Cryptocurrency As Money Part 1: The History Of Money
This post is the first in a three part series about Cryptocurrency as money. Subscribe to our newsletter to get updates about the future posts on this series!
Early trade systems with humans were probably not as peaceful and cooperative as they are now. Those systems were probably less “this for that” and more “if you don’t give me what you have, I’ll kill you”. But as people become more sophisticated, as do our trade systems - but how did we get from, well, bigger-stick-trading to cryptocurrency?
Well, the answer to that starts with the first trade system humans developed: bartering.
The basis of the barter system is simple and fairly logical, someone gives something they no longer want to someone who wants it, in exchange for something else. A shepherd might give a tailor a sack of wool for a new jacket, and in turn, the tailor may give that wool to the spinster in order to get a bolt of new fabric, so on and so forth.
People have probably been bartering far longer, but among the earliest known examples would probably be with Mesopotamian tribes around 6000 years ago, which were then introduced to and adopted by the Phoenicians. Traditionally, barter systems were used within communities, but the Phoenicians managed to barter across oceans.
But at some point, this loses its use. Maybe the tailor doesn’t need any wool, maybe the tailor needs new needles from the blacksmith. The shepherd can only get his new coat if he finds some way to get needles first - and that begs the question, what if the blacksmith doesn’t want wool either? This is where the concept of currency comes in. It cuts out the need to run around like a video game character on a series of increasingly ridiculous side quests to get everything needed to acquire the thing you wanted in the first place.
Currencies need only be a widely accepted medium of exchange. Early civilizations used things like animal skins or salt. Yeah, famously the Roman government paid their armies in salt, which was, at the time, more valuable than gold - which is, incidentally, where the phrase “worth your salt” comes from.
As time pressed on and humans discovered precious metals such as gold and silver, those things became more commonly used currencies. Typically, the ranking order would go something like this: Copper, the most abundant, being the lowest value, silver, being the second most abundant being the second most valuable, and gold, the rarest and most valuable. These coins would be typically measured by weight before governments started minting them as official currency within a kingdom.
Then came the incitement of paper money.
This started off in China somewhere around the Tang Dynasty (618 - 907 A.D.), a fair bit before it got popular in Europe in the 17th century, and well before it got popular with the rest of the world. It started with the concept of the banknote. In essence, it's a piece of paper that is exchangeable for an equivalent amount of precious metal coinage. At some point, people stopped exchanging the paper notes for gold, as it’s way easier to carry around a piece of paper saying you have 100 gold pieces than it is to carry 100 gold pieces.
Before the rest of the world even was looking at the concept, China had already gone through a relatively modern economic crisis. The printing and use of this money had gotten so out of control that the value of the money itself plummeted, and China, in the 1400s, banned the paper currency in order to avoid all-out economic collapse. Banknotes wouldn’t get brought back in China for another several hundred years.
In Europe, the first official banknotes would be issued in Sweden, in 1660. Sweden’s first bank, Stockholms Banco, had started minting new coins at a lower weight than the older ones. This lead people to go back and ask for the older coins, as they had a higher metal value, resulting in a run on the banks - which is the concept of a large mass of people going to withdraw their savings from the bank, as they no longer trust in the value of their money (Not So Fun Fact: this was one of the major factors in causing the Great Depression! Yay!).
But all of these currencies were still backed by a precious commodity. Eventually, due to a variety of reasons, most places switched over to fiat money - which is essentially money backed by nothing more than the word of the government. The United States switched over due to not being able to maintain the gold standard, under Richard Nixon. This is always a big scary jump because, according to inflation theory (and somewhat proven by what was shown in China in the Tang dynasty, among other instances), continuing to issue new fiat money will tank its value. Though, modern economists are starting to question if this is actually true.
The history of Bitcoin is widely understood - it was anonymously started in 2009 by a person or group under the name Satoshi Nakamoto. It’s the first to solve the double-spending problem for digital currency. The point where Bitcoin stopped being an interesting cryptography concept and became currency was when the first known commercial transaction occurred in 2010 when Laszlo Hanyecz bought two Papa John’s pizzas for ₿10,000.
Kind of an underwhelming first transaction, but what can you do.
With that, we’re brought into the last decade-or-so. After the initial proofs-of-concept, the first users of Bitcoin were, admittedly, shady characters looking to trade drugs on dark-web sites like Silk Road. In September of 2012, The Bitcoin Foundation was founded to promote Bitcoins development. Beyond that, Bitcoins value has been slowly on the up-and-up, peaking with a value of close to $20,000 USD in December of 2017, and dropping due to China’s blanket ban - with the first steps being taken to stop its trade being in February of that year.
With our history known and understood, we can now start to look to the present, and more importantly, look forward. Over the next few weeks, we’ll be examining the advantages and disadvantages of cryptocurrencies as the next step in money, the next step in global trade.