You know… there’s really nothing like seeing your friend’s name on a book, let alone two. I’m so proud of Timi and Tomiwa!
The Little Bitcoin Book is an adventure to a future where the money we use is created and maintained by individuals, not governments. It paints a picture of why Bitcoin is — or at least can be — the future of money.
What is money? Money is a medium of exchange that enables people to trade value. Think of it this way: if you have a valuable skill or property, you can convert it to money and then use the money to exchange for another person’s valuable skill or property.
Say… you create value by planting yams and I create value by building houses. If you wanted me to build you a farmhouse, it may be really difficult to estimate how many yams that’ll cost. And maybe I’m allergic to yams, so I don’t even want yams.
What we can do is to use a scarce, trusted and valued commodity, like gold, to do the exchange. You exchange some of your yams for gold and offer me some for my house-building skills. In changing your yams to gold, you’ve used gold as a store of value, and in listing my price in gold, I’ve used it as a unit of account.
This is a really dumbed down version of how money works.
In the past, we used natural resources like cowries, salt, copper and gold as money. They were effective because they were rare and, at the time, difficult to produce. Take gold for example: you mostly can’t find it lying around and you have to put in significant work to mine it. The scarcity of deposits, the effort required to mine it and demand for its lustre and density make it great as money.
But over time, rare natural resources lost efficacy as money. Some, like salt, became easier to produce with new technology. Others, particularly rare metals, were really uncomfortable for large transactions, being very heavy¹ and insecure to carry around.
Between 618 and 907 C.E., a money revolution took place in China². During the Tang dynasty, considered to be a highlight of Chinese civilization, merchants figured out a more efficient way to trade.
They’d deposit their coins with a trusted source and, in turn, get a promissory note (a paper receipt) basically saying:
I own this amount in coins.
- Signed, Trusted Source
This paper receipt was not just tons lighter but also much safer for transactions. As long as all parties involved trusted the source, the paper receipt was just as valuable as physical money.
This early use of paper money continued to flourish in China over the next few dynasties, so much so that during the Yuan dynasty, 500 years after Tang, Kublai Khan, the Emperor, made paper money the sole medium of exchange.
When Marco Polo, the Venetian traveller, visited Kublai Khan, he found out about this. He was thoroughly impressed and took this back to Europe from where it spread to the rest of the world.
In Chapter 24 of The Travels of Marco Polo³, he writes so excitedly:
With these pieces of paper, made as I have described, he causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends.
And nobody, however important he may think himself, dares to refuse them on pain of death. And indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan’s dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold.
And all the while they are so light that ten bezants’ worth does not weigh one golden bezant.
The rest, as they say, is history.
Today’s money, in the physical form of paper bills and coins, is known as fiat, Latin for “by decree”. Most countries have their own currency and some share, in what is known as a currency (or monetary) union.
With fiat currencies, paper money evolved from being just a receipt to being money in itself, backed by law. In the early days, people trusted paper money not only because governments said so but also because it was backed up by actual deposits of gold. For example, under the Gold Reserve Act, the US dollar was fixed at $35 per ounce of gold⁴.
In 1914, this started to change, primarily because of World War I. Countries needed more flexibility for their war shopping and many began to use the currencies of other (more powerful) countries for their reserves, instead of gold. The currency of choice was the US dollar.
Eventually, the US and then the world freed fiat money from the dependency on gold. Today, a complex system of economics and trade determines the value of one fiat currency against the other.
Such is the brilliance of humanity.
An institution called a central bank regulates the value of a currency by manipulating the supply — buying, selling, printing. This institution also sets the value of the currency compared to others, its exchange rate. The seed that sprouted in Ancient China has grown into an immense global network of currencies, most dominant of which is still the US dollar⁵.
The preamble so far is supposed to make one point: money is an idea, it can change, and over the centuries, it has, in fact, changed to better meet our needs.
What we know as money today is only an evolutionary outcome.
In a nutshell, The Little Bitcoin book is an introduction to a new type of money: Bitcoin.
Humanity has taken the learnings from our last money innovation and come up with a better solution. But first, what is really wrong with fiat money?
1. Restricted freedom
Because fiat money depends on a formal system of banks, many people across the world, especially women, are economically abused⁶ by spouses and family members who prevent them from opening bank accounts.
Also, governments can always restrict access to fiat money since it’s really their money anyway. An “agreeable” use case for this would be to punish bad actors, but power is bound to be abused. With fiat money, the freedom for well-meaning people to use money or move it across borders can be severely restricted by governments for personal or political reasons.
2. Mismanaged currencies
Sam Ewing describes inflation as “when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair”.
As an economy grows, inflation is bound to happen. Governments need more money to run the economy, so they print more. Creating money from thin air depreciates the value of existing money, because, demand and supply. This classic case of see-finish is why the US dollar, for example, has lost about 97% of its value since 1914.
The role of central banks is to keep this loss of value down to about 2% every year. However, many countries are badly managed and do much more poorly than this. The Naira’s current inflation rate, in comparison, is currently at 18%, and in an extreme case, the Venezuelan Bolivar lost 53,798,500%⁷ of its value between 2016 and 2019, what is known as hyperinflation.
In an increasingly global world, it’s an increasingly bad financial decision to tie your fortunes to a poorly managed fiat currency.
3. Government surveillance
If the cost of using fiat money as cash is the sheer bulk of it, the cost of using it in digital form is privacy. Fiat money today has ushered in new levels of government surveillance. It’s great that you can pay for the train with your card, but now the government knows everywhere you go.
The world is pushing for cashless societies, but the advantages of a cashless society⁸ like reduced cost and economic data come with big problems of government surveillance. In fact, there are entire websites dedicated to making the case for why cash matters.
So, how do we move forward from fiat money?
We take its best parts—ease, speed of transactions, trustworthiness and security, and combine it with features like privacy, fixed supply and decentralization.
In other words, we invent Bitcoin.
Bitcoin is like gold, but instead of mineral deposits scattered across the world, the resource here is rare numbers. Yes, mathematics.
Bitcoin miners invest in powerful computers that can compute these rare numbers. The reward for doing this work is bitcoins. So, much like gold again, all bitcoins start out as the property of miners.
Bitcoin is based on complicated cryptography, invented in 2008 by an unknown person or group called Satoshi Nakomoto. It isn’t the only type of digital currency—and in fact, there are more than 6,000 of them today—but it most suitably meets the economic preconditions of money:
Store of Value
This the most popular Bitcoin use case today. Millions of people all over the world today have bitcoins stored either on the internet in digital wallets or on physical flash drives, which is known as cold storage.
Medium of Exchange
This is the most impactful feature of Bitcoin because it allows cross-border money exchange as never seen before. Bitcoin is a truly global currency because it isn’t tied to any country. You can carry your bitcoins anywhere in the world and the value remains the same.
You can transfer bitcoins between countries in mere minutes(!), and multiple Bitcoin exchanges let you change it into fiat currency for daily spending. Consumer products like Buycoins and Cash App have also created pleasant product experiences for sending and receiving bitcoins.
Unit of Account
This is the least successful money function of Bitcoin today.
For Bitcoin to truly replace money, it needs to also be usable for daily spending. A handful of popular companies like Wikipedia and Microsoft accept bitcoin payments⁹, but most people will change their Bitcoins to fiat currencies before spending.
So, yes Bitcoin is money, but does it solve the problems of fiat money? The Little Bitcoin Book says yes, yes it does!
Bitcoin can be created anywhere in the world given sufficient computing resources. It relies on a network of people to function and as such is not controlled by any government.
This lack of central control means that individuals with bitcoins have complete ownership of their money. The book gives an example of Roya Mahboob, CEO and president of the Digital Citizen Fund, who, in 2014, started paying female employees in Bitcoin.
Bitcoin has a monetary policy written in code—only 21 million can be created, ever. This finite supply means that Bitcoin is immune to government-induced inflation.
Bitcoin is a very interesting technology. Although all transactions are publicly recorded, you don’t need any personally identifiable information to participate.
There’s a lot more about Bitcoin that’s explained in The Little Bitcoin Book, and you should get one for yourself, but here’s my takeaway:
- Bitcoin is an incredible technology, and whether it eventually replaces fiat money or compliments it as it does today, it is a successful model for what money can be.
- Although in theory, anyone in the world can create Bitcoin, in reality, it is dominated by men¹⁰ and organizations with massive computing power. Even so, it is undoubtedly more participatory than government money. It is maybe the most significant democratic invention since the USA.
- Bitcoin is very young and should be treated as a model to be continually improved. In comparison, although the basic form of the Internet (ARPANET) was created in October 1969¹¹, the Internet didn’t become global until the 1990s.
- There are several thousand other cryptocurrencies that serve various functions, but Bitcoin uniquely has the sweet combination of features that makes it a plausible model for universal, decentralized money.
- The fluctuating price of Bitcoin today is a function of user behaviour and not the technology in itself. More people are HODLing the currency for short-term investments than are spending it as money.
- Another big hurdle for Bitcoin to solve is accessibility. It is still very confusing to people who aren’t technology literate, and even worse for the handicapped¹².
Personally, I can’t wait to see how Bitcoin evolves over the next couple of years, but now I’m truly now invested in it as the future money and less as a money-making scheme.
Long live Bitcoin, and thank you, Timi and friends!
Buy The Little Bitcoin Book: https://www.amazon.com/Little-Bitcoin-Book-Matters-Finances-ebook/dp/B07W957N7T
¹ How heavy is gold? (Quora)
² The First Paper Money (Time)
³ The Travels of Marco Polo (Wikisource)
⁴ Gold Standard (Investopedia)
⁵ How the US dollar became the world’s reserve currency (Investopedia)
⁶ Economic Abuse (Wikipedia)
⁷ BCV Hyperinflation (Venezuela al Dia)
⁸ Cashless Society (Wikipedia)
¹⁰ Only 8.5% of Bitcoin traders are women (Bitcoin.com)
¹¹ Internet Timeline (Finding Ctrl)
¹² Bitcoin should be accessible to the visually impaired (Coindesk)