The Rise of Bitcoin: How We Got Here

Cryptocurrency is a topic many new investors shy away from as negative connotations come with it.

Many have made millions from cryptocurrency, but many more have lost their life savings. Thus, I understand when someone is not even open to understanding how cryptocurrency works.

However, I firmly believe that cryptocurrency will change the future and that it is best to understand how it works now before it becomes mainstream. Doing so will give us the chance to make some life-changing returns.

But before we start to learn how to invest safely in cryptocurrency, we should first learn about what led to its development. This is why today we will discuss the history of money and how people started to lose faith in their currencies.

What is Money?

In order to understand the importance of Bitcoin and cryptocurrency, we must first learn about money.

To all of us, money is an exchange of value. If I need to get a specific job done, I can pay you a certain amount of money for the time you spend doing the job or the value you add to completing it.

Then you can use the money I paid you to get value from someone else. You might want to buy something or pay someone to make something for you. Thus, we can agree that money represents value to everyone that accepts money as a trade.

However, over time, there were many things and materials that were used to represent money. For instance, wheat, silk, copper, silver, and gold were all used as a medium of exchange between people to represent value.

Since many different things were used over time, people had to trust that medium of exchange. People needed to trust that the material they were using would remain valuable over time.

Therefore, we can agree that money is equal to value, which is equal to trust.

Centralized Currency

It was only during the 20th century that people found it inconvenient to use materials as their medium of exchange.

People were carrying around gold bars or silver, and having to deal with the breaking of those materials in order to afford what they wanted. This was too cumbersome. Thus, fiat currency became more popular and eventually won first place as a store of value.

But what is fiat currency? Fiat currency is paper money. This is what we use today to exchange value. But here is how it started. Banks and governments have started to trade your gold for currency.

Essentially, you would take your gold and exchange it for a paper receipt, which is what we call bills today.

This is very convenient because paper bills are so much easier to carry around. They are also easier to break into smaller pieces.

Here is the trick: because these paper receipts or bills were controlled by the banks and governments, people no longer trusted the actual material (medium of exchange).

They were putting their trust in the people that controlled this asset, and because of this control, fiat currencies are known to be centralized currencies.

Centralized Currency Disadvantages

Since people were able to trade their money for gold and vice versa, this is known as the gold standard. This means that the money system in use is backed by a fixed amount of gold.

However, because fiat currency is a centralized system (controlled by someone), over time fiat currency is no longer backed up by a commodity such as gold or silver. This means that people are now trusting the banks and government to maintain the value of their currency and not lose their trust.

Here is the issue, though: because fiat currencies are no longer backed by a commodity, banks and governments can print as many paper bills as they want.

If you do not understand why this is a problem, then let's take a closer look. Having too much of something brings down the value because of what’s known as supply and demand.

The more the supply, the lower the demand, so the value decreases. The lower the supply, the higher the demand, so value increases.

When a government prints too much of a currency, we experience something known as inflation. Inflation is the decrease in your purchasing power. Basically, a decrease in the value of your currency because there is too much supply of it.

This means that you need more paper money in order to afford something that used to cost you less. This is why people now have doubts about their fiat currency.

Digital Centralized System

In our modern times, money has become digital. Meaning, that you no longer need paper receipts or bills to prove that you have money.

Banks have a centralized online system that stores all of your money. This is essentially just a ledger (storage device) to record how much money each person has. Then you can use services such as Venmo or PayPal to send and receive money.

That is because the bank is able to verify through their system that you indeed do have money with them. We also trust the bank with our money, and they rely on their ledger to keep track of our money.

I’m sure by now you have noticed that banks have the ultimate power when it comes to all of our money. As we all know, absolute power always leads to corruption.

The Birth of Bitcoin

During the economic recession of 2008, a white paper was published by Satoshi Nakamoto, the anonymous creator of Bitcoin.

A white paper is essentially a document that outlines or provides information on the issues and solutions to a complex problem. In this white paper, Bitcoin was declared as an electronic peer-to-peer cash system, essentially a decentralized currency.

A decentralized currency, also known as cryptocurrency, is essentially a digital currency that does not rely on a centralized system or authority to maintain it.

Bitcoin is the first cryptocurrency and was officially launched as a currency in 2009.

When creating a cryptocurrency, the creator has the freedom to decide how much to make of it (maximum supply). Bitcoin has a maximum supply of 21 million. That is, more bitcoins cannot be created. 21 million is the maximum amount ever.

The government, banks, and even Satoshi himself cannot create more of it. Additionally, you cannot recreate or duplicate them, which is a problem we currently have with fiat currencies.

Bitcoin vs Cash vs Gold

As the whitepaper explained, Bitcoin was intended to be a peer-to-peer cash system. This means it was created to replace cash, electronically.

However, this is no longer the case because the volatility of Bitcoin is too extreme to be used as cash in everyday transactions. Bitcoin’s price movements since its inception have gone up and down drastically in both directions.

This made people reluctant to use it as cash.

Say you want to pay for your $50 dinner using Bitcoin. The price of one bitcoin, on the other hand, quickly rises to $100. Then you essentially paid double for your dinner.

Because Bitcoin has a maximum supply, it resembles a resource more than cash. This is why many have compared it to gold and it has become known as "digital gold".

Many believe that Bitcoin will disrupt the gold industry for various reasons.

Bitcoin is scarce yet much more transferable than gold. Moving gold is costly, yet it's very easy to just store Bitcoin on what is called a personal hardware wallet or a ledger, as we discussed earlier with the banks' way of storing our money.

Bitcoin is seen as a store of value, meaning they buy it and hold it because they trust it will hold its value. Just like people hold cash, trusting the government to maintain its value.

Decentralized Currency

Satoshi Nakamoto created Bitcoin to offer us a decentralized solution to money. This means if you own Bitcoin, only you have control over it.

Once you buy it and transfer it to your personal ledger, no one can touch it or control it. Not any bank, or any government. That is, it cannot be seized or taken away from you for any reason as long as you have access to your personal ledger.

A decentralized currency like Bitcoin is also beneficial because it removes the middleman from the equation.

Say you want to send money overseas to a family member. In a centralized system, you send the money to another account and wait for the bank to verify that the money really does exist in your account before it transfers it over.

However, in a decentralized system, the blockchain ensures that transactions are fast and removes any middleman. But more about the blockchain in a future article.

Conclusion

This was a brief discussion of how Bitcoin came to be and why it is more important than most people think. In future articles, we will talk about how it operates and how you can invest in Bitcoin and other cryptocurrencies.

Have a great week!

Muhamed

📖 Quote of the Week

You can't build a financial empire if you're ignorant of basic finances and economics.

From The Millionaire Fastlane, By MJ DeMarco