Cryptocurrency might be a medium of exchange along with other resources like fiat money and precious metals like Gold, in the future.
But what made people follow Cryptocurrency? How did Cryptocurrency come into origin? What are the factors that led to the concept of decentralized money? And Why people are fascinated by Cryptocurrency?
Get answers to these questions by reading the article.
Money is merely a valuable instrument because we know that it is a form that is accepted everywhere, as payment. The value of this fiat money gets from the trust of the governing body. But what happens if money loses its value? They are almost equal to waste paper! Right?
So to understand where we started and to where we are heading now, we should know the history of money. Let’s dig deep into it.
Barter system
The barter system is a direct exchange of goods for goods. In simple words, if I have wood and another person has wheat, I will exchange wheat for timber. It is an age-old practice introduced in 6000 BC by Mesopotamia tribes. Soon, the method became popular and spread worldwide.
But there are a few disadvantages with the barter system. Sometimes the exchange goods did not have a fair valuation, and people started fighting for the same. Later, people began to use coins made of precious metals as a medium of exchange.
The era of coins
The primary requirement of an ideal currency is that it should have a monetary value. Hence Turks (in the 5th century BC) were the first people to introduce Gold coins. Gold is a precious metal, and usually carries some economic weight with it.
Before the advent of the Gold coin, people used to trade commodities using precious metals. But after the invention of coins, Gold coins became the primary mode of currency for people who deal between countries.
The value of a gold coin was linked to its weight. By the seventh century BC, Gold coins became famous around the world as a medium of exchange.
Later coins with a mixture of Gold and silver (Electrum) were minted. The value of the coin will change according to the proportion of Gold present in the currency.
The invention of Paper currency
By 700 BC Chinese started using paper currency as a medium of exchange. Paper currency has spread worldwide, and by 16th century, Europe began to print their own paper currency.
The Gold standard
In the barter system, the goods have some monetary value. At the same time, being precious metals, Gold and silver coins do carry some intrinsic value.
But in what way, a paper note is valuable? It doesn’t carry any value until it is pegged with valuable goods. Hence governments started printing currency notes in proportionate to the country’s gold reserves.
In simple words, if a country has 100 kilograms of Gold, the government can print currency notes equal to the 100Kgs of Gold, but not more than that.
It is otherwise called “THE GOLD STANDARD.” In simple words, if I pay a dollar to the government, it should be able to sell me the exact value of Gold in return.
Hence, the value of every Dollar comes from its underlying Gold reserve.
The paradigm shift from Value to Faith
Amid an ongoing financial crisis, President of The united States Franklin D. Roosevelt in 1934 enacted the Gold reserve act. According to it, the government issued an ultimatum to surrender all the gold reserves and certificates of the citizens to the United states department of Treasury.
Moreover, they devalued the Dollar so that a troy ounce of Gold would cost $35 instead of $25.67. As a result, many gold reserves were exchanged worldwide with the Dollar to take advantage of the Dollar’s devaluation to Gold.
The increased gold reserves increased the money circulation and lowered interest rates, which pushed the economy to the higher side.
As the value of a country’s currency is pegged to its Gold reserves, countries under a deficit of Gold started buying Gold from the USA in exchange for US dollars. After world war II, major European countries began exchanging Gold with dollars. As a result, Dollar became the mainstream of conversation for the rest of the world.
Read more about it at Bretton Woods System.
But n 1966, the United States of America has 14 billion dollars in currency which is pegged with only 13.6 billion dollars worth of Gold. This imbalance made President Nixon stop the Bretton Woods system of exchange.
In simple words, Nixon stopped the convertibility of US dollars to Gold. It is also referred to as Nixon Shock.
It was the end of “The Gold Standard.” Countries started printing money according to their requirement irrespective of their Gold reserves.
People started using the currency based on their trust in the government rather than the actual intrinsic value. Hence, it has destabilized countries without solid financial backup.
The effect of a centralized financial system
Now the value of a Dollar is not related to its Gold reserves anymore. Rather it depends on the country’s imports, exports, interest rates, and economic growth.
But the above factors are very much dependent on the government which is running the country. Hence good Governance makes the country proud in all directions, and timely economic reforms promote a country’s financial system.
It also strengthens its currency in the international markets. But, on the other hand, inadequate economic reforms can destabilize a country’s economy and lead to a new financial crisis.
For example, during a financial crisis in Venezuela, the government started printing more and more currencies to curb the situation. But it led to Hyperinflation, and the Venezuelan Bolivar’s value (Currency of Venezuela) depreciated to its core.
Hyperinflation has made their civilians impatient. As a result, people started using the US dollar instead of their currency. The government tried to stop the usage but was unsuccessful.
The lack of robust economic reforms has led the people of Venezuela, Zimbabwe, and many other countries into a severe financial crisis. People often think that Hyperinflation in the country could be due to a lack of decentralization of currency.
The Great financial crisis of 2007-2008
The great financial crisis in the united states between 2007 and 2008 is a classic example of mismanagement of the banking system. In simple words, banks started lending credits for house loans during this period, irrespective of people’s financial ability and credibility.
As a result, bad loans piled up, and banks entered a financial crisis. A lot of bad debts made banks stop lending interest to the account holders.
Even after knowing that bad debts are piling in their books, no banking authority disclosed it until 2008. Banks made a mistake. But the general public had to face the consequences.
The bank accounts of the general public were frozen, and withdrawals were blocked. It is insane!
It is the first step to the idea of decentralized money. The concept that “No one should govern money, and everyone should be part of the system” was prevailing in the minds of a group of people. Money should have an equal value all over the world and everyone should have equal opportunity to use it.
The Origin of Cryptocurrency
In 2007, under the name called Satoshi Nakamoto, a person or a group of people (not yet known) started working on a decentralized currency system (The Cryptocurrency) called Bitcoin.
In August 2008, Satoshi Nakamoto registered a domain under the name of Bitcoin called bitcoin.org. He has released a white paper on the world’s first Cryptocurrency: Bitcoin, on which he was working.
Mr.Nakamoto portrayed himself as a 37-year-old male living in Japan. His vision for the decentralization of money comes from one of his statements in the P2P Foundation forum in 2009.
He states that “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”
On 3rd January 2009, Mr.Nakamoto released the first version of his Cryptocurrency software on Sourceforge, an open-source community. He was the first person to mine the first block of Bitcoin, “The genesis block.”
As a reward, he earned 50 bitcoins. It is the start of a new era: “The era of Cryptocurrency.” The transaction was registered with a statement in his transaction ledger saying that “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.
Many newspapers published the same with their own interpretation.
In his P2P forum, Nakamoto collaborated with many people with similar interests and developed Bitcoin further. Later, in 2010, he disappeared suddenly after handing over the source code and alert key to his Co-developer Gavin Anderson.
What is decentralized money or Cryptocurrency?
Cryptocurrency is digital money that is secured by cryptography. It is a decentralized network where no single person or organization is held responsible for the transactions.
The transactions are open to all yet more secure than the regular digital transactions. This simple method is only possible with Blockchain technology.
To know more about Cryptocurrency, Bitcoin, and blockchain technology, do check out our article here.
Bitcoins and Cryptocurrency for beginners
Bitcoin Currency Converter
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