Blockchain & Crypto · Business

Internet Dollars? The relationship between money and Bitcoin

Initially written for a now-defunct cryptocurrency media website.

Some people don’t believe in Bitcoin. Scratch that, the majority of people don’t.

Bitcoin is a bubble. Bitcoin is a scam. Bitcoin isn’t real.

Many people find it difficult to comprehend how all this internet money, that we can’t touch, can be larger in value than USD or GBP for example.it makes sense: People tend to trust things better when they can hold it in their hands.

This is most apparent when a lot of currency pairs in the world of trading consist the main fiat currency in society today, the US Dollar. If anything happens to the Dollar, everything else gets hit.

Where does Bitcoin fit into all this?

Money and Gold: A Short History

After World War I and all its chaos, the Bretton Woods system was implemented: this was a series of monetary policies and agreements that sought to peg participants’ currencies to gold. Whatever the price of gold was at that time, it would have a profound effect on the currencies that were pegged to it.

Then, the Nixon Shock happened.

The Nixon Shock is a series of moves done by then-President Nixon to disconnect the US Dollar from gold. It went against what the Bretton Woods system was aiming to do, and as a result, the Bretton Woods broke down and canceled. Ever since then, it had always been a free-floating market for all the currencies.

Sure, there are a couple of advantages to this: protection from other countries’ macroeconomic problems, no need for any form of bank intervention, etc. But what are the problems?

When all the currencies are free-floating, their exchange rates become greater in volatility. Just as easy it is for a country’s currency to go up, it can easily go down just as fast. When countries who already have tons of problems at macro-level such as high unemployment rates and poor fundamentals for the quality of life, it doesn’t help that their currency can drop hard too.

Now, we have another question: how would Bitcoin solve all these problems?

The Role of Bitcoin

We now get to the good bits: how does a blockchain receive financial value?

Quick reminder: Blockchain works as a chain because each block contains the information of the previous block to connect it. This way, the blocks do not get confused, and you would have blocks in proper chronological order.

When you have a system that can’t rollback such as the description above, the information contained within becomes absolute. A bit like the gold you find in mines, every piece you find has weight, and the more gold uncovered the more it will affect the overall gold price. It is similar here: as adoption rate increases and more transactions are being recorded in each block, they become absolute and imprinted into the digital ledger that is the blockchain.

Once the ledger is set, it can’t be changed. If the very first block of the blockchain system starts off with 10,000 coins for example, and I get 5,000 of them (buying it in at a certain price), the absolute price of the coin will change as more and more blocks are introduced. With more blocks, come new coins. With more people buying into these coins, come the fluctuation of the market price: people will start trading and using these coins. The price may (hopefully) go up.

But first, you need a market. No one’s going to buy a bunch of online coins and cryptocurrencies when there is no market to trade and invest it in! How would people find out?

Dollars and Bitcoin: What’s the Difference?

In the real world. Fiat currencies are tied to their respective countries – Americans use the USD, the British use the GBP, and the Japanese use the Yen. They each have their own respective markets, and these markets interact with each other through investments and forex trading. Compared to Bitcoin and other cryptocurrencies, the markets are decentralized: everyone who has a computer or device can buy into the blockchain and have a piece of the digital pie. Since the buy-in is easier for cryptocurrencies, the adoption rate for Bitcoin is steadily growing.

Bitcoin and cryptocurrency usage in recent times had started to follow the same patterns as currency usage, except that the key differences include the physical aspect and decentralization. If budding investors, as well as high profile investors like Roger Ver, the Winklevoss Twins, and Vitalik Buterin, had contributed heavily to this digital financial asset, at the very least it’s not a scam, right? Is it a bubble? It can happen. There is always the possibility of it happening, but the inclusion of a decentralized system on a global scale is unknown in itself. Satoshi built this system to combat the flaws of a centralized system, after all, we will need time to see just how effective it is.

Remember, we’re still in the early phases of cryptocurrency adoption: the public had only just started hearing about this new technology. It is only a matter of educating people about the different kinds of application blockchain can be in, anything with data really. It always starts with a rejection phase, and acceptance always starts off slow in the beginning. Give it another few years and we will truly see just how much impact Bitcoin, Ethereum and Cryptocurrencies will have on the world. It could be just an awareness factor, or an education factor: just give it some time.

What patterns do you see that between currency and cryptocurrency? Do you think we’re going in the right direction when it comes to global acceptance of blockchain? Comment below!

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