Money is just a Piece of Paper
From Barter to Fiat Currency to Cryptocurrency.
Some people spend their entire lives chasing money.
If you really think about it though, coins and bills don’t have any value - they’re symbols.
Money does not have any intrinsic value, in no way does it directly provide heat, electricity, calories, etc.
Money is merely a social construct, and the only reason that it has value is that society has agreed for it to have value.
$n is not a fixed amount, it’s worth $n today but tomorrow it will likely be worth $n-x% (with n being the dollar value, and x being inflation).
With that in mind, one could ask, what exactly is $5? A number, or an amount of goods or services decreasing at some predictable rate?
Christopher Ingraham at the Washington Post portrays that some coins that we have been created cost more to produce, in comparison to what they are worth.
If this is truly the case, where does the true value of money lie?
Take a look at this picture, where is the value located?
The true value lies in the quality of the service performed by the electrician and the tastefulness of the pie. The money itself is not the value it is merely a symbol of value.
What is money?
It’s simple. Money is just a tool that is used to:
- communicate the value of a product or a service (e.g. how good is it really?)
- exchange value with others (e.g. how much is my time worth? or how much is this pie that I just baked worth?)
- store value (e.g. how much value have I created?)
Now an interesting way to think about it is, if money is just a way to measure how valuable something is, how many pies would be worth an electrician installing pot lights in someone’s house?
Kind of strange to think of pies as a form of payment isn’t it?
This was how society functioned before the idea of money came about.
The History of Money
Think back to 9000 BC. Prior to cash, there was bartering.
Bartering in a way is a form of money, it’s just not as fluid and high velocity. What it’s missing is a divisible, common medium of exchange.
The concept of bartering came about because if Bob has something that Alice wants, she needs a way to convince Bob to give it to her.
In order to do this, Alice would exchange something of equal value with Bob.
But, if you scale this up this can start becoming extremely difficult when you think about it. How would I know for sure how many pies my electrician deserves for fixing one lightbulb in 5 minutes?
Or what about the times I am away from home, have an opportunity to make a trade but, the thing I was willing to trade was just too big so I couldn’t bring it with me. I just lost an opportunity to get something that I wanted.
The ancient Chinese recognized this problem and started using Cowrie shells as “money”. Instead of losing out on the opportunity, I would be able to give these shells instead of having to make a trade.
At this time, the internet and global communication didn’t exist, so this idea was unknown to Western civilization
In the West, people slowly stopped using non-perishable items for trade, and eventually had started using gold. But, gold was too heavy to keep on you at all times, so in 200 A.D a smaller version was created as coins. These coins were weighed and stamped with their worth, to maintain consensus on the value of each coin.
And this is where the concept of modern-day cash was derived from (coins are no longer affiliated with gold).
In our world today, each country has its own currency called Fiat currency.
The term Fiat currency is derived from the Latin word fiat, which means a determination by the authority (in this case, the authority who decrees the value is the government).
Fiat money is a government-issued currency that is not backed by a commodity like gold. The money is controlled by central banks, which allows them to have power over the economy as they get to decide how much money is actually printed.
An Innovation: Bitcoin
I’m sure everyone has heard of cryptocurrency, but getting here we will be getting into more details.
Bitcoin is a digital currency that was created in January 2009 by the mysterious person or group, Satoshi Nakamoto (no one actually knows who, or what this is…) *read the Whitepaper to learn more*
The online currency is completely decentralized, which means that it is not controlled by a corporation or central authority (like fiat currencies are controlled by the government).
It is backed by Blockchain technology which allows the currency to truly stay decentralized, allowing users to complete transactions with low fees and quicker processing times. Users are not forced to trust a single counter-party to participate on the network.
Bitcoin has no physical asset associated with it, it only has the balances that are kept on the public ledger (the Blockchain) which remains completely transparent — anyone can see it, and anyone can join the network. Despite the transparency, the identity of a user may not be known publicly. Bitcoin is not anonymous, yet it is in fact
I’d also note that while anyone can see the account activity of any user on the network, the identity of such individual may not be known publicly. While many falsely believe Bitcoin is anonymous, it is in fact pseudonymous.
As of January 17, 2021: 1 Bitcoin is equivalent to 45,659.39 CAD. As a result of its high popularity 100s of other virtual currencies have been created by various developers. These currencies are called Altcoins.
If you want to fully understand how Bitcoin works it is essential to understand how the underlying Blockchain technology works.
Read my article on Blockchain technology here
What's the point of Bitcoin? Why is it relevant to society?
Bitcoin offers an abundance of advantages such as being able to decentralize power, cutting out intermediaries, being tamperproof, among many others.
But, the advantage that we will specifically be focusing on today is inflation.
Inflation? What’s that?
Inflation refers to when the purchasing power declines, as the value of the currency declines.
In simple terms, there is always some amount of currency that is circulating at any given time within a market. When a country is in debt, and the country needs more money, the government tends to start printing more currency.
When this happens, this decreases the value of money in circulation as the existing dollars held become ‘diluted’.
When something is rare its value is higher, but when it becomes more abundant (like when there’s more money printed), it then ends up decreasing the value of the money that is in circulation.
Over time, this also decreases the purchasing power (the financial ability to buy products and services) of the consumer as well.
For example, if I have $1 in one year, the next year my $1 will only be able to purchase 98¢ worth of product.
At any given time there is no way to determine how much money a government decides to print.
With this in mind, when looking at fiat currencies, it is never known how much one’s purchasing power may decrease as a result of inflation.
What sets Bitcoin apart from fiat currencies is the fact that there' is a set inflation rate.
Each time transactions are verified, the miner (person verifying the transaction) receives an award for verifying that block. On top of this, every 4 years it is also known that the Block reward will halve, with it currently being at 6.25 (and expected to halve to 3.125 in 2024).
On the network, no one participant can selfishly change the software to personally benefit but instead, people can propose changes to the community which will likely only gain adoption if enough members of the network believe it to be most beneficial — which allows for a truly predictable inflation schedule. This is compared to the ‘algorithm’ run by a central bank that has no transparency into the future.
At any given time, everyone within the economy is aware of the total amount of Bitcoin in circulation. The set inflation schedule results from the process of mining (verifying transactions on the Blockchain). This aids in mitigating the risk of inflation for consumers.
The Future of Money
Throughout history, the vast adaption of technology has been widely denoted through the use of cellphones to laptops, and much more. Currently, many individuals are speculating that cryptocurrencies have the potential to replace our current centralized financial system.
This allows for each individual to have complete power over their own data while mitigating high fees required in banks.
Right now, and right here — this is the rise of Decentralized Finance.
If you enjoyed reading this article or learned something new, I’d love to connect on LinkedIn. If you’d like to stay updated on my new articles or projects you can subscribe to my monthly newsletter here!