Bitcoin Vs Fiat Currency — Short History Of Money And Banking Crises
Could Bitcoin be the safe asset people run to in the next financial crisis?
There are only a handful of inventions in human history that has had as big of an impact as money.
Before there was money, people had to trade things with each other. Trading was easy if you were growing potatoes, and your neighbor was growing carrots, and you both wanted to trade them to each other.
It got complicated if you wanted some meat, but the butcher didn’t want either potatoes or carrots.
Insert money.
How were money and currency invented?
Money allowed humans to store the value of their labor in something concrete that every merchant and worker would accept, and they could trade it to anything they wanted.
Quickly we went from trading animal leather to gold pieces to gold, silver, and copper coins.
But metal coins (money) were cumbersome to use and to store safely. So people wanted a place to store their coins safely. The blacksmiths answered this need by creating vault and gave people wooden sticks (currency/fiat) they could use to collect their coins from the vault at any time.
And Boom!
We had our first bank.
World’s first banking crisis and bank run
What the blacksmiths didn’t foresee was that people didn’t always go to the bank to take out their coins. Instead, people started trading directly with wooden sticks.
It didn’t take long for the blacksmiths (bankers) to realize they had a lot of money lying in their vault, and nobody was collecting it. So the wise bankers started to use it themselves.
After a while, people started noticing the increased buying power of the bankers, and some got suspicious. People started to doubt that their coins were not stored properly.
Rumors started to spread that the bankers were using people’s money for their own benefit. As fears grew, people rushed to the bank to collect their money. The people who withdrew their money first were able to collect it, but others were left with worthless wooden sticks that nobody accepted anymore.
And Bust!
The currency/fiat lost its value and the banker was hanged to death.
Fictional boom and bust story?
This story might be fictional as there are no documents of this happening in this exact format. But history is filled with banking and financial crises where the currency has lost its purchasing power.
The cycle always plays out the same way:
- People have confidence in currency/fiat or a financial instrument or stocks
- Leverage is added to the system and there is financial growth (Boom)
- People buy into the asset and growth is accelerating while leverage is growing
- Eventually, the market starts to saturate and there are fewer buyers and smart people start to get out.
- Doubt, fear, and panic start taking over and the leveraged system cannot withstand the selling pressure (Bust)
- System crashes and people find something to store their wealth (money)
What about today? Are we using money or fiat?
Before the 1970s, the US Dollar was pegged to the price of gold.
Friday 13th, August of 1971 president Nixon announced that the dollar has been lifted off the gold standard.
This means that since 1971 there has been nothing backing the value of the paper dollar, exactly like the wooden sticks. And the governments around the world have been able to print as much fiat currency as they’ve wanted.
All of the world’s main currencies are fiat currencies (USD, EUR, etc.). Many people still believe that this government-issued paper will store our purchasing power in the future.
Since the 2000s, we have had two big bubbles because of too much debt and leverage. We got out of those bubbles by creating more debt. Now government debt, corporate debt, and personal debt are at all-time highs.
This is why some people are starting to lose faith and they are looking for a safer alternative.
Introducing Bitcoin — Digital money?
Gold and silver are still money. They have limited supply, they have maintained their value over thousands of years, and you can change them to fiat currency anywhere in the world.
However, everything is digital today. You cannot buy online services or order food online with physical gold.
But an increasing number of online and offline stores accept Bitcoin payments now.
This is why Bitcoin could be the future of money.
So, what makes Bitcoin better than fiat currency?
Bitcoin has a limited supply of 21 million Bitcoin. Whereas governments can print more Fiat whenever they choose, once all the Bitcoins have been mined, there can never be more, thus keeping its store of value, forever.
As there is no central bank and no middlemen getting involved, all transactions are strictly between you and the other person. The low fees are transparent and upfront.
Another key difference with Bitcoin is its security. Bitcoin Blockchain is the most powerful and safest computer network on the plant. It has never been hacked and it is near impossible to hack it.
Transactions are fast and they are stored transparently on the Blockchain. Although you cannot see who owns a wallet, you can always track which wallets have money and where money has come and gone from that wallet.
Key takeaways
Bitcoin was created to challenge the current fiat currency system.
All fiat currencies are inflationary in nature so their value goes towards 0. You can see this by monitoring gas prices or food prices and comparing them from 10 years ago. A dollar today is not the same as a dollar 10 years ago. Fiat currencies lose their value slowly, then very fast (hyperinflation).
Bitcoin price is only determined by supply and demand. As more users start using Bitcoin, its price will go higher because of limited supply. But if people stop using Bitcoin, its price will go down.
How do you think the next crisis will play out?
Will people run towards Bitcoin or something else?
Let us know in the comments below.
If you are still not sure what Bitcoin actually is or how to explain it to easily explain it to your relatives, check this article.
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