By now, most people have heard of Bitcoin and/or crypto, but there is much debate about if it is here to stay, and indeed, is it really a currency? Does it have true value?
Well, the same could have been said throughout the history of money. We may not have realised, but throughout time, there has been significant stages in the evolution of our monetary system. Realising this fact will help us to understand the concept of monetary evolution, and get our ‘heads’ around Bitcoin being the next logical step. So, let’s go back to the beginning…
Evolution of Money
It is generally believed that the evolution of money has passed through the following six stages:
In the beginning of civilization, the needs of people were very limited and therefore they used to exchange their goods for other people’s goods or services. Nothing complicated; just a simple, effective way of fulfilling their everyday needs.
Commodity Money was created to remove the difficulties of barter. In fact, money has evolved in response to the urgent needs of the various stages of economic growth. In the beginning of civilization, goats, animal-hides, axe-heads, knives, arrows, slaves etc., have been used as currency in many different parts of the world to perform the basic functions of money. It was, however, difficult to borrow and lend and it was more difficult to measure and store the value of goods and services – money had to evolve again.
Money made of metal is called metallic money. In the beginning, pieces of gold and silver were used as money, but it did not solve the complicated problems of exchange. It was very difficult to measure the value of goods and services with these pieces of metal. Another problem was the transportation and storage of precious metals. This problem was solved by making standardized coins.
During the third stage of the evolution of money (metallic money), paper money was invented. It is believed that the start of paper money was issuance and acceptance of receipts of gold smiths who were acting as money lenders in old Iraq. These goldsmiths were rich, respectable and considered men of repute. They used to keep the valuables of the people in their safe rooms and issued receipts as a proof for the goods stored. These certificates became convenient credit instruments and were freely used for borrowing and lending and making payment. Back in the 1100s, the Knights Templar also had a similar system. The Temple Church could be argued as being the first bank in London. During the crusades, instead of carrying huge sums of coin with them across Europe, they would be given a promissory note. Look on our bank notes today and you will see almost identical wording – “I promise to pay the bearer…”. In the 19th century, commercial banks started issuing their own notes of different colours and denominations.
In the present day, modern economies or bank money is used for making personal and business payments. In the developed countries, transactions are taking place with the help of deposits or checking accounts with paper money. Demand deposits or money sited in current accounts are easily convertible cash, therefore they are convenient and safe.
Today, with the invention of the computer and its application, the form and shape of business are changing fast. The concept of ecommerce is gaining vast popularity. The mode of payment is being transformed from cash to electronic transactions from one account to another. This form of electronic payment was referred to as electronic money. There are many problems in this type of transaction, but it is gaining popularity day by day. The evolution of money has not come to an end, it will never come to an end. As economies of the world are changing features and focus, money is inevitably changing.
It is at this point the question, “Why was Bitcoin created?” becomes relevant.
In 2008, much of the global economy was in turmoil. On Wall Street, financial behemoths like Lehman Brothers, Merrill Lynch, AIG and others were literally melting down in what became the worst financial crisis since The Great Depression of the 1930s.
Against this backdrop, a software developer by the name of Satoshi Nakamoto published a white paper outlining something called “Cryptocurrency” as a decentralized means of exchange that guaranteed user anonymity, provided a mechanism of incorruptible record-keeping based on cryptography, and limited the amount of currency available – Bitcoin was born!
In that paper, Nakamoto made the case for an internet-based currency not subject to the fees and permissions of a third party – such as a bank or financial institution. He devised a system that allowed people to send and receive value to anyone with a Bitcoin address, much in the same way we send and receive email.
Cryptocurrencies have a finite number of coins unlike government-controlled currency such as the dollar, Pound or Euro, which can be printed at will. The amount of a cryptocurrency that will be made available over a specified period of time is defined upon the release of a new cryptocurrency and cannot be changed. For example, there will never be more than 21 million Bitcoins. This feature helps cryptocurrency hold its value, mimicking the finite supply of precious metals like gold or silver.
In 2009, Nakamoto (believed to be a pseudonym for an individual or a group) released Bitcoin and a very small group of early adopters began exchanging and mining the currency. However, from 2009 through early 2010, Bitcoins had no value at all. In April 2010, the first public exchanges for Bitcoins came online and the value of a single Bitcoin stayed below 14 cents. In 2011, as it became popular as a way to send money quickly and anonymously, the price of a Bitcoin hit $1 for the first time.
Hundreds of cryptocurrencies started emerging, but Bitcoin was the original cryptocurrency. Others were quick to follow using the same principles as Bitcoin. Ripple launched in 2011 and Litecoin followed in 2012. There are now hundreds of cryptocurrencies in circulation. Some cryptocurrencies such as Ethereum have since joined the marketplace and are making innovative use of the blockchain technology (more on this in my coming blogs) at the heart of cryptocurrency to offer ‘smart contracts’ that cannot be altered or broken.
Merchants began accepting Bitcoin for payment in 2012. In 2012, WordPress became the first major merchant to accept Bitcoin for payment, followed by Expedia, Microsoft, IBM and other well-known brands. This adoption by companies like those shown above helped increase the credibility of cryptocurrency over time.
Governments tend to treat cryptocurrencies like commodities, while major corporations have begun adopting the use of cryptocurrency for payment. Governments have been more reluctant to weigh in (I wonder why?! They don’t want to lose the strangle-hold that they have now). In 2013, Germany became the first country to take a legal stance on cryptocurrency when it recognized Bitcoin for legal and tax purposes. In 2017, Japan became the first country to consider Bitcoin as a legal form of payment, with several public institutions accepting the currency for payment. India has recently begun regulating Bitcoin and may be the next to legalize it.
Here to Stay
Whether you love it or hate it, cryptocurrencies are here to stay. Their applications are already being utilised all over the world, and with the continuing uncertainty of the world economy, there is definitely a future for Bitcoin and some of the other cryptos – many believe it will be the currency of the future.
We must stop thinking of money as a tangible object – get past this and then anything becomes possible.
The only question that remains is, will you be one of the people to shy away from this enigma or will you embrace this technology and look to invest early? One thing is for certain, as attested in history, the early adopters are the ones who win out. They will have the potential to reap rewards far exceeding anything that we have ever experienced before, in the history of money.