When trying to understand Bitcoin people usually think of technology, cryptography, mathematics, computer science, economics, and even politics. There is no doubt that all of the things mentioned play an important role, but getting ahead of things often leaves these very fundamental questions forgotten.
Why Bitcoin?
What is its purpose?
What is the purpose that its creators wanted to achieve?
We have to dive into history, or at least into the philosophy of what money actually is.
What is money? What is currency?
Money, as most of us can conclude with common sense, responds to a need to overcome the fundamental problem of bartering. Bartering is important because by trading we can overcome the limits of individual consumption. Instead of producing and consuming something individually, we produce and trade with others. This way each individual can specialize in something that provides more value to the whole society.
But trading becomes complex when it is made between objects or services that have a different type of value for each player in the market. To overcome this problem that is generally called “double coincidence of wants” in the economy, a certain good that is exchanged more than others and is accepted more than others emerges from the market and becomes money. So money is something with the main function of helping trade.
However, there is a second function to money that is a bit less studied and a little less known, yet equally important. This function is also present in the case of Bitcoin. This is the function of saving, which is helped by money.
These two functions of money, the function of exchange and the function of saving are particularly effective when they occur together. However, these two values, these two functions of money seen together, create new problems.
One problem is that of censorship. That is when the number of people who want to exchange among themselves grows, so do communications and interactions to facilitate this market. This leads almost always to the temptation of some central players trying to control this market to increase their privileges.
The second problem is the problem of inflation. The problem with the production of money. If a form of money becomes a good saving tool, those who can produce this good that has been chosen by the market as money, are encouraged to produce more and more and more of it, thus creating a problem of inflation.
It is, therefore, necessary to understand the history of those goods that have become money. These goods had the characteristic of having their exchange difficult to censor and they were difficult to inflate if they were used for savings. Bitcoin, as we will discover, is exactly one of the forms of money that meet the criteria that money requires very well.
Pros and cons of gold.
At one point in history people begun to converge towards a particular good as money. The precious metal we call gold. Gold had certain fundamental characteristics working to its advantage. Gold is easy to divide, it is easy to exchange from hand to hand and it does not have a permanent label stating the name of the entity that owned it before. It is a so-called “bearer” tool. Very difficult to censor and track and also difficult to produce in unlimited quantities because of a relatively high cost of production.
So gold behaved as a currency difficult to inflate at will and difficult to censor at will. Still throughout history, gold has also shown its limitations.Physical gold can in certain situations be particularly difficult to recognize from false alternatives and gold can in some cases be also difficult to preserve. If we have millions of euros equivalent of purchasing power to move across a border, for example during political persecution, moving gold bars results very complicated.
The practical limitations of gold lead to people gradually creating tools to ease the verification process and the storage of this precious metal. But these tools practically always meant the creation of some trusted third party. The interesting thing is that over time, this tendency to use trusted third parties has increased exponentially. So much so that we have arrived at a recent chapter in which, today, money is simply a sheet of paper, or a number in a database, that has its only guarantor of value, the trusted third party.
Bitcoin disrupts this relationship and allows us to improve the transportability and storability of gold in its digital form. This becomes more necessary the more we enter the age of information and the age of the Internet, in where exchanging goods and services in exchange for physical gold would be absolutely anachronistic.
The Cypherpunk and digital gold.
A certain movement, born in the late 80s, with a particular name, Cypherpunk, dreamed of a form of money that would return the privacy and individual control typical to a physical gold coin, that can be exchanged from person to person without anyone censoring, spying on or tracing the exchange. With the addition that this money could also be used in the world of the Internet.
As previously discussed, physical gold cannot be sent easily from one country to another in a few seconds. Physical gold is anachronistic for the world of the internet. So instead the Cypherpunk dreamed of digital gold that would have the same characteristics of online payment, the same privacy characteristics of cash or gold coins, and that did not depend on any third party.
There is also another movement that dealt with the ease of which today’s money mass can be produced, inflated and manipulated. A school of thought that opposed this type of manipulation and tried to bring back the money to its inherent difficulty of creation, as in the case of gold. This movement sometimes referred to as the Austrian school of economics, that is the second line of thought that can be considered to be behind the research on Bitcoin.
Bitcoin is basically the fulfillment of the dreams of digital gold mentioned above. There were some more serious previous attempts aiming for the same goal. For example, PayPal, in the beginning, wanted to create a new type of money that was completely private and completely unmanageable. But these earlier attempts were run by centralized entities that were easy to influence and to stop if the end goal didn’t please regulators or whoever that had an interest in the status quo. Bitcoin instead manages to avoid these problems that previous candidates were unable to solve and has been overcoming all the obstacles on its way so far on its way “to the moon”.
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