The Reality of Money and Why Change is Coming

Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.

Prior to the introduction of money, we exchanged goods and services, which is referred to as bartering. What makes bartering quite interesting is the fact that both parties have a perceived relative value at the time of a transaction and thus can make the exchange accordingly. For example, it was commonplace to trade rice for chicken and commodities would be exchanged for building shelter. On a recent trip to Colombia, I had noticed a number of people bartering a couple of hours outside of Medellin. Peer to peer exchange is a free market that doesn’t require a government or bank to process the transaction, which is liberating in a world that seems largely controlled.  

In 2020, BBC wrote an article about the rise in bartering, Could bartering become the new buying in a changed world?. The underlying premise refers to economic uncertainty for a rise in bartering, which highlights economic conditions especially in a country like Fiji which relies on tourism for roughly 30% of their workforce. The logical question then becomes, why is bartering on the rise if the monetary system works well?

The truth is that the global monetary system does not work well. This has become more clear over the past year due to a combination of unemployment and rising inflation. So how did we arrive at this point?

According to Wikipedia, government issued fiat money was first issued during the 11th century in China. In 1944, the Bretton Woods Agreement established that central banks would maintain fixed exchange rates between their currency and the dollar, which would allow them to redeem US dollars for gold. It’s at this moment in history that the US dollar would be known as the world reserve currency. However, when President Nixon decided to decouple the dollar from gold in 1971, a system of fiat currencies was used globally and are no longer convertible into gold and solely relies on the government to ensure worthiness. 

In hindsight, it’s quite clear that fiat money has been a very poor store of value. Purchasing power over the past century has decreased by roughly 97%. This has contributed to people storing value in assets such as: real estate, gold, and art. By definition, money cannot be considered a store of value because it needs to retain value which we have proven to be false. Inflation has led to a significant decrease in fiat value. This article covers a number of countries who are witnessing devaluing of their currency, which poses a threat to their welfare. For people living in the United States, it can be difficult to understand what is happening in other countries, but the data shows that the economic conditions are dire.

What makes fiat money incredibly inefficient as a medium of exchange is the need for banks to serve as a middleman. Some examples are wires, remittances and foreign exchange fees. 

This leads us to the modern day and Bitcoin. Bitcoin is a digital asset that serves as the reward for a process known as mining and can be exchanged for other currencies, products, and services. The system uses robust cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Records of these transactions are settled on the blockchain. Each block in the chain contains a cryptographic hash of the previous block, a timestamp, and transaction data. The blockchain, by design, is resistant to data modification. In simple terms, there is no government or entity that can alter the supply of Bitcoin and the network operates off of peer to peer verification known as proof of work. 

The reason for Bitcoin being such a compelling advancement is due to its ability to be a medium of exchange as we have seen in El Salvador and being used as a store of value. Day to day volatility will continue to smooth out over time as adoption increases. For the first time in history, you’re able to acquire an asset ahead of the global financial institutions and become self sovereign. Bitcoin is freedom and will lead to a better future. 

I’ll leave you with a key takeaway, Bitcoin is still in its infancy and the comparison can be made to the early 90s internet. This video highlights similar questions to what we see in Bitcoin today and just like the internet, neither can be stopped.