The evolution of money is one of the most fascinating aspects of human history. In the Western world during its history it had precious metals which were used as a means of exchange. Then they had promissory notes in Britain that eventual evolved into the currencies we have today: Dollar, Pound, Euro etcetera. In my home country, we used cowries and kobo coins before transitioning to Naira/paper notes.
However, as much as this is the evolution of money, this is not the beginning of trade. Historically, people first traded by barter but the challenges of division, finding suitable trading partners, ease of carrying etc. Even today with money, people still execute barter trades when the conditions are suitable. However, the advent of money made it easier to trade; however not just anything could be money- or I could easily go out and get more money, which would destroy the value.
Therefore, money needs to serve as a means of exchange, store of wealth and measure of value by having the following characteristics: durability, portability, divisibility, uniformity, limited/controlled supply, and acceptability.
These characteristics are the reason gold was used as money for such a long time, what fuelled the goal rush in America, why central banks are required to house a certain amount of gold, and ultimately why gold could no longer be used as a means of exchange when the uniformity of gold coins came into question.
Even now, money has transition to digital, binary 1s and 0s, as the bulk of all the money of the world are recorded in bank accounts and investments without the need of the equivalent physical hard currency to be stored in vaults or backed by gold bullion. Some people get scared because money is mostly electronic so its open to hacking, EMP attacks etc. As much as this is a valid concern, every “apocalypse” movie or war-torn country shows you that, when the push comes to the shove, whether the money is physical or electromagnetic waves in the cosmos, it is worth nothing,
This is because money derives it value from the underlying commodity, product, service or skill which it is used to purchase.
Now, what are the potentials of bitcoin as the currency of the internet; answer, it would depend on its acceptability.
Bitcoin is essential the currency in the world that is currently the most durable, portable, divisible, uniform and limited or controlled in supply. Satoshi is a genius for the structure he set up for the bitcoin cryptocurrency. That is why most analysts and traditional financial experts love to talk more about blockchain, and all its application, than bitcoin, as even though blockchain is not money, it is extremely acceptable. Bitcoin on the other hand…is something else.
- But what if the acceptability of blockchain can be transferred to bitcoin through combining them- we will have bitcoin as a recognisable currency (already happening).
- But where will bitcoin derive its value when all the speculation and the “Bitcoin Rush” is over- bitcoins value can be inferred from the last transactions that were made and every subsequent transaction would be at fair value with historically information just serving as a reference.
- But how will futures prices be determined for derivatives- some derivatives may not be able to be used with Bitcoin initially, until the development and understanding is improved. However price discovery would basically be indicated by trends in seller willingness to sell and buyers willingness to buy.
So the proliferation of the users of bitcoin, their acceptance and the acceptance of regulatory bodies and governments would push the development of Bitcoin into the currency of the internet. However, in my own opinion even if regulators and governments are reluctant to surrender their control over currencies, an illegal market that would be or could evolve into a large informal market is bounded to occur just due to blockchain’s security alone. Wouldn’t is be better to acknowledge and direct the evolution, rather than fight it?
– God Bless