Before we talk about bitcoin, let’s talk about money. At its core, money is something that represents value. If I work for you, you give me money in exchange for the value I gave you. I can then use that money to get value from someone else in the future. Over the years, storing value has come in different shapes and forms, such as salt, wheat and of course gold have all been used as a medium of exchange, however in order for something to represent value, people must believe that it’s valuable, and that it will stay valuable in the future.
Up until a hundred years ago or so we always trusted in someThing to represent money.
However something happened along the way and we’ve changed our trust model from trusting someTHING to trusting in someONE.
Over time, people found it too cumbersome to walk around the world carrying bars of gold or other forms of money, so paper money was invented.
Here’s how it worked:
A bank or government would offer to take possession of your bar of gold; let’s say worth $1,000, and in return, that bank would give you receipt certificates, which we call bills, amounting to $1000. Not only were these pieces of paper much easier to carry, but you could spend a dollar on a cup of coffee and not have to cut your gold bar into a thousand pieces. If you wanted your gold back, you simply took $1000 in bills back to the bank to redeem them for the actual form of money, in this case that gold bar, whenever you needed… And so, paper money was born as an instrument of practicality and convenience.
However as time went by, and due to macroeconomic changes, this bond between the paper receipt and the gold it stands for was broken. Over time governments told their citizens that the government itself would be liable for the value of that paper money.