Looking into the History of Money to Understand Cryptocurrency
Are you eager to learn about cryptocurrency, but you feel there’s too much jargon in this industry?
Let’s look into the history of money to understand the concept of cryptocurrency. In the olden days, people didn’t have money or currency. They would exchange their milk for cheese, for example. But what if someone had a big cow, and they just wanted three of your chicken eggs? It wouldn’t make sense for them to give their whole cow just to take the eggs. Thus, they might offer three seashells to you to represent that they got three eggs from you. After they gave you a thousand seashells, you could exchange them for their full cow. So would the seashells have value in this case? Yes!
Since two or more people have accepted and agreed that the seashells have value, and they can be transferred to other people, the seashells indeed do have value. And when more and more people accept and agree to use these seashells, the more valuable they will become. Except that there’s one problem with that. There’s an unlimited supply of seashells, and you could easily cheat by getting more seashells at the beach.
For the seashells to have good value, there needs to be a limited supply for us to use them as money. So we stopped using seashells and started using rare metals like gold and silver. Gold has value because it has a limited supply, and some people say that all the gold stored in the world can fit into one big swimming pool. Gold also has value because it is accepted and agreed by many people to be valuable. A common belief is that, “Gold has high value because it conducts electricity and is used for making products like phones.” That’s part of the reason, but gold was valuable long before electricity, computers, and phones. Silver and oil have much more uses than gold. Then why is 1 ounce of silver or oil valued less than 1 ounce of gold? One of the main reasons is that gold supply is more limited than oil and silver.
After using gold and silver as money, kingdoms and empires used gold and silver coins with images of the king or emperor (but still, the value came from the gold/silver, not the government). In the past, the US dollar represented an amount of gold that you could withdraw from a bank. While the British Pound represented 1 pound of silver in England, the value of money still came from gold and silver, and not from the government, ‘commanding’ people to use government money.
Even today, you can see some governments stocking up on more gold to guarantee the value of their money. Despite this, the value of government money keeps going down, as can be seen by prices going up every year. Why? For leaders to stay in power, a government must give more and more free stuff to its citizens or its military, or else they will lose their position in an election. How does the government pay for these increasing promises of free stuff? One is through taxes, but that is never enough. The government also borrows money. But then the taxes are not enough to pay for these borrowings and interest. So the government just prints more money for the same amount of gold in the central bank’s vault. In some cases, the government might not even keep any gold at all, in which case the money might simply represent all the products in that country.
What happens when more money is printed for the same amount of products? Look at an apple that’s valued at $1. When more money is printed, the same apple becomes $2 instead of $1. That’s the same as saying the value of money goes down. Hence the solution would be for us to just keep gold, right? Well, maybe yes and maybe no, depending on who you ask.
Gold is not completely limited. There’s more gold found every day in unpredictable amounts. Gold is very difficult to transfer from person to person, or from country to country, which is not good for the digital world of today. Although gold certificates can be transferred online, the certificates still have to represent real physical gold in a vault in some country. A government can get gold from all the vaults located on its land and replace it with paper currency, even if the gold owner does not agree, just like the American government did in 1933.
A possible solution might be Bitcoin! Bitcoin is a worldwide digital money, which is not controlled or centralized by any government, bank, location, or corporation. It has a strict limited supply, as there will only ever be 21 million Bitcoins forever and ever. It can easily be transferred digitally around the world with reasonable speed. It is unstoppable by governments, banks, or corporations even if the internet is cut off.
Reminder: governments can control banks & corporations using laws. Instead of transferring Bitcoin through banks, it’s done using a blockchain, which is NOT centralized. Blockchain is technical to explain, so let’s just imagine it is millions of independent citizens and their computers around the world, working together and policing each other to honestly record transactions between you and me. These citizens also earn Bitcoin by providing this service.
Bitcoin is not a physical coin. It is digital like email, which you cannot touch or hold. It can be divided, subdivided, transferred, bought, or sold in decimals. To learn more about Bitcoin and blockchain, check out my other article by clicking below.
Originally published at https://opinined.com on December 16, 2019.