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The Evolution of Money: From Barter to Bitcoin

Rajat Soni, CFA,

Not understanding how money works is the biggest mistake you can make.

The younger you are, the better chance you have of being wealthy if you understand how money works.

Let me teach you the basics of how money works and why #Bitcoin will be seen as money:

We use money every single day and yet most people can’t explain what it is.

Money is involved in every transaction.

It’s a way to assign value to things, to easily exchange value for value, and to store value for the future.

Money makes transactions and commerce a lot easier. Historically the world has used commodities as money.

We went from using things like cattle, to shells, to precious metals.

Over time the market picked the form of money that was best end most efficient. Precious metals worked well as money while we lived in small communities.

Eventually, gold was replaced with gold certificates because they were easier to move around than actual gold.

From 1944 to 1971, countries around the world agreed to use US Dollars to trade. Dollars were essentially a receipt for gold.

It was expected that the US would always have enough gold to back all US Dollars in circulation. In 1971, the Federal Reserve (the US central bank) experienced a bank run.

Countries suspected that the US didn’t have enough gold to back all the dollars it had printed.

They wanted their gold back. On August 15, 1971, the US defaulted on it’s debt to other countries and severed the link between dollars and gold.

Other countries had deposited gold in the US banking system, but the US didn’t have enough gold to back the number of dollars it had printed.

The US had printed excess amounts of money to fund the great society program and the Vietnam war. We are now using US Dollars as the world reserve currency.

US Dollars are still backed by nothing.

Smart investors figured this out early. Since 1971, stocks, real estate, and gold have all increased in price because demand has increased. They realized that, since US Dollars can be printed at will (since they’re not backed by gold), US Dollars are not a great store of value. Becoming financially literate means that you understand this. Most people are NOT financially literate. They save in US Dollars their entire lives and they lose all the value they accumulated because of prices increasing.

If you understand that US Dollars are not scarce, you start buying other scarce goods to protect your wealth and purchasing power.

The US Dollar has lost at least 99% of its value since 1933! In order for humanity to succeed, we need to go back to a form of money that actually works.

Money cannot be controlled by a central third party.

It cannot be censored.

It must be permissionless.

Most importantly, the value shouldn’t be so easy to steal (paper currencies allow the issuer to steal value by printing more).

This was the case when the world used gold to transact. To become money, a commodity needs to have the following characteristics:

Portable - easy to move from location to location. Improves ability to serve as a medium of exchange.

Fungible - interchangeable with any other unit of money of the same value. Improves ability to serve as a medium of exchange and unit of account.

Divisible - Easy to break apart for smaller transactions, and easy to combine for large transactions without losing value. Improves ability to serve as a medium of exchange and unit of account.

Durable - Does not wear and tear so you can use it as a store of value. Improves ability to serve as a store of value.

Salable - Others must recognize it as money and you must be able to exchange it for goods and services. Improves ability to serve as a medium of exchange and unit of account.

Scarce - It must be difficult to make more of so it can be used as a store of value; if supply increases too much and too fast, the market value will decrease. Improves ability to serve as a store of value.

Gold is fungible, durable, salable, and scarce. Gold is not divisible or portable, so it requires third party intermediaries to process transactions.

The US Dollar improved on gold by being portable and divisible, but it lacked scarcity. It can be printed at will. Gold requires time, energy, and effort to create more of.

The world has historically gone through hundreds of paper currencies (like the US Dollar), and each one has failed because of excess supply and greed from the issuers. Bitcoin changes things. We won’t need a paper currency anymore. Bitcoin combines the best characteristics of gold and government-issued currencies. It’s portable, divisible, and scarce.

Currently it’s not as fungible as we would like, because transactions can be tracked. Bitcoin developers are working on ways to make Bitcoin completely private.

Bitcoin is still proving itself as a durable commodity - it only has a 15 year history compared to the USD’s 200 year history and Gold’s 5,000 year history.

Bitcoin is also becoming more salable with time as more market participants recognize that it has value. This will come with adoption and more merchants accepting it for goods and services. The market will always move to the form of money that works best as a way to assign value to things, to easily exchange value for value, and to store value for the future.

I think the world will slowly recognize that Bitcoin is perfect money. It’s the ONLY asset that has all of the required characteristics.

Since there are some flaws that are being worked on, Bitcoin’s value is lower than it eventually will be. There are valid concerns with privacy and potential government regulations, but Bitcoin cannot be stopped. There are no central parties to sue or businesses to fine.

Bitcoin will continue to improve as money and will be used as such within the next few decades.

As adoption increases so will the market price.

Since Bitcoin is designed to be digital money, it will eventually become the world reserve asset. We may still have government-issued currencies to transact in certain countries, but I don’t think housing will be seen as an investment. All real estate will drop to its utility value. The future is bright for anyone that recognizes that Bitcoin is money so early in its life cycle! If you enjoyed reading this thread, follow me for more money and Bitcoin content 👉 @rajatsonifnance

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