Bitcoin Revolution: Just Getting Started
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Bitcoin Revolution: Just Getting Started
Do we truly understand what value is and where it comes from?
Navigating Web3 tides with focused insightsAuthor: Marius Farashi Tasooji
Translation: Qin Jin
To fully understand Bitcoin and its implications, one must first understand what value is, what money is, and what gives an asset value.
This question may seem silly, but it's actually very interesting. Our lives are shaped by the prices of goods and services we consume or sell. Yet, do we truly understand what value is and where it comes from? (I invite you to ask yourself this question before continuing—there are no wrong answers).
There are many ways to think about value:
1. Labor Theory
This theory, proposed by classical economists, holds that the value of a good or service is determined by the amount of labor required to produce it. While this theory emphasizes labor as a source of wealth, it does not account for factors beyond labor in determining value. For example, it fails to explain the value of artwork.
2. Use Value
Proposed by neoclassical economists, this theory suggests that the value of a good or service depends on its utility to consumers. While it highlights the importance of satisfying consumer needs in determining value, it overlooks broader economic and social factors that might influence demand.
3. Subjective Value
Developed by Austrian economists, this theory argues that the value of a good or service is determined by individuals' subjective perception of its worth. While it incorporates personal preferences into value determination, it does not consider wider economic and social influences on those perceptions.
4. Exchange Value
Put forward by some economists, this theory states that the value of a good or service is determined by its exchange ratio with another good or service. While it offers a clear method for measuring relative value, it ignores broader economic and social factors affecting exchanges.
5. Scarcity Value
Proposed by ecological and institutional economists, this theory maintains that the value of a good or service is determined by its scarcity and opportunity cost. While it accounts for ecological and institutional factors in valuation, it does not address broader economic and social forces influencing scarcity.
Have you ever considered whether the money you use is good money? What characteristics define good money?
1. Scarcity
Scarce money maintains its value by limiting supply, preventing devaluation (inflation) and ensuring stability. Low supply also encourages demand, potentially leading to appreciation.
2. Divisibility
Divisibility allows money to facilitate transactions of varying sizes, making it more practical and flexible in exchange.
3. Portability
Portability makes money easy to store, carry, and transport, facilitating trade. It also enables long-distance transactions and circulation across regions.
4. Censorship Resistance
Censorship resistance ensures financial freedom and transaction privacy. It also prevents excessive government control or interference in monetary operations.
5. Durability
Durability allows money to retain value and functionality over time, protecting against depreciation due to inflation, manipulation, or technological obsolescence. It also sustains user confidence and stability.
6. Verifiability
Verifiability ensures authenticity, prevents counterfeiting, and is crucial for maintaining value, user trust, and reducing fraud risks.
Here’s a brief overview of the history of money:
1. Barter
Barter is a system in which two parties exchange goods or services without using money. In pre-monetary societies, barter was often the only available method of exchange. Today, it persists informally and sometimes serves as an alternative to money. For example, Romans traded rare salt for equally valuable spices from India and Asia. Salt-for-spice trade remained a dominant commercial practice in the region for centuries.
2. Shell Money
Shell money was a form of currency used in many ancient and tribal societies, employing shells as a medium of exchange and measure of value. This practice dates back thousands of years and was common across diverse cultures in Africa, Asia, and South America.
For instance, before European colonization, Native American tribes such as the Iroquois, Algonquin, and Lenape used "wampum." Wampum consisted of belts or necklaces made from shell beads, used in commercial transactions, political agreements, religious ceremonies, and marriages. Their value depended on rarity and quality, symbolizing wealth and social status. Wampum remained in use until the late 18th century, when European coins gradually replaced them.
3. Gold
Gold has been used as money since antiquity, initially in the form of gold nuggets, later as ingots. This practice dates back thousands of years and was widespread across many cultures worldwide, including China, India, and the Mediterranean.
4. Gold Coin Currency
Gold coin currency, used across many cultures globally, assigned fixed weight and purity-based value to coins. Common in antiquity, it continued into the 19th century with the adoption of modern gold standards. Coins were issued by states, banks, and private institutions. For example, the U.S. "Double Eagle" gold coin, minted from 1849 to 1933, had a face value of $20. It was widely used as currency in the American West during the Gold Rush and afterward.
5. Paper Money
Paper money refers to currency issued in paper form, representing a promise of payment by the issuing institution. First appearing in 7th-century China, it gained prominence in the 18th century with the rise of central banks and the adoption of modern fiat systems.
6. Gold Standard
The gold standard is a monetary system where currency value is pegged to gold. Widely used during the classical gold standard era—from the mid-19th century to World War I—an example is the U.S. Gold Standard Act of 1900, which established the gold standard as the foundation of the U.S. monetary system, fixing gold at $20.67 per ounce.
7. Fiat Currency System
A fiat currency system is one in which money's value is determined by public trust in the issuer, rather than intrinsic value like gold. Emerging in the 20th century with the rise of central banks and the end of the gold standard, fiat currencies are now ubiquitous: euro, dollar, pound, etc.
In the past, inflation simply referred to an increase in the money supply.
These two concepts may seem similar, but they are different. In fact, if newly created liquidity from central banks funds new activities without displacing others, the currency's value remains unchanged. However, when new liquidity mixes with existing money, purchasing power diminishes because users gain extra buying capacity, allowing them to consume more or higher-priced goods.
Thus, while increased money supply can lead to reduced purchasing power, this effect is not automatic.
The risk of increasing money supply lies in excessive devaluation, potentially triggering hyperinflation.
Historically, periods of hyperinflation have almost always stemmed from centralized monetary power—for example, Germany in the 1920s, Venezuela since 2016.
Here is a simple six-step process showing how inflation escalates into hyperinflation:
1. Centralization of Monetary Power
When a nation centralizes monetary authority, it tends to push limits by creating more liquidity, which appears beneficial in the short term.
2. Loss of Confidence
Once the state begins manipulating the system, users lose confidence in the currency and start selling it for other assets or currencies.
3. Severe Depreciation
As fewer people want the currency, a sell-off dynamic emerges, directly causing depreciation.
4. Rising Consumer Prices
When a region's currency depreciates, its actors lose purchasing power over neighboring currencies, raising import prices and increasing the cost of living.
5. Institutional Aid
To assist consumers, institutions provide financial aid to residents and businesses. This helps in the short run but creates additional liquidity.
6. Increased Money Supply
This aid only fuels further depreciation, as it is funded by creating new liquidity or tax exemptions—boosting short-term purchasing power but worsening inflation over time.
The only way out is either enduring a period of recession or financial crisis, or completely overhauling the monetary system—replacing it with another currency, eliminating debt, etc.
Here’s a brief summary of Bitcoin’s history:
1990s
Cypherpunks were a 1990s movement advocating privacy and cybersecurity through cryptography to protect personal data and communications. They were also instrumental in Bitcoin’s creation.
October 31, 2008
In 2008, a person or group under the pseudonym Satoshi Nakamoto published the Bitcoin whitepaper, describing a peer-to-peer electronic cash system based on cryptographic techniques and using a distributed database called blockchain. This publication marked Bitcoin’s birth as untraceable digital money.
January 3, 2009
The genesis block—the first block in the Bitcoin blockchain—was mined by Satoshi Nakamoto on January 3, 2009. This inaugural block included a reference to the front page of The Times newspaper that day, reporting on bank failures.
January 12, 2009
The first Bitcoin transaction occurred on January 12, 2009, between Satoshi Nakamoto and developer and cryptographer Hal Finney. Nakamoto sent 10 bitcoins to Finney—recorded as the first transaction on the Bitcoin blockchain.
May 21, 2010
Every May 21 is celebrated as Bitcoin Pizza Day, commemorating Bitcoin’s first commercial transaction. On this day, Laszlo Hanyecz bought two pizzas for 10,000 bitcoins—now worth hundreds of millions of dollars.
December 12, 2010
The disappearance of Bitcoin’s creator, Satoshi Nakamoto, remains a mystery. Starting December 2010, Nakamoto ceased involvement in Bitcoin development and gradually vanished from public view. Though several individuals have claimed to be Nakamoto, his true identity remains unknown. Nakamoto’s exit transformed Bitcoin into a decentralized, autonomous currency free from central influence or control, boosting user confidence in the technology. Since then, neither Nakamoto nor anyone else could attack the Bitcoin network—his disappearance eliminated its greatest vulnerability.
Bitcoin’s numerous innovative features enable it to compete fiercely with the current monetary system.
First, the cap of 21 million units ensures Bitcoin is a finite asset, immune to potential inflation and offering long-term monetary stability.
Moreover, Bitcoin’s decentralization makes it censorship-resistant—uncontrolled by any entity or manipulatable by governments or individuals—providing users with stability and financial freedom.
However, Bitcoin’s price volatility remains a barrier to adoption. Although volatility decreases over time and will continue to shrink as valuation and adoption grow, it still presents a hurdle to overcome before Bitcoin gains widespread acceptance as an alternative to traditional monetary systems.
Today, over 400 million people use cryptocurrency—about 5% of the global population. Usage varies by individual, but largely depends on their quality of life.
1. In 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender. El Salvador now has two official currencies: the U.S. dollar and Bitcoin.
Adopting Bitcoin brings two main benefits to the population.
First, it provides 70% of the unbanked population access to Bitcoin addresses, which are safer and more efficient than cash.
Second, over 22% of El Salvador’s GDP comes from abroad, primarily remittances from migrants (mainly in the U.S.) sending money home, which involves high fees (20% to 50%) and takes days to settle. Bitcoin enables instant transfers for just a few cents.
2. In Iran, facing severe inflation and international sanctions, Bitcoin has become a vital financial tool. With the Iranian rial suffering sharp devaluation, Bitcoin offers stability and inflation hedging.
Bitcoin enables Iranians to bypass banking restrictions imposed by sanctions, conduct international transactions, and access global markets. Beyond finance, Bitcoin represents digital freedom and silent resistance against government control, reflecting a shift toward self-governance.
Thus, in challenging economic conditions, Bitcoin has become a symbol of resilience, innovation, and empowerment for the Iranian people.
Bitcoin has significantly facilitated international transactions and helped avoid excessive control by certain governments, among other benefits.
In summary, compared to traditional banking systems, Bitcoin offers multiple advantages: higher security, lower transaction fees, censorship resistance, stronger privacy, and global accessibility.
Bitcoin transactions are also irreversible, eliminating the possibility of refund fraud.
Additionally, Bitcoin users can send and receive payments without needing a traditional bank account, providing greater financial inclusion for hundreds of millions worldwide who lack access to conventional banking.
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