Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money
Bitcoin was, very simply, a new way of creating, holding, and sending money. Bitcoins were not like dollars and euros, which are created by central banks and held and transferred by big, powerful financial institutions. This was a currency created and sustained by its users, with new money slowly distributed to the people who helped support the network.
Bitcoin held out the promise of taking power from banks and governments and giving it to the people using the money.
In the 1970s and 1980s, though, mathematicians at Stanford and MIT made a series of breakthroughs that made it possible, for the first time, for ordinary people to encrypt, or scramble, messages in a way that could be decrypted only by the intended recipient and not cracked even by the most powerful supercomputers.
Cold, hard cash had long provided an anonymous way of making payments, but this cash did not make the transition over to the digital realm. As soon as money became digital, some third party, such as a bank, was always involved and therefore able to trace the transaction. What Hal, Chaum, and the Cypherpunks wanted was a cash for the digital age that could be secure and uncounterfeitable without sacrificing the privacy of its users.
Good money has generally been durable (imagine a dollar bill printed on tissue paper), portable (imagine a quarter that weighed twenty pounds), divisible (imagine if we had only hundred-dollar bills and no coins), uniform (imagine if all dollar bills looked different), and scarce (imagine bills that could be copied by anyone).
The essential quality of successful money, through time, was not who issued it—or even how portable or durable it was—but rather the number of people willing to use it.
Rather than relying on a central bank or company to issue and keep track of the money—as the existing financial system and Chaum’s DigiCash did—this system was set up so that every Bitcoin transaction, and the holdings of every user, would be tracked and recorded by the computers of all the people using the digital money, on a communally maintained database that would come to be known as the blockchain.
The reward of new coins helped encourage Bitcoin users to set their computers to partake in the communal work of recording transactions.
The software also mandated that the winner of each block would get fifty coins for the first four years, twenty-five coins for the next four years, and half as much again every four years until 21 million coins were released into the world, at which point new coin generation would stop.
In 1971 Richard Nixon finally decided to cut the value of the dollar loose from any anchor and end the gold standard permanently. The dollar and most other global currencies would be worth only as much as someone was willing to pay for them. Now the value of the dollar arose from the commitment of the United States government to take it for all debts and payments.
With a hard cap on the number of Bitcoins, users could reasonably believe that Bitcoins would become harder to get over time and thus would go up in value.
After the financial crisis, Erik became particularly fascinated by the role that central banks played in maintaining government power. He came to believe that it was only through printing money that governments were able to pay for their budgets and wars. Monetary policy had been one of the issues he was most passionate about when he joined the Free State Project. But when he discovered Bitcoin, he saw a shortcut to achieving his goal of a world without government power.
Political scientist Mark Lilla has written about the onset, after the financial crisis, of a libertarian age, in which the shared values are “the sanctity of the individual, the priority of freedom, distrust of public authority, tolerance.” These principles, Lilla said, have been enough to bring together small-government fundamentalists on the American right, anarchists on the European and Latin American left, democratization prophets, civil liberties absolutists, human rights crusaders, neoliberal growth evangelists, rogue hackers, gun fanatics, porn manufacturers, and Chicago School economists the world over.
“I’m pretty confident that Bitcoin is the most important invention since the Internet itself.
In America, the dollar seamlessly serves the three functions of money: providing a medium of exchange, a unit for measuring the cost of goods, and an asset where value can be stored. In Argentina, on the other hand, while the peso was used as a medium of exchange—for daily purchases—no one used it as a store of value.
The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money.
Once you’ve seen what’s possible, how can you do otherwise? How can you plug yourself into the tax eating, life sucking, violent, sadistic, war mongering, oppressive machine ever again? How can you kneel when you’ve felt the power of your own legs?
Like Argentina, China had incredibly restrictive rules about moving money into and out of the country. But in China, unlike Argentina, these rules were not a response to runaway inflation, but instead part of the government’s effort to keep tight control over the exchange rate of the yuan, in order to promote the export economy.
Each Chinese citizen could move only the equivalent of $50,000 out of the country each year. As a result, it became difficult for wealthy people, including government officials, to get their riches out of China and into more secure foreign bank accounts.
Everyone looked for reasons that could explain the continuing rise but, as is often the case in speculative markets, the upward moves seemed to be less dependent on outside events than they were on previous upward moves in the market.