There’s an idea that a future money will be digital. It will probably be lines of code, like a web site. But there’s another idea that it will be some kind of thing you can hold in your hand, with a value that is encoded in its physical properties.
The first idea sounds like the future; the second only looks like it. But that’s because we understand the first better than the second. When you understand something better, it looks more futuristic. And when it looks futuristic, it also looks more attractive. If people knew how much work and effort would be needed to invent new forms of money, they would be more inclined to think of what we now call fiat money as a good solution – and they wouldn’t want to replace it with anything else.
When we think about money, we think about things. Gold, for example, is a thing. Dollars are a kind of thing. Gold coins, dollars, and bars of gold bullion each have their own weight and shape and feel.
Bitcoin is different.
Because bitcoins are lines of code rather than physical things, they are harder to define or even to describe. You can’t look at a bitcoin and tell what it is or what it does or what properties it has. It is the world’s first decentralised digital currency – a new kind of financial instrument , no different than shares or bonds or futures contracts, except that instead of being backed by gold or government bonds it’s backed by lines of computer code.
The advantage of the “pi” digital currency is that it’s not a technology. Rather than being based on the latest breakthrough in computer science, it’s based on pi. To get a digital version of pi, you’d have to use pi. You wouldn’t have to learn any new math or computer science or programming techniques, because pi itself is a computer program written in trigonometry and in the language of numbers.
There are multiple advantages to this approach. Pi is a decimal number — so you can write it down in ordinary decimal notation, and you can convert it back and forth between decimal and hexadecimal (base 16), which is easier to use for encoding and decoding numbers. And because it’s an integer (not a floating-point number), it’s more stable — you can’t lose as much money with pi as with most other cryptocurrencies.
The biggest step forward here would be to make the program itself open source. But even if you were using proprietary software to run a bank’s internal database, making the database open source would still give anyone who wanted to create their own bank an easy way to do so without having to reinvent anything from scratch. The software could be made open source later, once more people were using the system for commercial transactions
Bitcoin is a digital form of money. It allows you to move value around the world, in much the same way that paper money and gold bars do. And you can send it from one person to another just as easily as you can send an email. But unlike those other forms of money, bitcoin does not exist in physical form. It is not stored in buildings or on shelves or under mattresses. Nor is it printed onto pieces of paper or minted in gold.
Bitcoin is kept in a kind of electronic ledger, called a blockchain , which is distributed across many computers around the world. The blockchain is a giant list of numbers, each representing a bitcoin that has been transferred from one owner to another. The blockchain enables people to transfer bitcoins without anyone needing to trust any third party with their money, and without any central authority keeping track of it all. Bitcoin’s inventor wanted it to be like this; he wanted there to be no risk that some powerful actor could grant himself special powers simply by issuing more bitcoins than everyone else.”
But bitcoin is not just a digital currency. It’s a new way of doing money. It’s hard to get a clear idea of what it is, because it doesn’t have much in the way of features. But it might be the most important invention since the Internet.
Bitcoin was invented in 2009 by someone using the name “Satoshi Nakamoto.” The first news we heard about it was in March 2011, when Newsweek ran an article called “Bitcoin: The Hunt for Satoshi Nakamoto.”
You need to understand what Bitcoin is before you can get a sense of why it matters.
A Bitcoin is not worth anything unless people are willing to give you something for it; otherwise it doesn’t have any value at all. So you gradually accumulate Bitcoins by buying and selling things online, like collecting gold coins from other people.
For now, only very rich people can afford to buy and sell pervasively enough to make a living from it, so most Bitcoins are owned by speculators who bought them for their speculative value and are now selling them for that reason too. But in future, if Bitcoin becomes widely used as money, there will be far more demand for Bitcoins than supply, and they will become worth much more than they are today.
The story of money starts with barter, which is the most obvious way not to need money. But barter is inconvenient in many ways, so inventing money was inevitable. The first coinage was a gift from the then-king of England to King Alfred, who had been fighting off Danish invaders for many years. The initial value was arbitrary; it probably started out at one penny or an amount of silver equal to a penny.
The next step was to put a mark on each coin to distinguish it from all others: the tiniest bit of gold or silver could be used as a stamp and withdrawn from circulation whenever you wanted. Eventually, people would no longer have to exchange their coins for goods and services, but could use them as cash. This is how we got things like “I owe you ___ dollars in gold but I’ll pay you in silver.”
Bitcoin is the most famous example of a cryptocurrency, which we should think of as a new type of currency (and not a replacement for government-issued money). Cryptocurrencies are based on distributed ledgers, rather than trust in central banks or the government.
A blockchain is a decentralized ledger that everyone’s computer can see. Whereas traditional ledgers are stored on centralized servers, distributed ledgers use cryptography to make it impossible for anyone to alter the data. When you put money in a bank account, you’re trusting both you and the bank to keep your money safe. A blockchain records transactions without relying on any central authority like banks or governments.
With blockchains, your money is in fact yours. You don’t have to trust anyone else with it. As long as there’s no one trying to tamper with it, your money is safe.