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The History of Money that Lead to Bitcoin – hold my BLOCK – Medium

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Bitcoin, gold and money are the pursuit of many, however, very few understand the relationship between all three.

So, let’s start by asking this:

Which of the following items is different than the other two?

Most adults who are asked this question don’t know the answer. If you chose the Monopoly bill, then you are…wrong.

It’s the gold coin.

The gold coin is real money, whereas the Monopoly and hundred dollar bills are just forms of currencies. The terms money and currency are used interchangeably, but wrongfully so.

Although they share many common traits, such as being portable; durable; divisible; interchangeable; a medium of exchange, and a unit of account, there is one trait that separates money (gold) from currencies, and that is VALUE.

Throughout the history of humankind, the only form of money that has stood the test of time is gold. Every other form of money has disappeared.

But why does gold have value?

Simply, because it is rare. It is only formed through a supernova (star explosion) and stays around forever. As a result, humans have conventionally decided to attribute value to it mostly because of that factor, and have made it the ultimate form of money.

At one point in time, banks came into existence (don’t, worry, we won’t get into the details of that). The main thing to remember is that banks were initially used to store people’s gold. Banks would then issue the gold owner a note (receipt) that proveds the amount of gold that was held for him/her at the bank.

The bearer of that note could go back to the bank and exchange the note for physical gold. The bank was only allowed to print those notes based on the amount of gold physically present in its vault. If you are curious, here is what those notes looked like:

These notes were the dollar bills, and were a representation of real money (the gold in the vaults). However, stand alone, those bills had no value.
In the US, the Treasury is the entity that controls the issuance/printing of 
dollar bills (currency). Up until 1913, the Treasury had to abide by the Gold Standard, a monetary policy which stipulated that the country’s currency or paper money (printed) has a value directly linked to gold.

In other words, it meant that for every $1 bill printed, there was supposed to be $1 worth of gold in the vault. That’s known as a100% reserve ratio.

Throughout the next 60 years, the reserve ratio kept decreasing, until 1971, when the Gold Standard was completely replaced by the Dollar Standard, which meant that the Treasury no longer had to have any gold reserves in order to print new dollar bills.

The impact of that decision was strongly felt approximately 40 years later.

Referring to the chart below, you’d notice that in all of its existence, the US Treasury had only printed $825 billion dollars in the years leading up to 2008.

However, in 2008, when the infamous economic recession came knocking, many banks, insurance companies and corporatations were facing bankruptcy, and the only way to save them was to grant them money. That’s when the Federal Reserve (which controls the monetary policy) asked the US Treasury to print some dollars (essentialy out of thin air), and hand it to them, in order to “bail” them out. Of course, I’m oversimplifying the situation and process here, but you get the gist of it.

So, in the period 2008–2015, the Treasury printed $3 trillion dollars.
That’s more than 3 times what it had printed in the past 200 years!

Subsequently, all the dollars that were artificially printed, made their way back into the economy, leading to an inflation in prices of goods, which translated into a decrease in the purchasing power of the dollar.

Now, here comes the interesting part.

In October 2008, an anonymous person by the name of Satoshi Nakamoto released a whitepaper titled: “Bitcoin: A Peer-to-Peer Electronic Cash System”.

In January 2009, Satoshi released the software and launched the Bitcoin network. Satoshi started communicating with a few coders of the cypherpunk community (who love cryptography) and started developing and working on Bitcoin’s network collectively.

Till today, Bitcoin remains an open source system. No one owns it, and no one can shut it down. People who work on developing the network are just coders who do it, not only for the love of the challenge and testing their skills, but also because they believe in Bitcoin’s mission.

What is that mission, though? Why did Satoshi create Bitcoin? And how is any of this related to the topic of money, and its history ?

Satsoshi was a strong believer in the concept of the Gold Standard, and was very much against the concept of the inflationary practice of printing money out of thin air (he hated the post 2008 bailouts). He did not believe/trust that human beings are able to consistently make sound decisions when it comes to monetary policies.

In my view, Bitcoin could be the solution; a trustless decentralised monetary system governed by software and mathematical equations. The only decision maker here is the code itself, and we can all trust that a code will perform what it is set out to perform, whereas it is much harder for us to trust that a human being will act accordingly.

Bitcoin was designed to be deflationary. Unlike the current monetary system that has proved to be inflationary with infinite amount of printed dollars, Bitcoin will only have 21 million coins in existence (rare like gold). The number of Bitcoins released is halved every 4 years.

Moreover, Bitcoin is:

Transparent:Whatever happens on the Bitcoin network is public. All the transactions are visible to everyone.

Uncensored: Cannot be shutdown by anyone (just like the internet). It has no central point of control. Bitcoins on the network cannot be frozen or blocked or seized. Bitcoin is not a company, nor a product, nor a service that you sign up for.

Secure system: Not hackable (unless a 51% attack materliases, but that’s another topic for another post about game theory).

Many believe that Bitcoin’s design is that of a genius. In fact, many are betting their life’s worth that Bitcoin will become the global monetary standard. 
Will Bitcoin live up to its hype? Will it become the global digital form of money?

Only time will tell.

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