Evolution of money: Gold-pegged and fiat currencies have formed the backbone of the global economy for decades but with the advent of bitcoin and alt coins, an alternative financial system which is also known as decentralized finance (DeFi) is emerging. However, before discussing what cryptocurrency is all about and how it began, there’s the need to discuss how money came about from the use of gold and paper money (Fiat money).
Money serves as the principal measure of wealth and it is that commodity that is acceptable generally as a medium of exchange for any services rendered. The earliest forms of money were concrete as they were in form of an immediate utility that can be consumed and these were known as consumption goods which later changed to coins made from metals (capital goods).
The introduction of banknotes marked the transition from commodity money (for consumption goods) to representative money (for capital goods), since it only represents a peg to metal coins but has no intrinsic value. After the gold standard were abandoned, banknotes became fiat money, which are neither pegged nor possess intrinsic value.
What is Fiat Money?
In history, fiat money was sometimes issued by local banks and other institutions while in modern times, it is generally authorized by the government regulations. Therefore, Fiat money is a form of currency that is not backed by any commodity such as gold or silver. Rather, it is designated and issued by the government to be a legal tender.
Generally, fiat money does not have intrinsic value or use value, it only has value because it value depends on demand and supply, it is being used as a unit of account or a medium of exchange and this is because it is being agreed upon by the merchants and other people who use it.
Fiat money gives its makers (central banks) greater control over the economy as they are the ones who determines how much money gets printed and moved into circulation and this has put them in the better position of managing the interest rates and liquidity. Most modern paper currencies (U.S. dollar, the euro and other major global currencies) are fiat currencies.
Around 1,000 AD, fiat money was first used by China and it wasn’t until 18th century before the west followed suit and started using paper money. Fiat money became popular around the 20th century when President Richard Nixon, the U.S. president made a law that canceled the convertible of U.S. dollar into gold. The use paper-based fiat currencies that only serve as mode of payment has been used globally since then.
History of fiat money
The value of fiat Money is dependent on the performance of a country’s economy, the governance of the country and the effect this two factors has on the interest rates.
During the 10th century, fiat money originated from China as a result of high demand for metal currencies which has exceeded the supply of the metal currencies and bought about discomfort in the economy. As a way of improving the economy, the people readily accepted pieces of paper or paper drafts and traders started issuing private notes covered by a monetary reserve and this was considered to be the first legal tender as it was conferred to the ministry of finance then.
In the 18th century, the use of notes has travelled down to the west as American colonies, France and the Continental Congress started issuing bills of credit as the medium of payments and this issued notes were used to pay taxes to the authorities. The federal government issued united state notes during the American Civil War and this notes (a form of paper fiat currency) were popularly known as ‘greenbacks’.
The use of currency however gained it popularity after the cancellation of the convertibility of U.S. dollar into gold and by 1973, most developed nations were allowing their currency to move freely with variable exchange rates between most major currencies and by the 20th century, it has gained it ground.
Governments and banks had promised to convert notes and coins into nominal commodity in demand after world war 1. However, the costs of war and the repairs required coupled with the growth of economy based on government borrowing afterwards, made the governments to suspend what was promised. But in the vein of not being wary of the consequences of paying debts by consigning newly printed cash to their creditors, there was the result of hyperinflation.
Therefore, the issuing of too many notes generated to many controversies along the line as they came the problem of inflation. The notes depreciated and this brought about a hike in the commodity prices as the notes lost its value.
Fiat Money to Cryptocurrency
The evolution of currency from fiat money to cryptocurrency is made possible because of the generation of newer technologies and the world getting modernized. The journey of fiat to crypto didn’t just happen overnight, it’s however began due to the nationwide financial crisis which occurred between 2007 and 2010.
This crisis which contributed to the U.S. recession of December 2007 to June 2009 was triggered by a large decrease in home prices which led to mortgage delinquencies and the devaluation of housing related securities. The element of the crisis became visible during 2007 and by 2008, several major financial institutions has collapsed with significant disruption in the flow of credit to businesses and consumers, bringing about severe global recession.
In a way of solving this recession, the US developed a monetary policy where a central bank buys a predetermined amounts of government bonds in order to infuse liquidity directly into the economy. By 2009, 1 trillion of bank debt, mortgage backed securities and treasury notes was flown out into the market and this was repeated every year until 2012.
However, this monetary policy that was developed led to many problems and one of it notable issue was income and wealth inequality. In 2012, a Bank of England report showed that the policy had benefited the wealthy mainly.
Although, While all this was going on, there were those who were against the monetary policy and had no trust towards central bank owned currencies. One of them was Satoshi Nakamoto and he created Bitcoin in 2008 when the recession was at it peak.
The rise of Money to cryptocurrency
Cryptos were invented as technology started getting hyped and this digital assets popularity has increased since they were created. The idea of Cryptocurrency first emerged in 1983 when David Chaum, an American cryptographer published a conference paper outlining an early form of anonymous cryptographic electronic money. This concept was for currencies that could be sent in a manner that did not require centralized entities and can’t be traceable.
Chaum built on this ideas and developed a porto-cryptocurrency called Digicash in 1995. In 1998, a direct precursor to Bitcoin, Bit Gold, which required solving of cryptographic puzzles and receiving a reward was designed by Nick Szabo. However, this could not solve the double spending problem without the use of central authority.
In 2008, a person or group of people with the name Satoshi Nakamoto, set the history of cryptocurrencies and Bitcoin in motion. The Bitcoin white paper describing the functionality of the Bitcoin blockchain network was published and it should be noted that all cryptocurrencies wouldn’t be possible without blockchain technology which involves creating data structures that can’t be altered.
The bitcoin blockchain was launched when the first bitcoin block called the genesis block was created on the 3rd of January, 2009. Satoshi mined up to 1.1 million bitcoins in the first seven months following bitcoin’s launch.
In 2010, The availability to buy, sell and trade bitcoins on online exchanges started after the first real world financial transaction involving the use of bitcoin took place. This transaction was done by a Florida man who negotiated to pay 10,000 BTC for two John’s pizzas priced at about $25 and this transaction valued the price of one bitcoin at roughly a fourth of a cent.
In 2011, the price of bitcoin crossed the $1 threshold for the first time and also has its first competition in the crypto space which was the launching of Litecoin (LTC). By November, 2013, bitcoin prices has reached $ 1,000 and as it continued to rise, so does its visibility, popularity and volatility.
In 2015, bitcoin had another competitor and that was the Ethereum blockchain which went live. The bitcoin prices and trading volumes really started to snowball in the late 2017 and by 2018, the was the plagued by outright frauds and scams which brought about a collapse to it value and this dragged bitcoin prices down.
Bitcoin gained it ground again during the COVID-19 pandemic in late 2020 and eventually made it as high as $68,990 in November 2021. However, persistent elevated inflation prompted the federal reserve to aggressively tightened the monetary policy in early 2022 and this triggered sharp sell-offs in cryptocurrencies and other risky assets which brought about liquidity crisis that led to the collapse of billions cryptos.
The 2022 sell-off during the crypto winter didn’t affect bitcoin as it still remains one of the best-performing financial assets over the long term but it’s volatility still remains a hurdle.