Cryptocurrency: Has Money Finally Matured?
The invention of Bitcoin and other cryptocurrencies marks an important step in the development of financial systems, but also a conceptual leap for money itself. Just like with credit cards or bank transfers, transactions are still a promise of payment and no one ever actually sees a physical coin. So what makes Bitcoin such a step forward for currency as a whole?
Historically, money was invented as a means of extending and standardising trade. Before coins were used, most societies relied on complex systems of gift economics, debt and barter. Within communities, the first two were more common. Gift economics is the act of giving goods in exchange for an unspecified future return; debt is the act of supplying needed goods in anticipation of getting them back later (usually with interest). Surprisingly, barter was less common than most people think and existed primarily between strangers and potential enemies.
These exchange systems relied heavily on social factors and were slowly replaced by coins that were made of valuable materials and which represented standard amounts of a given commodity. Many modern currencies still have the same words for monetary units as were originally used – shekels and pounds were both weights before becoming monetary units, for example.
As coins became more prevalent and banks appeared, paper money came into existence. This marked the next step in the development of currency, as money moved from using physical units to symbolic units: bank notes represented a promise of payment rather than an actual pile of coins. The paper itself had little intrinsic value, but the bank’s promise to supply a certain amount of coinage in exchange for the signed note represented financial worth. British bank notes still have the words “I promise to pay the bearer on demand the sum of” printed at the top, before the note value.
Money didn’t change for a long time after bank notes were commonly accepted. Over a thousand years passed before the next big conceptual advancement was made: the introduction of charge cards, credit cards and debit cards in the twentieth century.
“Plastic money” takes the next step along the path of symbolic currency because there is no longer any physical exchange of money. The buyer hands a piece of stamped plastic to the seller, who accepts it as a promise of payment. The buyer then gets the card back. There is no physical exchange of money: everything takes place electronically, behind the scenes, as funds are transferred from one bank account to another.
Bitcoin transactions work in the same way as card payments. So why are cryptocurrencies so important in the development of money? There are three main reasons: they are not based on any commodity, they are not controlled by any government and they do not use banks.
Bitcoins and other cryptocurrencies are traded and exchanged all over the world without having any fundamental, real-world value. They are only worth something because the community says they are, not because there’s a certain amount of gold stored somewhere to back the currency.
The online community also manages, controls and uses cryptocurrencies without any external intervention. No one sets interest rates or inflation rates. No one decides to print more money, to devalue the currency or to manipulate national debt to influence its worth. The entire system is self-contained and self-sustaining, outside of the influence of “the powers that be”.
Cryptocurrencies are stored in each individual’s electronic “wallet”. There are no banks to hold coins. Bitcoin users actually own and hold their own money, just like cash, but can use it anywhere in the world, just like “normal” electronic funds.
For the first time in history, the entire population of the planet has a worldwide currency available to them that they can hold for themselves, without being forced to rely on bankers, governments or anyone else. This is a massive conceptual leap. Money has finally matured.