The Bitcoin Revolution: Just Beginning

Author: Marius Farashi Tasooji, Translator: Qin Jin

To fully understand Bitcoin and what it means, you must first understand what value is and what money is. And what gives an asset value?

This question may seem silly, but it is actually very interesting. Our lives are determined by the prices of the items we consume or sell. However, do we really understand what value is and where value comes from? (I invite you to ask yourself this question before continuing to read. There is no wrong answer).

There are many ways to think about value:

1. Labor theory

This theory was proposed by classical economists and believes that the value of a good or service is determined by the amount of labor required to produce that good or service. Although this theory emphasizes labor value as the source of wealth, it does not consider factors other than labor when determining value. For example, it does not explain the value of a work of art.

2. Use value

This theory was proposed by neoclassical economists and believes that the value of a good or service depends on its utility to consumers. While this theory emphasizes the importance of satisfying consumer needs in determining value, it does not take into account broader economic and social factors that may influence demand.

3. Subjective Value

Developed by Austrian economists, this theory argues that the value of a good or service is determined by an individual’s subjective perception of its value. While this theory takes into account individual preferences and perceptions when determining value, it does not take into account broader economic and social factors that may influence perceptions.

4. Exchange Value

Developed by some economists, this theory argues that the value of a good or service is determined by the ratio of its exchange with another good or service. While this theory provides a clear way to measure the relative value of goods and services, it does not take into account broader economic and social factors that may influence exchange.

5. Scarcity Value

Developed by ecological and institutional economists, this theory argues that the value of a good or service is determined by its scarcity and opportunity cost. While the theory takes into account ecological and institutional factors when determining value, it does not consider broader economic and social factors that may affect scarcity.

Have you ever wondered if the currency you use is good money? What are the characteristics of good money?

1. Scarcity

Scarce currencies maintain their value by limiting their supply, which prevents the currency from depreciating (suffering from inflation) and ensures its stability. In addition, low supply encourages demand, which causes the currency to appreciate.

2. Divisibility

The divisibility of currency allows for transactions of different sizes, making it more practical and flexible when exchanging.

3. Portability

The portability of currency makes it easy to store, keep, and transport, making it easy to trade. This also facilitates long-distance transactions and allows currency to circulate between different regions.

4. Censorship Resistance

Censorship resistance guarantees financial freedom and transaction privacy. It also allows the operation of money without excessive restrictions or control by the government.

5. Durability

The durability of money allows it to maintain its value and utility over the long term, avoiding devaluation due to inflation, manipulation and/or technological obsolescence. This also guarantees user confidence and stability in the currency.

6. Verifiable

The verifiability of money ensures its authenticity and prevents counterfeiting, which is essential to maintaining the value of money, user trust and reducing the risk of fraud.

Here is a brief overview of the history of money:

1. Barter is a system in which two parties exchange goods or services without using money, and it has existed since ancient times.

In pre-monetary societies, barter was often the only available method of exchange, while today it is used more informally and in some cases as a substitute for money. For example, the Romans traded salt, which was scarce at the time, for Indian and Asian spices, which were also valuable. For centuries, trading salt for spices was one of the main forms of commerce in the region.

2. Shell money is a form of currency used by many ancient and tribal societies, using shells as a means of exchange and measurement of value.

The practice dates back thousands of years and is used by many different cultures around the world, including Africa, Asia, and South America.

For example, Native Americans such as the Iroquois, Algonquian, and Lenape used "wampum" before European colonization. Wampum is a belt or necklace made of shell beads that was used in business transactions, political agreements, religious ceremonies, and marriages. Their value depended on their rarity and quality, and they were considered a symbol of wealth and social status. Wampum was used until the late 18th century, when European coins began to replace them.

3. Gold has been used as currency since ancient times, first in the form of gold nuggets and later in the form of gold bars. The practice dates back thousands of years and was used by many different cultures around the world, including China, India, and the Mediterranean region.

4. Bullion currency is a form of money that has been used in many cultures around the world and has a fixed value for the weight and mass of gold. This practice was common in ancient times and continued until the adoption of the modern gold standard in the 19th century, with gold coins issued by countries, banks, and private institutions. For example, the United States' "Double Eagle" gold coin was issued from 1849 to 1933 with a face value of $20. This gold coin was widely used as a form of currency in the American West during the Gold Rush and the years that followed.

5. Paper money is money that is issued in the form of paper or paper money and represents a promise to pay by the issuing institution. This practice first appeared in China in the 7th century, but became increasingly important in the 18th century with the rise of central banks and the adoption of the modern paper money standard.

6. The gold standard is a monetary system in which the value of a currency is tied to gold. This system was widely used during the classical gold standard period, which lasted from the mid-19th century until World War I. An example of the use of the gold standard is the US Gold Standard Act of 1900, which established the gold standard as the basis of the US monetary system and fixed the price of gold at $20.67 per ounce.

7. A fiat currency system is a monetary system in which the value of a currency is determined by people's trust in the issuer of the currency, rather than by an intrinsic value such as gold. This system emerged in the 20th century with the rise of central banks and the end of the gold standard. Now, fiat currencies are everywhere around us: the euro, the dollar, the pound, and so on.

In the past, inflation simply referred to an increase in the money supply.

These two things may seem similar, but they are actually different. In fact, if the liquidity created by the central bank will be used to develop a new activity without affecting any other activities, the value of the currency will remain the same. When new liquidity is mixed with old liquidity, the value of the currency will fall, because the new liquidity will give users more purchasing power and they can consume more or more expensive things.

Therefore, we can say that an increase in the money supply leads to a decrease in the purchasing power of money, but it is not systematic.

The risk of increasing the money supply is that the currency depreciates more than expected, which may lead to hyperinflation.

Historically, periods of hyperinflation are almost always triggered by the concentration of monetary power. For example, Germany in the 1920s, Venezuela since 2016, etc.

Here are six very simple steps on how we go from inflation to hyperinflation:

1. Centralization of Monetary Power

When a country concentrates monetary power, it tends to push the limits by creating more liquidity, which is beneficial in the short term.

2. Loss of Confidence

Once a country starts to play by the rules, currency users lose confidence in the currency and start selling it in exchange for other assets and/or currencies.

3. Severe Devaluation

As fewer and fewer people want the currency, a selling force is created that causes it to depreciate directly.

4. Rising Consumer Prices

If a region’s currency depreciates, then actors in that region will lose purchasing power over the currencies of neighboring regions, which will increase the price of imported goods and increase the cost of living.

5. Government Agency Assistance

To help consumers, agencies provide financial assistance to residents and businesses, which helps them in the short term but creates more liquidity.

6. Increase the money supply

Such assistance will only support currency depreciation, because it is achieved by creating new liquidity or tax exemptions, which will increase their purchasing power in the short term, but will increase inflation in the medium term.

The only way out of the predicament is to experience a period of recession or financial crisis, or to completely change the monetary system: replace it with another currency, eliminate debts, etc.

Here is a brief summary of Bitcoin's history:

90 era

Cypherpunks is a privacy and network security defense movement that emerged in the 1990s, advocating the use of cryptography to protect personal data and communications. They are also the driving force behind the birth of Bitcoin.

October 31, 2008

In 2008, a person named Satoshi Nakamoto published the Bitcoin White Paper, describing the working principle of a peer-to-peer electronic payment system based on encryption technology and using a distributed database called blockchain. The publication of this article marked the birth of Bitcoin, an unverifiable currency.

January 3, 2009

The genesis block is the first block in the Bitcoin blockchain, mined by Bitcoin's creator, Satoshi Nakamoto, on January 3, 2009. This initial block quoted the front page of the Times that day, reporting the bank's collapse.

January 12, 2009

The first Bitcoin transaction took place on January 12, 2009 between Satoshi Nakamoto and developer and cryptography advocate Hal Finney. Satoshi sent Finney 10 Bitcoins, the first transaction recorded on the Bitcoin blockchain.

May 21, 2010

May 21 of each year is Bitcoin Pizza Day to commemorate the first time Bitcoin was used for a commercial transaction. On this day, Laszlo Hanyecz bought two pizzas for 10,000 Bitcoins, which would be worth millions of dollars today.

December 12, 2010

The disappearance of Satoshi Nakamoto, the creator of Bitcoin, is an unsolved mystery. Starting in December 2010, Satoshi Nakamoto stopped participating in the development of Bitcoin and gradually disappeared from public life. Although several people have claimed to be Satoshi Nakamoto, his identity remains unknown to this day. Satoshi's disappearance made Bitcoin a decentralized, autonomous currency without central influence or control, which strengthened users' confidence in the technology. From then on, neither Satoshi nor anyone else could attack the Bitcoin network, and disappearance was a way to eliminate its greatest weakness.

Bitcoin's many innovative features allow it to compete fiercely with the current monetary system.

First, the limit of 21 million units guarantees that Bitcoin is a finite asset, shielding it from potential inflation and providing a long-term monetary stability.

In addition, Bitcoin's decentralization makes it resistant to censorship, which means that Bitcoin is not controlled by any entity and cannot be manipulated by any government or individual, providing stability and financial freedom to its users.

However, Bitcoin's price volatility is also a factor that hinders its application. Although price volatility will gradually decrease over time and will continue to decrease as Bitcoin's valuation increases and adoption increases, price volatility is still an obstacle to overcome for most people to fully accept Bitcoin and use it as an alternative to the traditional monetary system.

Today, more than 400 million people are using cryptocurrencies, accounting for about 5% of the world's population. Usage varies from person to person, but it mainly depends on their quality of life.

1. In 2021, El Salvador became the first country in the world to accept Bitcoin as legal tender. El Salvador now has two currencies: US dollars and Bitcoin.

The adoption of Bitcoin mainly brings two benefits to the population.

First, it allows 70% of people who do not have bank accounts to use Bitcoin addresses that are safer and more efficient than cash.

Second, more than 22% of El Salvador’s GDP comes from abroad, from immigrants (mostly in the United States) who send remittances to their families, which requires huge transaction fees (20% to 50%) and takes days to complete. Bitcoin is a way to transfer remittances instantly for just a few cents.

2. In Iran, facing severe inflation and international sanctions, Bitcoin has become an important financial tool. As the Iranian rial faces a sharp depreciation, Bitcoin provides stability and a hedge against inflation.

Bitcoin enables Iranians to bypass sanctions restrictions on the banking industry, conduct international transactions and access global markets. In addition to its financial uses, Bitcoin represents a form of digital freedom and a silent protest against government control, reflecting a shift toward a culture of autonomy.

Therefore, in a challenging economic environment, Bitcoin has become a symbol of the resilience, innovation and empowerment of the Iranian people.

Bitcoin significantly facilitates international transactions, avoids excessive control by certain governments, and so on.

In summary, Bitcoin offers several advantages over the traditional banking system, including greater security, lower transaction fees, resistance to censorship, greater privacy, and global accessibility.

Bitcoin transactions are also irreversible, meaning chargeback fraud is impossible.

In addition, Bitcoin users do not need a traditional bank account to send and receive payments, which provides more financial services to the millions of people around the world who do not have traditional bank accounts.