How can we define money?
Before we get into Bitcoin, I’d like to write about money. What exactly does the term “money” mean? At its core, money represents value. If I complete a task for you and you pay me money in exchange for the value I provided, I can put that money toward purchasing something from another party later.
Throughout history, various materials representing value have been used as a medium of exchange, including gold, wheat shells, salt, and other materials. Salt was the most common form of currency. However, for something to have value, people need to believe that it is valuable and will continue to be valuable for a sufficient amount of time for them to be able to redeem it in the future.
About a century ago, we always trusted something to represent money, and that something was always something we could trust. Nonetheless, something occurred along the way. In addition, we have changed the focus of our trust model from having faith in something to having confidence in an individual. Let me explain. People eventually found that walking around the world carrying gold bars and other forms of currency was too difficult of a task for them to continue doing so. In response to this need, paper money was developed.
Specifically, this is how it functioned: Your gold bar is worth $2,500, so a bank or the government might make you an offer to take it off your hands. In return, the bank would give you $2,500 worth of receipt certificates, more commonly referred to as bills.
Not only were these pieces of paper simpler to transport, but they also made it possible to buy a cup of coffee for one dollar without shaving down a gold bar into a thousand smaller pieces. And if you decided that you wanted your gold back at any point in the future, you had to take the $2,500 in bills back to the bank and trade them in for the actual form of money, the gold bar. As a result, people started using paper to represent money as a practical and convenient method.
However, as more time passed and as a result of shifts in the macroeconomic environment, the connection between the paper receipt and the gold it represents was severed. It can be challenging to articulate the steps that resulted in our departure from the gold standard. It is sufficient to note, however, that governments communicated that the government itself would be responsible for determining the value of the paper currency. We all concluded that we should stop trading gold and use paper instead.
As a direct result, people carried on with their businesses using receipts backed by the government’s word. And what factors contributed to this strategy’s ongoing success? Because of trust, to be specific. People had faith in their government, which led to the creation of fiat money even though there was no actual commodity backing paper money.
The term “fiat” comes from the Latin phrase “by decree.” It refers to the fact that a particular currency, such as the U.S. dollar, the euro, or any other currency, has value because the government has decreed that it is legal tender, which means that it is money that must be accepted as payment. As a result, the value of today’s currency is derived from the legal status that a central authority, in this case, the government, granted it to make it a valid form of exchange. Consequently, the trust model has shifted from having faith in something to having faith in somebody, specifically the government.
There are two significant drawbacks associated with fiat currency. Its control and distribution are delegated to a single centralized authority. When this occurs, the government or the central bank, which is not constrained by quantity, can print as much as they desire whenever required, which results in an increase in the amount of money available on the market. The problem with printing money is that as a result of flooding the market with more money, the value of each dollar decreases, which in turn decreases the value of your own money.
This is because each dollar’s value decreases due to the increased supply of money. When you see a gradual increase in prices over a period of time, it is more likely that the purchasing power of your money is decreasing. This means it now takes more money to purchase an item that originally cost less. After the establishment of fiat currency, the migration to digital currency was a relatively straightforward process.
We already have a centralized authority responsible for issuing currency, so why not make the majority of money digital and have that data authority keep track of who owns what? Credit cards, wire transfers, PayPal, and various other types of digital currency are the most common payment methods used today. The quantity of actual currency in circulation worldwide is practically non-existent and continues to contract each year. Because of this, money is now stored digitally. How does that even make sense?
If I have a file representing one dollar, what stops me from copying it a billion times so that I end up with one million dollars? This is what people refer to as the problem of double expenditure. A centralized solution is what’s being used by banks as a solution today. They do this by keeping a ledger on their computer that details who owns what and where it is located.
A running tally of the current balance in each person’s account is kept in this ledger. We have complete confidence in the bank, and the bank itself has faith in the capabilities of its computer system. As a consequence of this, the solution is concentrated on the ledger of this computer.
You should be aware that there have been numerous attempts to create alternative forms of digital currencies. On the other hand, if they hadn’t relied on a centralized authority, they might have been able to resolve the problem of double spending with greater ease. When you give someone control over the amount of money in circulation, you give them enormous power, resulting in three major problems.
The most significant issue is bribery and fraud. And the absolute exercise of power tends to corrupt completely. When banks are required to generate money or value, they effectively control the flow of value throughout the world, which grants them power that any other institutions essentially unconstrained.
The scandal at Wells Fargo, in which employees secretly created millions of unauthorized bank and credit card accounts to inflate the bank’s revenue stream for years without the knowledge of the customers, is a small example of how power can corrupt. In this scandal, employees created accounts to increase the bank’s revenue stream.
The second problem with centralized systems is that they are prone to mismanagement. There is a possibility of mismanagement if the interests of the central authority are not aligned with those of the people who control the money. One example of this would be printing a significant amount of money.
The issue that arises when an excessive amount of currency is printed is that it leads to inflation and reduces the value of the money held by citizens. People in Venezuela no longer count their money because the government has printed so much of it, and its value has plummeted to such an extent that they do so by weighing it instead. This is an extreme example of this phenomenon.
The last thing to be concerned about is control; when you give the government or a bank control of your money, you give up control. Your bank account could be frozen, and you would be unable to access the money at any time if the government so chooses.
Even if you only deal in cash, the government can take away the legitimacy of your currency and make it illegal to use. This is what happened in India a few years ago. This was the state of affairs before 2009. It appeared unlikely that a successful alternative could be developed to the existing monetary system. However, after that, everything was different.
The Beginning of Bitcoin
In October 2008, a person using Satoshi Nakamoto’s alias published a document online. This event occurred in the year 2008. The piece of writing, also known as a white paper, proposed a system that would underpin a decentralized currency known as Bitcoin.
It is believed that this system will generate digital currency that will do away with the requirement of a centralized authority to stop double-spending. Bitcoin is a decentralized digital currency that uses an open ledger with no centralized authority.
But what exactly does this muddled expression mean? Let’s look at Bitcoin through the lens of a bank, shall we? Given that the vast majority of money is already stored in digital form, the bank is responsible for managing its ledger of transactions and balances.
However, the bank’s ledger is not open to public inspection because it is kept on the institution’s primary computer, to which only the bank has full access. Bitcoin, on the other hand, features an open and accessible ledger. The ledger displays all of the transactions and balances at any given time.
The only thing you cannot determine is who the owner of these balances is and who was responsible for each transaction. Because of this, Bitcoin is considered to be pseudo-anonymous. Everything is open, trackable, and transparent to everyone. On the other hand, it is impossible to tell who is sending what to whom.
Let’s look at an example to understand this better. A particular Bitcoin address sent 10,000 Bitcoins to another Bitcoin address in May 2010. A man named Laszlo made the first purchase with Bitcoin, which was used to pay for two pizzas.
This transaction is considered to be the first ever made. In 2010, Laszlo asked online for someone to sell him two pizzas in exchange for 10,000 Bitcoins. His request was posted on the internet. Someone did, and the total market value of these two pizzas currently exceeds one hundred million dollars.
Additionally, no central computer holds the ledger for Bitcoin, making it decentralized. Every computer part of the system keeps its copy of the blockchain, another name for the distributed ledger. If you want to break into the ledger or bring the system down, you will need to take down thousands of computers, each of which is constantly updating a copy.
The vast majority of money in circulation today, including bitcoin, is digital. This indicates that there is nothing physical to hold in Bitcoin; no actual coins are involved. There are only rows for transactions and balances in this table. When you own Bitcoin, you can transfer funds to another address using a specific Bitcoin address recorded in the ledger when you own Bitcoin.
So, what exactly does all of this imply? Why is Bitcoin currently the Talk of the Town?
Since the introduction of digital currency, we finally have an alternative that can be used in place of the system that we currently use. Bitcoin is a decentralized digital currency not subject to regulation by central banks or national governments.
Think about how concentrated the flow of information was in the days before the Internet. In general, if you are looking for specific information, you can get it from a select few major players like The New York Times, The Washington Post, and others like them.
Because of the internet, information has become decentralized, and it is now possible, with just the click of a button, to communicate with people from all over the world and to consume knowledge from anywhere in the world.
Bitcoin is often referred to as the “internet of money” and offers a decentralized alternative to traditional monetary systems. Bitcoin offers a number of advantages over the system that is in place right now.
It grants you complete command over your financial situation. Because Bitcoin is decentralized, nobody but you can access your money. No government or financial institution can put a hold on your account or seize your property. Additionally, the number of intermediaries required for monetary transactions is diminished by using bitcoin.
Bitcoin is typically cheaper than traditional payment methods like wire transfers and money orders. In addition, bitcoin was designed from the beginning to function solely in the digital realm, unlike fiat currencies.
Bitcoin paves the way for digital commerce for the 2.5 billion people worldwide who do not have access to traditional banking systems. Smart money can be created by adding additional layers of programming on top of Bitcoin, which means that it can be transformed into digital currency.
Due to the location in which they were born and the circumstances surrounding their birth, these people do not have bank accounts or have inadequate bank accounts. However, today, they need a mobile phone and the touch of a button to start trading with Bitcoin without permission.
There are currently many online and offline stores that can take Bitcoin payments. If you choose, you can use bitcoin to pay for a flight or reserve a room at a hotel. Even Bitcoin debit cards enable you to spend your Bitcoin balance in virtually any retailer’s establishment. On the other hand, acceptance by the vast majority of people in the world has a long way to go, but I’m optimistic that we’ll get there soon.
