To better understand the ongoing evolution of digital currency, it is essential to understand the origin and purpose of the traditional money we have always known.

Definition of Money

Money is the means of payment used to carry out a purchase or sale transaction. Usually, it is in the form of a material object, made out of metal or paper, that is given a conventionally recognised value

Before Money

Bartering

The economy, in its primordial form, was characterised by the medium of barter and the end of self-sufficiency.

Since the dawn of mankind, in fact, people have exchanged food, leather, utensils, jewellery and everything that could be used for living. Each family unit produced what it needed and exchanged what it lacked.

This system quickly proved ineffective because what a family had to offer might not serve the community or local merchants. Conversely, what communities and merchants offered may have been useless to a family.

For example. A wool cloth merchant barters with an egg farmer. This hypothetical exchange could happen without problems in February but the merchant would have serious problems bartering his goods in the summer.

If this simple principle is backdated to a few thousand years ago, it is easy to imagine how, as trade progressed and crafts specialised, the oldest human societies felt the need to replace bartering with more articulated forms of exchange. At this point, objects no longer passed from one person to another for their value of use (I give you an apple for an egg to eat what I cannot produce myself) but for their value of exchange (a sheep or a cow can produce milk and tomorrow they can be resold or slaughtered).

The great transformations of currency

Money, before becoming what we know today, was many things: cattle, salt, feathers or shells.

The idea of transforming precious metals into small circular discs arrived only in the 6th century B.C. in Turkey and only 200 years later it spread in the Hellenic world and in the south of Italy. All in all, only 2400 years have passed since money came to exist as we know it today.

The first forms of banknotes were born, instead, in China about 2500 years ago. They were paper deposit receipts used as a method of payment. These receipts represented a number of precious metals that the merchant could withdraw by presenting the banknote.

The diffusion of banknotes coincided with the birth of banks in Europe around the 18th century.

Until the 20th century, most national currencies remained linked to the value of gold, this was called “Gold Standard“. Every central bank, therefore, had a reserve of gold which gave the right to a certain amount of credit in the form of banknotes or deposits. In addition to being the natural evolution of the ancient monetary system, the principle of the Gold Standard provided a fixed exchange rate between different currencies, thus increasing stability.

From 1971 with the end of the Bretton Woods agreements, the currency that relied largely on its intrinsic value, mostly gold and silver, was declared inconvertible and began to be coined virtually. From that moment on, all coins became fiduciary, i.e. without an intrinsic value.

For example, a 100 euro note has no value in itself and does not correspond to any equivalent gold reserve, it is just a piece of paper. A 100 euro note is valid for its purchasing power, i.e. for the value of goods and services it can buy.

This means that modern currency or fiat currency is based on a trust system (and not on gold reserves): trust that the currency given to us is not false, trust in the institution that issues it, trust in its purchasing power, trust in the central bank that controls its inflation rate.

The crisis of 2008 triggered an irreversible mechanism, because it represented a great crisis of confidence. The bankruptcy of Lahman Brothers and the collapse of the financial markets, which brought the world’s economy to its knees, sanctioned a profound loss of confidence in the banking system and launched complementary currencies in a digital format.

 

Bitcoin: the alternative currency and the paradigm shift

The idea of money out of the control of central banks and governments is not new. After the First World War or the collapse of 1929, for example, private and state-owned companies in countries such as Germany and Switzerland created a mutual credit network with alternative currencies, which allowed the economies of the states to survive and recover.

It is therefore quite reasonable that alternative currencies gained new appeal after the financial crisis of 2008.

If the intrinsic value of a currency is given by the instrument used as currency, today its intrinsic value is no longer given by the gold with which the currency is made but, as it is digital, it is given by digital security and the IT infrastructure that guarantees its exchange.

This is where Bitcoin and the Blockchain technology were born.

Totally digital, based on innovative and very reliable technology, which allows online transactions without having to use banks or financial intermediaries, bitcoin is decentralised. It is based, that is, on a peer-to-peer network system that uses the various participants who carry out the transactions and deposit them in virtual wallets to ensure their security. This success has led to the emergence of many other cryptocurrencies with different exchange values.

The potential and applicability of blockchain technology, using virtual space, are essentially infinite. The application of Blockchain to all aspects of the socio-economic system would create a support network for cryptocurrencies, allowing them to integrate into a new system and to create a new, more sustainable normality. Hopefully, cryptocurrencies can meet the expectation of growth and write a new chapter in the global economy.