What we today perceive as money is the result of thousands of years of evolution. And looking at history, why we would be the “lucky guys” to live in the end-state of this evolution? Crypto-currency like bitcoin represents yet a new step in the evolution of money.
A short history of the development of money in 5 logical steps:
1) From barter trade to a reference commodity
Lets place ourselves back some 3.000 years and imagine we are trading the proceeds of our little farm on a market nearby or with our neighbour the fisherman: 2 apples equals 1 reasonably sized fresh fish which again represents 6 chicken eggs of the third neighbour…
But then we found it easier to have a central commodity in between (i.e. historic example sheep: pegus hence pecunia) to reference the exchange ratios between the neighbours. So 100 apples is 1 sheep, 100 Fishs = 2 sheep, 1 slave = 2,5 sheep etc. etc. This made it far easier for all to see the relative rate of all the commodities.
2) From perishable reference commodity to gold as a reference commodity
The set-up with sheep had a lot of disadvantages: what happened if your sheep died? Or when a disease would kill a lot of sheep? And how to pay if you do not have sheep, but you have other stuff the other party does not want to have in return? Or you do not want to chop it up to only buy a few apples?
Now enter the great invention: lets have a good (= a commodity) in between that is scarce as to be valuable, cannot die, can be stored for later use, etc. etc.: lets use precious metals like bronze and gold as the in between commodity! Let us now create standardised lumps so we all know how much these lumps (i.e. weigh) are worth. We let the state have the monopolistic right to coin these lumps and as a sign of authenticity (and weight!) we stamp the head of our emperor on it!
Money has been engraved in our minds as the physical coins ever since. The gold coin IS the money. In effect these golden coins represent the money and indicate its value 1:1. Gold has been the standard commodity for money for over two millennia ever since the Romans.
3) From reference commodity to certificates.
To make the reference commodity even more efficient we started using paper certificates that could be traded in for gold. Also coins from other materials then the gold it represents as backing were created. This step in the 13th century represents a crucial development where the cost of the paper/coin representing the money was not linked to the represented value it self. (NB Today many small denominated coins are more expensive to produce then the value they represent.)
The certificate slowly but surely transformed in the banknotes we use today: when you had to take gold with you to an other town you could get a certificate from a bank (by handing over your gold) in your own town that said to the bank in an other town to give gold to you when you handed over the certificate. Then instead of going to the bank to collect the gold and then go to your business partner with it your business partner would accept the certificate itself. He then would have the option to get the gold at the bank or pass the certificate on himself. The gold could remain in the safe en the certificates where then circulated as money. In time we learned that banks could circulate much more certificates then having gold in the safe. The certificates “fiat money or ” where based on “trust”. The de-materialisation of the money had started to take effect.
These certificates (like today’s travellers cheques) where then institutionalised into banknotes, as we knew them until only a few decades ago. These certificates could literally be changed for gold at the reserve. It would even say so on the banknote (“Betaal aan toonder”).
4) Drop the gold backing to get an immaterial reference commodity
Later we decided to drop the gold backing of the banknotes altogether (e.g. USA dropped the link with gold for the US dollar in 1971). The ratio between gold and certificates/banknotes had grown to such a ludicrous small fraction that it was the fairy-tale about the cloth of the emperor anyway. Money from then on was based on trust alone (“fiat money”) and had become an immaterial commodity.
Fiat money is money that derives its value it represents not from the matter from which it is made (such as gold and silver coins), but from the confidence that goods and services may be bought with it. The nominal value is not based on a specific weight and fineness of a precious metal but is based on the confidence that economic operators set the value of the currency.
5) From banknotes to digital money
If you look at a paper banknote today every banknote of a certain denomination (lets say €50) is exactly the same as all the others. Except for one thing: they are baring a unique number. All the other aspects of the bill are created to make it recognisable as a valid (not counterfeited) copy of the denomination. So in a logical sense we are only handing over a unique number. The number it self can not be verified based on the physical aspects of the banknote or by how it is formed as such if it indeed is a unique number. So we need to make the paper note and its security features to transport the unique number. But what if we could create a unique number that cannot be replicated? Then we would not need the paper and the security features on them. Then the money would not only be an immaterial commodity but would not even need paper to transport and authenticate it: we could send it over the Internet.
Voilà; and that is exactly what bitcoin is: an immaterial and virtual reference commodity.
The de-materialisation of money and our dependency on trust started a long time ago. Money has evolved in a series of steps into an immaterial commodity. With crypto-currencies like bitcoin we now make a (final?) conceptual leap towards money being an immaterial virtual commodity. Bitcoin as a crypto-currency is the ultimate reference commodity! With hindsight it is the inevitable outcome of a continued process of abstraction.
NB Cash and banknotes reside in the physical world, but currencies reside in both the physical and the digital world, digital currencies reside only in digital world. While a bitcoin is not more then a unique number it can only reside and be passed on via the Internet. Bitcoin is tightened to the network and therefor still having an unbreakable link to the physical world. Where a number on a banknote is bound 1:1 to the paper it is printed on the Bitcoin in that same respect is bound 1:1 to the Internet, it is only not bound to one small bit of identifiable matter.
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