written by
Josh Lehman

Bitcoin - The Future Of Money

Education 12 min read

Technology has changed the world around us, penetrating into our daily lives to such an extent that it’s now difficult to imagine the world without it. The financial industry has been particularly impacted by digital advances, going from banknotes to credit cards to Bitcoin in just a few decades. But is Bitcoin really the future of money? Or is it just a fad destined to go away when some other form of electronic cash appears? To answer these questions, we must first take a closer look at the evolution of money to see its possible future.

The Evolution of Money

The evolution of money is long and winding, but most anthropologists agree that it started with a system of exchange called barter, in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange.

Barter

“Money is not coin and banknotes. Money is anything that people are willing to use in order to represent systematically the value of other things for the purpose of exchanging goods and services,” says Yuval Noah Harari, an Israeli historian and a tenured professor in the Department of History at the Hebrew University of Jerusalem, in his book Sapiens: A Brief History of Humankind.

During the era of hunting and gathering, which occupied at least 90 percent of human history, humans had to exchange goods and services to survive and bartering proved to be an effective solution because the scale of exchange was very small. You can imagine two groups of hunters and gatherers meeting from time to time to exchange materials that were only available in one area for materials that we available only available in some other area.

With the arrival of the Neolithic Revolution, sometimes called the First Agricultural Revolution, it was finally possible to move from the lifestyle of hunting and gathering to one of agriculture and settlement. As a result, the human population experienced an explosive increase, from just a few million to hundreds of millions.

Emergence of Money

The unprecedented population growth created many new roles in society, making humans more dependent on one another than ever before. As Aristotle put it, “When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use.”

Initially, things of great value and reliability were used as money, such as livestock and plant products. It wasn’t until the Bronze Age when several cultures around the world started to use commodity money, valuable objects that have value even when not used as money. Good examples of commodity money include shells, large stones, salt, alcohol, cigarettes, and, of course, gold and silver.

Around 1000 BC, money had become so indispensable that most empires and civilizations officially set standards of weight, size, and material to be used for minted coins. Early standardized coins were not that different from the coins we know and use today. They were typically disk-shaped, small enough to comfortably fit into a small pouch, and stamped with various ornaments and markings.

One crucial difference that separates early standardized coins from today’s coins is the fact that the coins we use today are no longer made of gold, silver, and bronze. Instead, they tend to be made of copper, tin and zinc.

How Money Lost Its Value

For a very long time, coins carried their value within themselves because they were made of precious metals. However, precisely because coins were made of precious metals, they were heavy and limited by the supply of those precious metals. A better solution was needed, and the invention of paper by the Chinese in 100 B.C. has made it possible.

“Rather than carrying coins everywhere, people could leave their valuables at the bank, and the bank would provide a signed note that verified the value of the item or items a person had in the bank,” explains Blockchain writer Kenny Li. “This system was based on trust that the note could be exchanged for actual valuables. Instead of exchanging for the tangible valuables at any time, people could continue to exchange the notes.”

Not long after the first signed note was issued, goldsmiths all over Europe were using notes as a security. The emergence of notes backed by gold represents the shift from commodity money to representative money, which is described as any medium of exchange that represents something of value without having any or very little intrinsic value.

European banks eventually realized that they could afford to issue banknotes of greater total value than the total value of gold they can back them up with, setting the stage for the eventual move from gold, which is credited to President Richard Nixon.

Fiat Money Problems

Currently, we are in the era of fiat money, which is a currency that doesn’t have any intrinsic value because it’s not created from a useful good or some precious metal, and it’s also not backed by something valuable. The true nature of fiat money has been recently revealed by the economic crisis in Venezuela, with inflation reaching 1.35 million percent at the end of 2018.

Hyperinflation in Venezuela
Graph showing the hyperinflation in Venezuela

As Alan Greenspan, an American economist who served as Chair of the Federal Reserve of the United States from 1987 to 2006, put it, “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.”

It shouldn’t then be a surprise that the current fiat system has been a subject of heavy criticism since its beginning. “The modern banking process manufactures currency out of nothing,” said Sir Josiah Stamp, who was a director of the Bank of England. “The process is perhaps the most astounding piece of slight hand that was ever invented. If you want to be slaves of the bankers, and pay the cost of your own slavery, then let the banks create currency.”

During the financial crisis of 2007–2008, the entire world financial system nearly collapsed if it wasn’t for the bailout of banks by national governments. While some regulations were put in place to prevent another similar financial crisis in the future, the banks that were responsible for the crash in the first place were essentially rescued from their own mess using taxpayers’ money.

It’s no coincidence that the first cryptocurrency in the world, Bitcoin, was invented by an unknown person or group of people using the name Satoshi Nakamoto amid the aftermath of the financial crisis of 2007–2008.

Bitcoin as an Alternative to Fiat Money

“Bitcoin emerged as economies across the world started losing trust in the current banking model,” according to the Geneva Business School. “Bitcoin saw the opportunity to take the power out of the [financial] institutions and provide a better service, and the people responded. Bitcoin operates universally, meaning for the first time there is a possibility of a global currency. With a truly international currency, possibilities for global economic growth and social equality are endless.”

Unlike fiat money, Bitcoin can be exchanged peer-to-peer, which means there’s no need for trusted intermediaries. Without them, Bitcoin is influenced only by the buyers and the sellers. Needless to say that the financial crisis of 2007–2008 would have never happened if Bitcoin had been adopted as the main form of money at the time.

Bitcoin Transaction Fees
History of Bitcoin transaction fees

Bitcoin transactions take just a few minutes even when the sender is on a different continent than the receiver. As the chart above illustrates, Bitcoin transaction fees have almost always been extremely low, especially compared with traditional international bank transfers, which cost as much as $30 per transfer, while the current Bitcoin transaction fee is just $0.05.

It’s been 10 years since Bitcoin was first released, and the ecosystem around it has matured considerably. There are now many reputable exchanges to choose from, and convenient Bitcoin wallets are available for virtually all popular platforms, allowing Bitcoin users to transact with anyone, any time of the day, without having to go to a bank, wait in line, fill out forms, submit an ID, and so on.

For these and many other reasons, Bitcoin has become a very popular alternative to fiat money in the middle of the growing political and financial crisis in Venezuela, with weekly trading volume exceeding 2,000 bitcoins and hitting record highs.

“Bitcoin and crypto are on the ground in Venezuela. The country is falling apart, and the fiat kings $USD and £ are swooping in. The people have an historic opportunity to boycott fiat entirely and convert to Bitcoin to birth freedom!” tweeted Max Keiser, a Founder, Partner, and Chief Investment Officer at Heisenberg Capital.

Bitcoin as a Store of Value

Even though Bitcoin was invented as a peer-to-peer electronic cash system, another very compelling use case for it emerged over the years: a store of value. Investopedia defines a store of value as an asset that maintains its value without depreciating.

Milk, for example, is a terrible store of value because it takes just a few days for it to lose its value due to decay. Gold, on the other hand, is an excellent store of value because it can be stored virtually indefinitely without losing any of its intrinsic value.

Market capitalization of gold and Bitcoin
Market capitalization of gold & Bitcoin.

The two charts above show the total market capitalization of gold (left) and Bitcoin (right). Notice how similar they are. According to Matt Hougan, the Global Head of Research for Bitwise Asset Management, there are two things that can be expected from any store of value as it established itself: a rapidly appreciating price at first and high-but-declining volatility.

“The price of a new store of value would likely start out very low, as few would believe in it. As it became established, prices would rise exponentially. Over time, this price appreciation would slow as it reached a steady state,” says Hougan. “Similarly, early volatility would be extreme, as its long-term sustainability would be in question. But over time, that volatility would tail off as the asset became more established.”

Bitcoin seems to be following the same trajectory as gold, with its volatility rapidly decreasing as more and more people use it as a store of value. While there’s no guarantee that Bitcoin will eventually replace gold as the dominant store of value, it’s definitely on the right path to get there.

It’s true that Bitcoin depends on electricity and the internet, but the current political and financial crisis in Venezuela shows us that both electricity and access to the internet are now readily available even during times of social upheaval. The same can’t, however, be said about access to traditional financial institutions, which can be easily shut down or strictly controlled.

What’s more, Bitcoin is far more practical than gold because it can be easily transported and secured. Even the lowest criminals can steal gold from someone’s home but hacking into a reputable online exchange or cryptocurrency wallet is nearly impossible if proper security precautions are taken.

Bitcoin as a Payment Method

Bitcoin is often described as an alternative to Visa and Mastercard, the two leading credit card companies in the world today. This comparison is not really fair because it’s like comparing apples to oranges. Visa, Mastercard, PayPal, Venmo, Square Cash, Google Wallet, Apple Pay, or Samsung Pay all offer various methods how to make transactions with fiat money. Bitcoin doesn’t do that.

Instead, Bitcoin is an alternative to fiat money, and there are many different ways how to make payments with Bitcoin. Thousands of retailers around the world currently rely on a whole host of Bitcoin payment processors and solutions, such as BitPay, Coinbase, CoinGate, SpectroCoin, and many others, to accept Bitcoin payments.

Visa and Mastercard should, instead, be compared with the Lightning Network, which is a payment protocol that operates on top of Bitcoin’s blockchain, enabling fast transactions between participating nodes. According to Visa, its global processing network is capable of handling more than 65,000 transaction messages a second, and the network handles on average around 2,000 transactions per second.

Network capacity
Bitcoin Lightning Network capacity

The Lighting Network is capable of millions to billions of transactions per second, blowing away Visa and other legacy payment methods by many orders of magnitude. Recently, the capacity of the network has increased to a massive 575 BTC worth $2.04 million, which is even more impressive considering that the network is just a few years old, whereas Visa was founded in 1958.

Where Is Bitcoin Right Now?

bitcoin market cap
Bitcoin market cap

After reaching an all-time high of over $20,000 at the end of 2017 and subsequently falling below $4,000, Bitcoin seems to have entered a phase of decreased volatility. While bad news for speculators who invested in Bitcoin when it was worth much more than today, it indicates that we are now moving past the trough of disillusionment of Gartner’s Hype Cycle and are gradually entering the slope of enlightenment, which is followed by the plateau of productivity.

However, with many economies set for the worst year since the financial crisis of 2007–2008, it’s possible that a powerful catalyst for Bitcoin adoption is just around the corner. Bitcoin has millions of active users around the world, and nearly 80 percent of adults are aware of its existence, according to the study by YouGov Omnibus. It’s very likely that the upcoming slowdown of all major economies will cause people to see Bitcoin as a life raft, using it to hedge against another major financial crisis.

“When asked about the recession and the reaction of cryptocurrency prices to it, 72 percent of the institutions [surveyed by Fundstrat] said that prices of cryptocurrency would rise while 28 percent denied it,” writes Darryn Pollock, an award-winning journalist. “The same question yielded 5,382 responses on Twitter out of which 59 percent of people said they believed the prices would increase.”

Clearly, many decision-makers have more faith in Bitcoin than traditional financial institutions even though there are still quite a few challenges that must be overcome. Perhaps that’s because Bitcoin has, again and again, proved itself to more than capable of adapting itself to meet the needs of its users.

Conclusion

Since it was released a decade ago, Bitcoin has managed to disrupt the financial sector, providing a compelling alternative to fiat money and establishing itself as a possible replacement of gold as the dominant store of value. While there are still some challenges that must be overcome for it to reach peak adoption, Bitcoin seems to be on the right path to become the future of money.

bitcoin cryptocurrency digitalsurge