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In 2010, Laszlo Hanyecz paid 10,000 bitcoins for two pizzas. Today, with the price of bitcoin over over $40k, those same coins are worth nearly half a billion dollars. How could a simple string of digital bits be so valuable? Good question! In fact, the answer is not merely economic, but also social and political. Money is a human construct, and gains its legitimacy – and value – from consensus and convention.
Before we had “money”, humans would barter, or trade, items of intrinsic value, such as shells and salt, which demonstrated a “proof of work” – often based on discovery, extraction, or transport. Some items were clearly more valuable than others; for example, gold possesses a singular array of elemental traits: rarity, beauty, and strength, while simultaneously not being poisonous, radioactive, or corrosive.
Over time, governments saw value (and profit) in standardizing the size, shape, and weight of what we now call money. China produced the world’s first metal coins over 3,000 years ago, and the first paper bills over 1,000 years ago. Ultimately, governments also have the unique authority to declare something “legal tender”, which means that courts of law are required to recognize it as a satisfactory payment for a debt.
Governments have continuously experimented with minting coins and printing bills, and they found that good money is similar in nature to the most valuable natural resources: scarce, durable, portable, and verifiable. Thus, some of the world’s oldest coins are still in existence today.
Money, Defined
Today, economists argue that there are three essential characteristics of good money.
- Medium of Exchange: An intermediary token that can be traded for goods and services.
- Unit of Account: A stable measure of prices, profits, and performance.
- Store of Value: A durable asset with saved purchasing power.
As we look at the future of cryptocurrency, it is important to consider whether it can satisfy all three of these requirements.
War and Peace
Today’s international economic (and political) system was forged in the ashes of World War II. In fact, in times of crisis, when human civilization seems to be most fragile, that is also when it is easiest to understand the value of natural resources. As war broke out in 1939, England, France, and Poland secretly shipped millions of pounds of gold to North America and Africa in spectacular missions such as Operation Fish.
When the war was over, and the Allied Powers were desperate for economic stability, they created the “Bretton Woods” system, in which many countries pegged their exchange rates to the US dollar, and in turn, the dollar was pegged to the price of gold.