Objective: Explore the evolution of money, including fiat systems and the rise of crypto.
Outcome: Identify the limitations of traditional money and how crypto aims to address them.
Introduction
In the last lesson, we discussed the principles of value—scarcity, utility, and trust—and why they’re essential in understanding assets like Bitcoin and Ethereum. Now, let’s take a step back and examine how these principles have influenced the evolution of money itself. From barter systems to the digital age, money has continuously evolved to meet the needs of society. By understanding this journey, we can see why cryptocurrencies like Bitcoin represent a natural progression in the history of money.
The Evolution of Money: A Journey Through Time
1. Barter: The Birth of Trade
Imagine a time before coins, cash, or credit cards—when people exchanged goods directly. You might trade a sack of potatoes for a goat if both parties agreed on the value. This system, known as barter, worked but had one major flaw: the "double coincidence of wants." Both parties needed to want what the other had at the same time.
For example, imagine if Oz and I lived in this era. I’d offer a Liverpool scarf for some firewood, but Oz, being a Manchester United fan, would flatly refuse. This inefficiency meant trade was limited and cumbersome, paving the way for something better.
2. Commodity Money: Introducing Universally Recognised Value
The solution came in the form of commodity money—items with intrinsic value that everyone agreed upon, like gold, silver, or even shells. Gold became a popular choice due to its rarity and durability. Unlike barter, gold allowed trade to happen more smoothly, as it was universally accepted.
But commodity money wasn’t perfect. Gold, for instance, is heavy and inconvenient to transport. Imagine trying to carry a bar of gold to the match to pay for tickets and snacks—clearly not practical. This inconvenience led to the development of something even more revolutionary: fiat money.
3. Fiat Money: Backed by Trust, Not Intrinsic Value
Fiat money, introduced by governments, derives its value not from the material it’s made of but from the trust people place in the issuing authority. Early on, paper money was backed by gold reserves, but over time, most governments moved to fiat systems where currency is backed solely by trust.
This system made transactions faster and more efficient. You no longer needed to lug gold around or worry about someone accepting your cow in exchange for goods. However, fiat systems introduced new vulnerabilities. Central banks could print money at will, leading to inflation and, in extreme cases, economic collapse. A vivid example is Zimbabwe, where hyperinflation saw people using wheelbarrows of cash to buy bread.
4. Digital Money and the Rise of Bitcoin
As the internet revolutionised communication and commerce, the concept of digital money emerged. Credit cards, PayPal, and mobile banking paved the way for faster, cashless transactions. However, these systems were still centralised, relying on banks and third parties to process payments.
Bitcoin took things further by introducing a decentralised form of money. Unlike fiat, Bitcoin isn’t controlled by any government or central authority. Its value is backed by its scarcity, utility, and trust in blockchain technology. For instance, if I wanted to trade Bitcoin for Ethereum or Solana with Oz to settle a friendly bet after a Liverpool win, the transaction would be peer-to-peer, verified by the network, and completed in minutes.
Ethereum added another layer by enabling programmable transactions through smart contracts, further expanding crypto’s capabilities.
Insights from Jonathan Chester: What Is Money?
In a Crypto Unplugged podcast episode recorded in July 2022, I had the opportunity to interview Jonathan Chester, the Co-Founder and CEO of Bitwage, about the nature of money and the importance of financial literacy. Jonathan highlighted how Bitcoin embodies the principles of good money, such as scarcity and trust, and even argued that it is superior to gold due to its portability and digital nature.
Jonathan also explained how the evolution of money has brought us to a crossroads, where centralised systems face challenges from decentralised platforms like Bitcoin and Ethereum. His company, Bitwage, plays a crucial role in this transition by enabling people worldwide to receive salaries in crypto, bridging the gap between traditional and digital money. His insights underline the importance of understanding where money comes from and where it’s headed.
Real-World Comparison
To make the evolution of money more relatable, let’s consider three scenarios:
- Barter: You trade your garden vegetables with a neighbour for their fresh eggs.
- Gold: You visit a market where all merchants accept gold coins for goods, removing the need for a direct trade.
- Bitcoin: You use Bitcoin to exchange value globally, or trade it for Ethereum or Solana, without needing a bank or intermediary.
Each stage represents progress in efficiency and trust. Cryptocurrencies like Bitcoin and Ethereum combine the best aspects of previous systems—gold’s scarcity, fiat’s portability, and digital money’s speed—while solving their shortcomings.
Conclusion
In this lesson, we traced the evolution of money from its earliest days to the rise of cryptocurrencies. Each stage brought improvements, addressing the inefficiencies of the previous system. Cryptocurrencies like Bitcoin and Ethereum are the latest evolution, offering decentralisation, security, and global accessibility. In the next lesson, we’ll explore how purchasing power parity (PPP) impacts Bitcoin’s value and shapes global crypto markets.
Discussion