Money itself is as old as civilization, even in the most primitive societies, useful and valuable objects were used as means of payment. Natural or commodity money are generic terms for these early forms of money. In the course of history, a wide variety of things were used as money. These include food, farm animals, weapons, jewelry, clothing and also the shells of snails. Thus, the most widespread means of payment in terms of space and time is the cowrie snail, which is often mistakenly called 'cowrie shell'. Cowries, the most successful means of payment in world history to date, were used in large parts of Africa and Asia.
Findings in China even suggest that the cowrie shell was used as money there as early as the 2nd millennium BC. Usually, these types of money were bartered, meaning that you would need to exchange one good that you owned with a different good that you desired, making interchangeability a rough estimation game.
This money in kind or commodity money was replaced with increasing trade by coins, which had exclusively money function.
The first coins were struck in the kingdom of Lycia in the 7th century BC. These were shapeless lumps of electrons, a naturally occurring gold-silver alloy. Coinage made trade much easier, and so the new cultural technique of payment spread from Asia Minor to Europe in antiquity. Slowly, coins were also minted in Greece and Rome. Ancient rulers began to stamp their portraits on the coins, which were thus not only a means of payment but also image carriers. With the end of the Roman Empire in the 5th century AD, the ancient era of coinage also ended, and in late antiquity and the early Middle Ages, the circulation of coins throughout Europe declined sharply.
It was not until the High Middle Ages, in the 12th century, that the transition from a natural to a monetary economy took place again in Italy, and with it, coins reappeared. However, there was no longer a uniform coinage system as in the Roman Empire. Thus, in the Holy Roman Empire of the German Nation, which was characterized by small states, many different currencies circulated. In the late Middle Ages, the Rhenish florin finally prevailed as a kind of reserve.
Paper money as we know it today did not become established until relatively late. Yet paper money has appeared as a means of payment throughout history, for example in China in the 10th century AD. In Europe, it was introduced much later. It was not until the Bank of England in Great Britain adopted it that it succeeded in creating lasting public confidence in paper money. In 1833, the English government declared banknotes to be legal tender and thus became a pioneer. Due to the rapidly growing he supply of money was of essential importance. This led to a gradual move away from precious metal currencies. Coinage became small change.
Money, regardless of its shape or form, is often defined in terms of three functions or services:
Store of value:
value is upheld or increased over a long period of time.
Unit of account:
providing a common measure of the value of goods and services being exchanged and has to be fungible, divisible and countable.
Medium of exchange:
is an intermediary instrument or system used to facilitate trade of goods between parties.
Money can be any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another. In today’s world there are two traditional forms of money, fiat money and commercial bank money. Fiat money, in the form of notes and coins, receives its value because the government declares fiat money to be legal tender, which requires all merchants and traders within the country to accept it as a means of settling debt. By definition, fiat money has an intrinsic value, which is significantly lower. Its value is derived through supply and demand forces. This is the form of currency with which we are most familiar.
An additional form of money is commercial bank money which can be described as claims against financial institutions that can be used to purchase goods or services. What all these types of money have in common are the basic characteristics of money:
A unit of account
Legal tender status
Resistance to counterfeiting
To understand Bitcoin, it is crucial to read the Bitcoin whitepaper as Bitcoin is the most important crypto asset as measured by market capitalization. Note that you do not have to understand the technological parts in detail at this stage. Reading the white papers is supposed to provide a high-level overview of the intentions of Bitcoin and the mechanics of the technology.
Access the whitepaper here.
After reading through it, test your understanding with this quiz.
What are Bitcoin wallets and which kinds of wallets are there? To get an overview of this topic, listen to the Generation Blockchain Podcast Episode “Bitcoin Wallets”.
Example of a Bitcoin public key:
DO NOT SEND BITCOIN TO THIS ADDRESS, BITCOINS SENT TO THIS ADDRESS WILL BE IRREVERSIBLY LOST!
A public ledger records all Bitcoin transactions, and servers around the world hold copies of this ledger. The servers are like banks. Although each bank knows only about the money its customers’ exchange, Bitcoin servers are aware of every single Bitcoin transaction in the world. Any computer can set up a node. This is like opening your own Bitcoin bank instead of a bank account. Note that setting up a node is not equivalent to being a miner.
Around the clock and without downtime, people transfer Bitcoins through the Bitcoin network. On the public Bitcoin network, members mine for cryptocurrency by solving complex mathematical crypto calculations to create new blocks. Bitcoin mining is the process of providing computing power for transaction processing, securing and synchronizing the current blockchain status for all users on the network. Mining is a type of decentralized Bitcoin data center with miners all over the world. This process is called mining which is reminiscent of gold mining. Unlike gold mining, there is a reward for useful services in Bitcoin mining. The payout of the respective Bitcoin shares is based on the computing capacity provided. In 2022, the block reward for miners is 6.25 BTC per new block. Miners compete with one another to solve the calculation for the next block the fastest. The block of the miner that manages to solve the cryptographic calculation first is eventually recorded in the next block in the blockchain. The blocks of the other miners are invalid and cannot be appended to the chain. The block time which defines the time it takes to mine a block for Bitcoin is 10 minutes on average. All miners start to solve the puzzle simultaneously. The time to solve the puzzle depends on the current rate of difficulty. If relatively more miners are trying to solve the puzzle at the same time, it will be solved faster on average for a short amount of time until the level of difficulty adjusts to the total number of miners, evening out the block time of 10 minutes. New Bitcoins are not mined based on demand, the total amount of Bitcoin is fixed since its inception (at 21 million) and cannot be inflated by monetary tools. Traditional fiat currency systems, governments or central banks print more money when there is a need. Rather, Bitcoin is mined itself or in the cloud (cloud mining). The system broadcasts each new transaction publicly to the network which means that the nodes in the network share transactions with other nodes. A new block acts like the definitive account book of Bitcoin.