Bitcoin Was Inevitable. Here’s Why Thinking of Bitcoin As “Money” Isn’t So Crazy
Understanding what money is and where it came from makes it easier to imagine (and recognize) its future.
“What IS bitcoin?”
Easily the most frequently asked question among new people in the crypto space — and rightfully so. If you were to ask 10 different people this question, you could get up to 10 different answers. One of the simplest (and probably most debated) answers that you’ll hear: bitcoin is “digital money.”
It seems almost too simple, but this is a legitimate definition (and one that many veterans in the space would openly accept). Many analysts and financial experts, however, often debate this definition, claiming that you can’t classify something like bitcoin as “real money” for a slew of different reasons (i.e. its volatility, its lack of tangible backing, its “arbitrary supply limit,” etc.).
Diving deeper, we could even get into the difference between “money” and “currency,” but realistically — it doesn’t matter that much. So for the sake of K.I.S.S., we’ll just treat both terms as interchangeable (the same thing).
To the average person, such opposing information can muddle their understanding of bitcoin and lead to misguided assumptions about the cryptocurrency. Fortunately, this uncertainty and confusion can easily be cleared up. When you understand the concept of “money” itself and its evolution over the centuries, it’s easy to see why so many people consider bitcoin to be simply the next evolution of money.
It’s gonna be a ride, so get comfortable.
What Is Money?
There are many definitions for money, but one of the simplest definitions is given here:
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context.
Still kinda iffy? That’s fine — money’s function is more important than any arbitrary definition we give to it. Here are the key functions of money to remember going forward:
- medium of exchange
it’s widely accepted for the exchange of goods and services that you want - store of value
while retaining (or even gaining) worth/value/purchasing power, you should be able to save, store and retrieve it at a later date for use - unit of account (measure of value)
it can be used to measure the relative worth/market value of any kind of exchange/transaction (i.e. ‘This computer costs/is worth [insert unit of account here]’)
Still too technical? Ok, boom: if you can spend it, you can save it and people can agree on how much stuff costs with it… then it’s money.
Where Did Money Come From?
Barter
So let’s start by taking it to the furthest point that we know: barter.
Dating as far back as ~60th century B.C., this was the first known version of humans exchanging objects of value with one another. While some anthropologists do debate whether or not the barter system actually existed, the foundation of it definitely did.
It’s a simple premise: if you had something that I wanted, I would offer you something of mine that you might want in exchange (i.e. if a fisher wanted some potatoes, they would find a potato farmer and ask to trade some of their extra fish for some of the farmer’s potatoes). Simple, right? Pretty straightforward.
Problem: barter itself kinda sucked.
First issue — there was no common unit of account (remember? from before?). Here’s how that plays out: last week, the fisher caught the farmer on a good day and the farmer accepted five fish for a bag of potatoes. This week, though, the farmer doesn’t really want any fish, so it doesn’t matter that the fisher really wants some potatoes. Eventually, the fisher gives up and offers 15 fish for a bag of potatoes (instead of the previous deal of five fish).
Second issue — there was no store of value (seeing a trend?). Most goods were perishable. Food expired. Crops died. Animals died. You could horde as much of this stuff as you wanted, but they could never last very long. The fruits of your labor were only good for a couple days, weeks, months, or (if you were lucky) a few years.
Third issue — transportation was inefficient. This one kind of speaks for itself. You ever tried walking a cow across town on foot? How about a couple barrels of fish? Some bags of potatoes? Now imagine if you carried all those things across town and didn’t end up trading anything. Now you had to carry everything back too. Tragic.
Fourth issue — it wasn’t secure. Scammers and thieves are as old as business itself so this came with the territory. When you went to sleep, if you didn’t have someone guarding your goods, Deebo could slide through in the middle of the night and collect his potatoes. Then what do you do? Ask him for your potatoes back? “What potatoes?”
Summary — barter was trash and we needed something new.
So, we adapted.
Precious Metals (Gold, Silver, etc.)
Fast forward (somewhere between the 8th-4th century B.C.), and people were collecting precious metals like gold. Far and wide, people liked these metals and were willing to trade their goods and services in exchange for some. They would mine for the ores then smelt the metals to form coins, bars, or whatever other form was popular/convenient at the time.
So it’s easy to see where this was already better than barter:
- metal coins/bars could serve as a common unit of account
- they were great for storing value (since gold doesn’t age)
- they were relatively easy to transport
- they were noninflationary (because we know that there should only be a finite supply of precious metals on Earth, we also know that there should always be a demand for it)… we’ll expand on this in a bit.
Seems like we should have been in the clear now, right? Well…
Problem: it still kinda sucked.
First — it was pretty expensive to create the metal coins/bars. You didn’t just walk into an open field with a shovel, dig for a couple of hours, and hit gold. There was searching, and mining, and extracting, and refining… it was a whole thing, and it was costly (of time AND resources).
Second — while it was relatively easy to carry around if you had a lot of it… this became an issue quickly. Have you ever lifted a gold bar? One is over 27lbs (over 12kg for people not in the US), so imagine having to carry 10 of them around with you. Or carrying 10 sacks of gold coins. It was just impractical.
Third — it was not secure (in fact, it’s often argued that the gold was less secure than the goods used in barter). If you didn’t have your gold guarded at all times, it was open season for people like Deebo. He could come through while you were sleeping and collect his gold. He could even just walk up to you on the street and take it. What were you really gonna do about it? Nothing. The answer is ‘nothing at all’ (tbh, the ease of carrying bags of gold just made Deebo’s job a bit easier)
Summary — gold (and other precious metals) were cool, but they had some serious kinks to work out as “money”.
So, we adapted.
Paper Currency (Dolla Billz)
Now, let’s jump ahead to some time around the 10th century A.D. (this isn’t history class so I won’t go too much into the story, since it’s not that relevant to the point at hand). It started out as merchants/banks storing precious metals for various people and giving them (paper) receipts/IOUs to keep track of who was owed and how much they were owed. They were laying the groundwork for what would eventually become the ‘modern banking’ that we have today. Eventually, people decided that it would be easier to trade those “banknotes” with each other instead of having to take the additional step of going to the bank to withdraw/deposit their metals every time they wanted to buy/sell something.
These paper banknotes definitely came with some perks:
- transportation was efficient (it was significantly easier to carry 100 banknotes than it was to carry 100 gold coins)
- it was cost-effective; creating/manufacturing more paper was WAY cheaper than mining for more metals
- it was backed by something that people agreed to trust, like gold or (in more recent times) governments
“So what was wrong with this one? Isn’t this where we’re at right now?”
Glad you asked. Let’s talk about why…
Problem: it STILL kinda sucked.
First — this form was arguably the LEAST secure one so far. It was significantly easier to steal 100 banknotes than it was to steal 100 gold coins (see what I did there). With paper money, Deebo could double down on his profits in no time.
Second — this form of money was inflationary (this is more so the case in recent times). A simple definition of inflation: the decline in a currency’s purchasing power; or, an increase in the general level of prices for goods/services. It’s Econ 101: the less scarce something is (or the higher the supply is), the lower the demand for it will be (shoutout to my high school teacher, Ms. Johnson). Due to the fact that more paper money could always be made/minted, the money itself had no scarcity. When money was pegged directly to something tangible (i.e. gold), this wasn’t really an issue, but since good ol’ Tricky Dick (still can’t believe yall actually called him that) took America off of the gold standard, paper money has been backed by nothing more than faith (read ‘fear’) in the government (read ‘the armed forces’). So over time, the paper money’s value would continue to decrease as long as that money printer kept going ‘brrrrrrrrrrrrrrrrrr’.
Third — there was no identification tied directly to the paper money. You see and hear about it all the time: untraceable bills, duffle bags full of cash, daring heists with millions of dollars on the line… paper money has been a staple in illegal activity for YEARS. You know what they say: no face, no case. With nothing to directly tie specific banknotes to specific people, paper money made the funding of illegal activity easier than ever.
Summary — paper money was definitely a step up from gold and other precious metals, but it still wasn’t perfect. We could do better.
So, we adapted.
Checks (‘Cheques’, if you fancy)
For this one, we’re looking at around the 18th century. Essentially, checks were designed to be “paper money 2.0.” They were meant to copy paper money’s advantages but improve on some of its weaknesses. Some of their perks:
- having a verified sender and verified receiver eliminated the anonymity of paper money and decreased the likelihood of checks being used for illegal activities
- it was more secure; since a signature from the account owner was needed for the validation of every check, even if they were stolen, they would be practically useless to the thief (sort of… we’ll get to that in a bit)
- the value of each check was variable; you could write out yourself how much that specific check would be worth, eliminating the need to use multiple banknotes at a time (i.e., I could write “$1,000” on one check instead of needing ten $100 bills)
Now, it’s 2021 at the time that I’m writing this article and I don’t think that I need to tell you that checks are far from the most popular form of payment these days. They were definitely innovative for their time, but alas…
Problem: it still sucked… just a bit less than paper money.
First — while it was safer than paper money, it still wasn’t that safe. To start, “bearer checks” were just as unsafe as paper money. These were checks that didn’t have a specific recipient; they were written to be paid to the “bearer” (any person that was in possession of the checks). If you got a check that was written to be paid to the bearer, Deebo could smack you, take the check, and easily use it himself. Bearer checks aside, though, it was still relatively easy for Deebo to use your checks — he could just forge your signature himself (or even hire a professional) so that he could take your checks, write them out himself and still use them. He could even make his own checks if he wanted (if you haven’t already, go watch “Catch Me If You Can”).
Second — verification for transactions wasn’t immediate; this was done after the transaction, at a later date. With paper money, you didn’t need to verify the worth of a $1 bill… each banknote was worth its printed value. Checks, on the other hand, had to be taken to a bank/financial institution to verify/validate that the check issuer had access to those funds before they could be redeemed by someone else. This means that a shop keeper that sold goods and accepted checks all day would not know for sure if all of the checks were good until they took them in to their bank/financial institution (you can imagine what Deebo could pull off with this).
Third — this new paper medium was still tied to the same system that we created with the paper money, so inflation was still an issue and our money was still slowly losing value.
Summary — checks swung for the fences, but were just shy of making it out of the park. It worked for us (for the time being), but with the advancements in technology that we began to see and the speed at which human life began to change, new possibilities were being born. Our money had to keep up.
So, we adapted.
E-Wallets (Digital Cash/Money)
The year is 1999. We were not only entering the new millennium, but the Digital/Information Age as well. People’s wildest dreams back then were of things like flying cars, space travel and virtual reality (came a long way in just 20 years, huh). Among a list of other technologies that began emerging from this era, a company named “Confinity” burst onto the scene (you might know them better by their current name, “PayPal”), introducing the world to the first (soon-to-be widely accepted) digital/electronic wallet. All of your money could now be accessed from just a computer. Innovation in tech and the internet at this time led to huge advancements in society, so e-wallets came out of the gate strong. Some of it’s perks:
- it was digital, so we didn’t need to use paper or mine for metals to make it; it was just 1s and 0s on a computer
- it was WAY more secure than anything before it; things like passwords, biometrics, and firewalls prevented Deebo from easily gaining access to your money
- it was highly efficient and super convenient; the use of the internet allowed for quick (often, instant) verification of payments from any location
- there was more accountability/transparency for both sides (consumers and financial institutions); it was easier for consumers to actively watch their money and see when/where it moved; it was easier for financial institutions (and any other governing bodies) to track account activity and see when/where money had moved (obviously to “keep us safe” and catch any illegal activities)
Looking at it, this seemed to be “the one”. It would almost seem fair to say that this was a perfect solution to all of our issues with money from the past.
Problem: key word there was “almost”
First — these e-wallets were still tied to the same financial system as paper money and checks. What did that mean? Money could still be made out of nothing, so inflation was still coming through uninvited like Bruh Man from Martin.
Second — a new issue was introduced with these digital wallets that we didn’t see with money before: the double-spending problem. Digital files are just strings of code (1s and 0s), so with some finesse, it was possible for them to be duplicated/copied. The same thing applied to these digital wallets; double-spending was when the same currency was digitally duplicated and spent more than once from the same digital wallet.
Summary — while there were a plethora of advantages with these e-wallets, we still didn’t shake the overbearing shadow of inflation and we hadn’t figured out how to prevent the double-spending problem. No matter how flashy the new, digital money was, it didn’t mean much because it was still slowly losing it’s overall value.
To make matters even worse, more and more people were starting to become aware of the high levels of corruption that the governing bodies allowed behind the scenes in this system, serving themselves instead of their citizens (re: the 2008 Housing Crisis and bank bailouts). Unfortunately, with this system set as the global standard, there was nothing else that people could turn to. You could try to put money into other assets, but their value was still tied to these slowly dying “fiat” (faith-based) currencies.
We had no other options. We were being held hostage by a system that didn’t really work for most of us (and I didn’t even touch on how much this disproportionately affected specific minority/disenfranchised groups around the world… but this article is long enough).
We needed to adapt.
Bitcoin
It’s 2009 and we’re fresh off the heels of the biggest financial crisis in generations. It was at this point that Satoshi Nakamoto had enough and, with a whitepaper that detailed a new kind of money, came through like the Undertaker and choke slammed the current financial system. Whoever Satoshi Nakamoto was (a mystery still to this day), with this whitepaper, they introduced concepts that directly challenged our current financial system and could potentially solve every problem that we saw in all of money’s previous forms. The name of that whitepaper: “Bitcoin: A Peer-to-Peer Electronic Cash System” (go read it.. seriously.. it’s free and available in multiple languages).
So Satoshi dropped this whitepaper like their latest mixtape on DatPiff (the original SoundCloud for you kids), and we immediately saw that the “money” being proposed here had some beneficial qualities:
- it would be digital (exclusively online, so computing power was the only resource needed to create new ones; fitting for the “digital age”)
- it would be decentralized (would be open source and peer-to-peer, so no central authority/figure would own or operate the network; anyone that ran a “node” had authority and a say in the network’s operations)
- it would be disintermediated/more private (people could run their transactions without the need for a “central authority” acting as the middleman, and could do so without needing to disclose any personal info, i.e. name, DOB, SSN, etc.)
- it would be trustless (you wouldn’t have to trust in any business or individual; you would just have to trust the code)
- it would be immutable (would be practically impossible to change any information that had already been verified on the network’s records/“on the blockchain”)
- it would be relatively cheap (with the lack of a middleman and the efficiency of the network’s design, transactions could be completed for mere fractions of the costs that we see in our current systems)
- it would be secure (using special digital encryption techniques, the network would be protected from hackers, requiring a minimum of 51% consensus/control of the network for any changes to be made)
- it would be noninflationary/deflationary (there would only ever be 21 million bitcoin created, so there would be a known scarcity over a predetermined amount of time)
- it would solve the double-spending issue (with EVERY transaction being openly verified on the blockchain and an airtight, consensus-based security model, double-spending was no longer an issue)
After so many years of living under what felt like the financial equivalent of the Fire Nation, bitcoin was like the Avatar (Aang, not Korra), challenging the existing regime to return balance, power and (financial) freedom to the people.
Are there flaws with the network? Of course! From time to time, it can get congested and slow down to ridiculous wait times. Fees can skyrocket from time to time due to heavy traffic. Funds can be lost forever if improperly handled. It’s definitely not perfect (…yet).
But all of bitcoin’s main issues so far have been technical issues. This is the case with most new technologies, and is usually fixed over time. Bitcoin has come a long way in its 12 years of existence already, and developers are ensuring that it only continues to improve as the network grows.
So ultimately, it all boils down to the main question here: can we classify bitcoin as “money”? Let’s do a quick review:
- Can it be spent? Yes.
- Can it be saved/stored? Yes.
- Can people agree on how much stuff costs with it? Yes.
In my opinion, while these questions alone are enough to qualify bitcoin as a form of “money,” the qualities and functions of the network are what make bitcoin (or something similar to it) the natural next step in human advancement and the next evolution money.
*I am not a financial/investment advisor, this article is not financial/investment advice and any information shared here should be personally researched prior to making any financial/investment decisions.*
P.S. RIP Tommy Lister Jr.
