Welcome to the third article in a series of Web3 articles that I write based on what's currently on my Web3 radar. If you missed the last article, you can find it <here>.
As the article below deals with digital assets, please note that this is not financial advice and for educational purposes only.
The word 'bitcoin' is probably not unfamiliar to you anymore, but have you ever ventured into the concepts behind bitcoin? In this case, a relevant question could be:
'What is money?'
I'm glad you asked!
Preceding money was trade that dates back to 3000 BCE and usually happened with items that had intrinsic value i.e. trading textiles that could be used for clothing or grains that could be used for food with items such as metal and timber that could be used for construction. This is commonly referred to as the 'Barter System'.
Later on, around 600 BCE, standardised currencies in the form of coins were invented. The coins provided a more convenient and efficient medium of exchange that accelerated trade and economic growth. No longer would a person need a specific item for the counterparty to be interested in trading, but could rather buy the wanted items with small coins that could conveniently be transported around. Later on, banknotes and paper money came into existence as well.
Money is therefore defined as a medium of exchange that can be used to purchase goods and services, provide a standard measure of value and in some cases a store of value. The last part very much depend on the supply though, as purchasing power is quickly diminishing when supply is too plentiful. This can also be referred to as inflation, which you might have read about in the newspapers over the last years.
Lastly, depending on where you live in the world, money has become increasingly digital over time with some countries only using cash for 1% of all transactions.
Now you might be wondering ... this is all fine, but how does it relate to bitcoin?
Before jumping head first into bitcoin, we must first examine the Gold Standard. The Gold Standard was a monetary system that used gold as the economic unit of account from approximately the 1870's to 1971 (note it was not used in a number of years during this period due to world wars) by guaranteeing any supported currency could be exchanged for a fixed quantity of gold. During this period, you could therefore always exchange your coins or banknotes to a precious metal with an intrinsic value if you preferred holding that instead.
With the end of the Gold Standard in 1971, money no longer had any intrinsic value by itself, but was instead declared legal tender by government decree, meaning that the entire value of money derived from a political decision and trust. This is also referred to as fiat money.
So how is bitcoin different from fiat money?
Understanding what money and fiat money is, we can take a deeper look into bitcoin. A few key characteristics of bitcoin:
Bitcoin is a decentralised digital currency that operates without a central bank and without the need for intermediaries
The supply is predefined at 21 million bitcoins and is designed to mimic precious metals like gold by being scarce
The inflation rate is predefined until all bitcoins are mined in approx. year 2140 and currently stands at 0.84%, which is cut in half every four year with the 'bitcoin halving event'
Bitcoins are stored, received and sent via bitcoin wallets, which is a tool that anyone can use. Wallets come in many different forms and shapes
Based on the characteristics above, bitcoin therefore stands out compared to fiat money and is by some people called 'digital gold'. Key differences to fiat money:
Bitcoin is decentralised vs. centralised fiat money
Bitcoin has a scarce supply vs. infinite supply of fiat money
Bitcoin is deflationary vs. inflationary fiat money
Bitcoin transacts via bitcoin wallets vs. bank accounts for fiat money
Now, I hope this explanation provides a bit more depth to any discussion about bitcoin and why it's interesting. As you may know, gold is by nature cumbersome to store and transport due to the size and weight. However, in November 2004 gold was launched as an ETF (Exchange-Traded Fund) meaning that anyone could suddenly buy and sell gold on a fractionalised basis i.e. buying and selling gold for $1 without having to deal with all the logistics of gold. The gold ETF was the fastest growing ETF at the time and reached $10B in assets under management in just over two years. It grew more and more for the first seven years, took a breather in year eight, and then continued growing assets under management. The gold ETFs currently has $246B in assets under management.
In January 2024, bitcoin was launched as an ETF, enabling a broader audience to buy bitcoin in a tax efficient manner and perhaps giving bitcoin a white stamp of regulatory approval. Some of the worlds largest wealth management firms entered the space in a race with some even forgoing their fees for the first six months. Since then, the bitcoin ETFs has altogether grown to $56B of assets under management as of writing and is the fastest growing ETF to date as it reached the $10B milestone in just two months, compared to the previous record of just over two years.
Conclusion
In this article we have scratched the surface on "What is money?" and "What is bitcoin" by comparing it to different types of money and compared the launch of gold ETFs with bitcoin ETFs. I think it's always worth noting when world records are broken as it may signal a change in markets and I look forward to see where the bitcoin ETFs will venture from here.
In the meantime, I will bring you deeper down into the rabbit hole of bitcoin next week, where we'll explore what is going on in the world of bitcoin beyond the ETFs such as how to generate yield on bitcoin and how to improve transaction processing times.
Thank you for joining me in this weeks issue of "Web3What? by Joachim", enjoy your week and you'll soon hear about more Web3 takes from me again.
