Money isn’t real, but the trust we place in it is.
Let me explain how we got here, and why Bitcoin is challenging the way it works.
Barter
Thousands of years ago, people exchanged things through barter.
It all started with specialisation: the baker made bread, the butcher prepared meat and the woodcutter chopped wood.
I exchanged what I had for what someone else had.
Everyone focused on what they did well, then traded with others to meet their needs.
But the system had limits.
What if nobody wanted what I produced right then?
What if my speciality wasn’t useful?
I’d be left without a solution, struggling to survive.
Even a surplus of resources could be a problem.
If I couldn’t preserve them, they would eventually go to waste or be destroyed.
That’s where a world-changing solution appeared: money.
Money
People quickly realised that money had to serve several purposes.
It needed to be:
- Easy to exchange
- Easy to carry
- Able to hold its value
As you can imagine, a cow would make a terrible currency.
Bulky, difficult to move and not particularly easy to preserve.
Instead, people chose valuable, durable things such as shells, salt or rare stones.
Some were chosen because they also had a practical use.
Salt, for example, preserved food.
Others, such as precious stones or shells, had no real function beyond serving as money.
Their value came from an unspoken agreement:
"We agree that this object has value, and we’ll use it to trade."
Keep that principle in mind.
That changed everything.
I could sell what I produced for money, then use it to buy what I needed from someone else.
The move to paper money
Every new solution brings new problems.
Carrying large quantities of precious stones, shells or salt wasn’t practical or safe.
Especially when people with bad intentions wanted to take them...
Once again, people came up with an answer.
Early banks, churches and some merchant guilds began offering an ingenious system:
Deposit your wealth somewhere safe in exchange for a receipt proving it was stored there.
This time, the system rested on a promise:
"I trust this organisation to return my wealth when I need it."
No more carrying gold or salt. A piece of paper was enough to claim what I was owed.
Handy, right?
More problems
It worked for a while, but new problems emerged.
What if the custodian lost my money?
Worse, what if it forged currency or issued receipts without holding the assets to back them?
Unsurprisingly, some banks began issuing more receipts than they had resources.
When too many people came to claim their property at once, the banks couldn’t deliver.
Centralisation
To prevent these abuses, states began taking control of the monetary system.
A larger authority with stronger guarantees needed to step in and keep things in check.
Kings, then governments, began centralising the issuing of money.
They took control of major banks and started issuing their own notes, backed by the state’s gold or silver reserves.
But why believe them this time?
Because, in theory, if an authority with power, and especially an army, tells me this paper is worth something, I can trust it.
That guarantee helped paper money take hold.
When money stops being backed by something real
Initially, every state-issued note was backed by physical reserves.
A corresponding quantity of gold or silver was stored somewhere for every note in circulation.
That was the gold standard.
Over time, though, states started moving away from it.
Why?
Gold was limited. The state’s needs weren’t.
A government wanting to fund a war or revive its economy needed to create more money than its gold reserves allowed.
Little by little, governments abandoned the idea of backing their currencies with gold.
The paradox: we’re asked for more and more trust in something that becomes less and less tangible.
Fiat money
Today, the money we use rests entirely on trust in the state and the system.
That’s called fiat money.
A €500 note is just a piece of paper.
But it’s a piece of paper the European Union recognises as having that value.
And the value holds as long as our trust does.
With this complete centralisation, governments and central banks hold enormous power:
- They set the rules for the whole financial system
- They control the amount of money in circulation
- They can create money out of nothing
The criticism
Enormous power brings the potential for abuse, and criticism of how it’s used.
The main objections?
Central banks can create money as they please.
Some people believe that reduces the value of what they already own.
That’s the idea behind inflation.
Then there’s the fact that I have no control over this system.
Decisions on interest rates or printing money are made by a small group of people, such as the FOMC in the United States.
Where do I fit in? I deal with the consequences.
Finally, everything relies on a centralised system.
So centralised that if it weakens, everything collapses and we get financial crises.
But what if we could avoid all that?
Bitcoin
In 2009, Satoshi Nakamoto launched a project claiming to solve those problems:
The basic idea is radical: an independent currency.
Independent of governments, banks and even a single central authority.
No need to trust someone to guarantee its value.
The rules are built into the system, and the system is designed to run on its own.
Why is it "different" this time?
A decentralised currency
Bitcoin runs on a global computer network.
Every transaction is recorded in a system called the blockchain.
- No bank needed to verify exchanges
- No gold reserves needed to guarantee value
Above all:
- Bitcoin can’t be created endlessly. The limit is 21 million
- Transactions can’t be altered or falsified
- Anyone can join the network without permission
Unless half the computers on the network agree, no change is possible.
If it still hasn’t clicked, I’ll leave you with this quote from Naval Ravikant:
"Think of Bitcoin as a completely decentralised bank account in the cloud: neither the Swiss government nor the US government controls it. All the participants in the network enforce it."
I’ve simplified complex ideas to make them accessible. Some deserve a fuller explanation.