its intrinsic value. Money as we know it today (Fiat) is not held because of its look but the transactional value otherwise called purchasing power it can facilitate.

But Gold, as used in ancient times and most especially in the 19th Century, ushered in a more recognized and controlled form of money. This is called the Gold Standard. The Gold Standard was an innovative concept that combined the best aspects of paper money with those of coins. It allowed central banks to create money whilst at the same time having that money backed by precious metals.

This introduced the concept known as Reserve where fiat money as we know it today doesn’t necessarily need to possess intrinsic value but is backed by a stash of collection of GOLD which upon need is redeemable.

But as there are sharp contrasts between rhetoric and practice when it comes to the global economy, different Schools of thought in Economics lock horns as to why there might be recessions and depressions or the best solutions out of it. One thing they do not disagree upon is the impact on the common man.

Philosophy Behind Bitcoin’s Creation

As pointed out earlier, the Genesis Block was mined by Satoshi himself, but an event even more prominent than the block zero mining was the cryptographically encrypted message Satoshi embedded within the genesis block which read

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.

This was exactly the headline of The Times publication covering another bank bailout that plunged the financial world into recession. This note has been interpreted as both a timestamp of the genesis date and a derisive comment on the instability caused by fractional-reserve banking.

In the nineties, although there have been many attempts to create digital money, they all failed. Although Bitcoin was the first established cryptocurrency, there had been previous attempts at creating online currencies with ledgers secured by encryption.

Two examples of these were B-Money and Bit Gold, which were formulated but never fully developed.

… after more than a decade of failed Trusted Third Party based systems (Digicash, etc), they see it as a lost cause. I hope they can make the distinction, that this is the first time I know of that we’re trying a non-trust based system. — Satoshi Nakamoto in an E-Mail to Dustin Trammell

The creation of Bitcoin can also be said to have taken roots within the Cypherpunk movement that was prominent during the nineties. The cypherpunk movement was a group of people who believed that with strong online privacy and strong cryptography you could re‐architect the way that people interact with each other.

In this world, cypherpunks believed, people could protect themselves and their interests more effectively and with much less activity (or, as they would say, interference) from the Government. As you can see from Satoshi’s E-Mail to Dustin Trammell above, you would be arguing unsuccessfully Satoshi was not influenced by that movement.

Soon events like the first Bitcoin real-world transaction where 10000 BTC for one pizza valued today at over 97 Million USD was facilitated by Laszlo Hanyecz who agreed to pay 10,000 Bitcoins for pizza which has prompted the commemoration of May 22nd of every year to be celebrated as the “Bitcoin Pizza Day”.

Today’s Society and How Bitcoin Fits in

A quick look at the Bitcoin Whitepaper authored by Satoshi Nakamoto is titled: A Peer-to-Peer Electronic Cash System which has in the conclusion section,

“We have proposed a system for electronic transactions without relying on trust”.

Looking at today’s world where the sharing economy has rapidly grown from $14 billion in 2014 to a forecasted $335 billion by 2025, the sharing economy is an economic model defined as a peer-to-peer (P2P) based activity of acquiring, providing or sharing access to goods and services that are often facilitated by a community-based online platform. This has birthed global giants like Uber and Airbnb.

The common denominator between the sharing economy and Bitcoin is the underlying Peer-to-Peer transactions they facilitate.

With the world increasingly shifting towards a shared economy model, Bitcoin itself which the Nobel Laureate and American Economist Milton Friedman may have unknowingly forecast when he said:

“The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A.”

is also not slowing down. If that was a prophecy, we can safely say it has come to pass and is now becoming a mainstay. And as the sharing economy continues to expand, there is a concomitant growing need for a peer-to-peer form of payment that doesn’t rely on trust to complement its growth.

Bitcoin is already the most valuable cryptocurrency by market value and there’s room for more growth making it a good complement to the sharing economy especially with breakthrough research as reported by the Lightning Network project.

The BIG SHOE Bitcoin Formidably Steps Into

Bitcoin is smart money conceived by its creator to address the very issue where governments especially those who are no longer accountable to their citizens are weaned of their dictatorial powers economically.

This is not by another sanctioning authority such as the United States or other financial watchdogs but its citizens through its peer-to-peer design. In the conclusion section of the Bitcoin Whitepaper, Satoshi stated

“We have proposed a system for electronic transactions without relying on trust”.

Yes, it’s a cryptocurrency but it has stepped into a much bigger role for many such as those in Venezuela or Zimbabwe. These are people who may not be able to fight the crippling effect of inflation trumping their native currency which no longer serves as a useful medium of exchange.

Remember, trust is expensive and hard to come by and Bitcoin has a finite supply of 21 million units which will NEVER exceed that. Can the same be said of most fiat currencies? I think not.

As the government of nations has the sole powers of determining the money supply within their jurisdiction which most times is not in the best interest of the common man, Bitcoin is by design built for the future where out of deep mistrust of citizens of their government continue to search for a credible option.

Bitcoin is not controlled by any central government and as history has proven, any attempt to try to subvert Satoshi’s vision will be but an arduous exercise in futility.

References

1. Kyrian V. 2016. Origins and Philosophical ideology behind Bitcoin [https://medium.com/all-things-ledger/origins-and-philosophical-ideology-behind-bitcoin-680f09a6a063] Accessed February 2020Daniel C. 2014.
2. How Economist Milton Friedman Predicted Bitcoin. [https://www.coindesk.com/economist-milton-friedman-predicted-bitcoin] Accessed February 2020Alex F. 2016.
3. A Brief History of Money. [https://blog.humaniq.co/a-brief-history-of-money-66e076f70652]. Accessed February 2020
4. Jim C. 2019. Sharing Economy. [https://www.investopedia.com/terms/s/sharing-economy.asp]. Accessed February 2020Satoshi N. 2008.
5. A Peer-to-Peer Electronic Cash System [https://bitcoin.org/bitcoin.pdf]. Accessed February 2020