To understand this, we need to reiterate how our economy actually encourages investment and penalizes saving. Since the money supply gets larger over time more, every new dollar that gets created reduces the value of every dollar already in existence. This is because there's only a certain amount of goods in the world. If you create more money there is still the same amount of goods but with more money circulating, therefore those goods end up priced higher.

What this means, however, is that people are encouraged to spend their dollars. As more money is created, the dollars that people keep in their savings accounts become worth less and less over time. A lot of people understand this intuitively, even if they don’t understand all the mechanics behind it. We’ve all heard the saying that you ‘need to make your money grow’. That’s what this dynamic is. If you keep money sitting in your bank account, it loses purchasing power over time. To prevent this, people invest their money. 

There is an unintended side effect to this, however. Our savings, what we count on to retire, have become financialized. 

Before the last decade, who could invest in the first place was pretty limited. There was no Robinhood. If you wanted to invest in equities, it had to be through professional investment advisors and stockbrokers. 

Now, it's easier to invest than ever. You don't need a stockbroker or investment advisor anymore. People can easily invest from their phones or online, and as a result, more people are investing than ever, by a considerable number. 

Because of this idea that you need to make your money grow, which comes from inflation - you need to make your money grow because the money that you keep in the bank isn't going to hold its value - people are putting almost all of their wealth into the stock market through index funds. Your investment account is really your long-term savings account.

The combination of these two factors - that there is all this new money in the economy, and so many new people are investing - stock valuations do not reflect actual cash flows, projected growth, or anything fundamental anymore. Since most people are investing in funds that track the market as a whole, the valuations of all companies are increasing whether or not they're financially sound. Index fund investing has risen all tides. 

In the past, if a company underperformed its projections - a sign that the company is doing worse than expected - it would mean the stock price of the company would go down since projected future growth is now worse than previously expected. In today's market, however, that stock might be at all-time highs again in two weeks.

Stocks, primarily through index funds, have become a vehicle for savings for most Americans. Instead of investing being a game of winners and losers, a risk, investing has now become so critical to the financial security of Americans - with most people's savings stored in markets where they don't even care what companies they're holding - that the stock market has become too big to fail. Numbers have to keep going up, or else.. The entire country is invested in a way that's never happened before. Investing has become saving.

What's really happened here is that stocks have taken on a monetary premium for filling the store of value feature of money. When a new good becomes money, its value increases beyond its general utility. As we know, gold and silver have an industrial value and are often used in machinery. The price of gold and silver, though, is much higher than their industry value would otherwise be if they were not fulfilling a role of money - in this case, to hold value. When a good acquires a monetary premium, its value exceeds its base worth. 

People often critique Bitcoin because you can't spend it in stores, but stocks function in the same role. They have become store-of-value money. A savings account that you can't spend. You may still think that stock prices are based on something tangible. Cash flows and revenues. I’m not so sure. 

Don’t get me wrong, I’m still playing the game. When the music is on, you gotta dance. But the idea that valuations reflect fundamental value is just as wrong as the belief that gold’s value is related to its use in certain industrial electronics. Monetary premium is everything.

To start, we need to talk about how our economy encourages debt. It's a result of the idea of inflationary money, which just means that the money supply gets larger over time. .

What this means is that people are encouraged to spend their dollars. If more money is created over time, then the dollars that people keep in their savings accounts get worth less and less over time. a lot of people understand this. If you keep money just sitting in your bank account It loses value over time. Knowing this, people invest their money. 

If you're not investing in something like a brand new business, you're probably investing your money in the stock market. Since your dollars lose value over time in your bank account you want them to grow by investing in stocks. This is how our system of money penalizes savings and encourages both investment and consumption. If you're not spending your money somehow, either on goods or in investments, you're losing purchasing power by saving it.

This has always been the case in America. The money supply is always grown, and debt and investment have always been encouraged. but never to the degree that it is right now.

Before 1971 the United States was on a gold standard. This meant that the amount of new money that could be created was limited, it was capped by the amount of gold that was held in reserve by banks. This meant that there was a limit to the amount of their money that could be created. as such, there was also a limit on how much incentive there was to spend your money. The less new money is being created, the less that people are incentivized to spend their dollars because their savings would be losing less value. If no new money is created in a given year, then your savings would retain purchasing power.

Since 1971 when we left the gold standard, there's no longer a cap on how much money can be created. Over the last 50 years, we have been printing new money at a huge rate. there's more than 10 times the amount of money circulating now than there was in 1971. What does this mean though?

What it means is that more than ever, Americans can't save their money. You have to spend your money or invest it or else it's going to lose value over time more than ever. This encourages debt, because just in the same way that savings lose value over time, so does debt. a $200,000 loan in 1990 is worth more than a $200,000 loan in 2020, $200,000 bought more stuff in the past than it does now.

What's happened is that the amount of new money created has gotten to a point where it's virtually impossible to save money in the bank anymore. you're not allowed to opt-out of investing. If you're not a financially minded person who just wants to save your money in the bank, you're going to fall far behind everyone who's investing in stocks, because your dollars are losing more value than ever, because of all the new money that's being created. you fall behind – fast. 

Before 1971 you fell behind but not nearly at the rate that is happening today. If you're not investing your money in something like the stock market today, you have no chance to maintain your wealth throughout decades. In a way, this isn't fair. not everyone is a financially minded person or wants to invest their money, and those people really shouldn't have to. you should be able to at least, to some degree, store your wealth in the dollar without investing. That's not the reality that we live in today though. new money is being created more than ever, and that's not going to stop. The truth is that we're just getting started when it comes to money printing. As long as new money is getting created at the rate that it is, there's just no way to avoid spending those dollars. You can’t save your money in dollars.

While most of us assume we’re comfortable with how modern banking works, “money” is actually an ever-developing human invention. With Bitcoin, we’re seeing the benefits of a fixed supply, high-powered money that was designed for the internet and gives us hope for a better future.

To better understand Bitcoin as money, let’s first think about how digital, cashless, payments function today. If I want to pay you, or anyone else, without using physical cash, there is currently no way to do that without depending on a financial intermediary.

Think about it – using a credit or debit card requires going through a merchant facilities provider, the payment processors, the gateways and the banks. Financial applications such as Venmo, Zelle, or Cash App have become increasingly popular methods for sending payments and have added more intermediaries to the mix. Every time you pay digitally, your bank, Mastercard or Visa, and Venmo all get every piece of information about your payments, which they use to build a complete profile about you. The idea behind Bitcoin is digital cash – to make digital payments feel more like handing a dollar bill to someone rather than going through a series of intermediaries or companies to process a single transaction.

In late 2008, on what was known as “cypherpunk mailing list”, (essentially a small group of ideologically driven mathematicians, computer nerds & scientists) a person going by the name of Satoshi Nakamoto sent out a ‘Whitepaper‘ detailing his new digital cash idea called Bitcoin. Satoshi’s goal was to create a new form of money, a natively digital cash, that was fully peer-to-peer. If you send a transaction through the Bitcoin network, there is no intermediary that the payment needs to go through. There is no bank, no company, and no government. The network is decentralized. Bitcoin was designed to be more like exchanging a dollar with someone than exchanging credit card information.

What is important to realize here is that the ability to send a payment through the internet, without needing an intermediary or company to route through, has never existed before. This is how Bitcoin revolutionized the concept of digital money.

Through the creation of a technology now known as a blockchain, Bitcoin has become a distributed, decentralized, and global monetary network that requires no central authority in order to operate and reach consensus. Furthermore, with no server, central database, or company to shut down, it has become something that is impossible to turn off.

What is a Blockchain?

Think of a blockchain as an empty notebook, which represents the history of all transactions on the Bitcoin network. Miners are the ones who write the pages of the notebook, and the writing contained within those pages is every transaction that’s happening worldwide on the Bitcoin network.

Every 10 minutes when a block on the blockchain is “mined”, a new page of the notebook is published and forever set in stone. While miners are the ones writing the pages, nodes are the verifiers (computers) who check to make sure that miners are locking the blocks consistent with the rules of the network. If a miner tries to process a transaction from a Bitcoin wallet that does not actually have any Bitcoin, nodes will reject the transaction.

Fixed Supply Money

Bitcoin has a fixed monetary policy. There will only ever be 21 million Bitcoin. Starting at zero, every 10 minutes on average, new Bitcoin is issued onto the network at a pre-determined rate. Every four years, the amount of Bitcoin that is created every 10 minutes is cut in half. This happens until the year 2140, at which point no new Bitcoin will ever be created. There is no federal reserve, no bank, no individual, or group of people, that can ever change this. By 2033, the annual inflation rate of Bitcoin will be 0.2% per year

Nothing like this has ever existed before. Secured by the mathematics of cryptography and its decentralized properties, Bitcoin has a level of unforgeable scarcity that has never been seen in any type of money before. Bitcoin is also essentially infinitely divisible, with the smallest unit, known as a Satoshi, being 1/100 millionth of a Bitcoin. So yes, you can acquire a tiny fraction of a Bitcoin.

If you can understand the value proposition of Gold, you’re about 75% of the way there with Bitcoin. Bitcoin may not on the surface have Gold’s history, but in some sense it actually does. It’s like the next stage in the evolution of money and takes the properties which made Gold historically the best form of money and embeds them in an open-source set of rules, on a network secured by math. We now have an asset that cannot be inflated, which you can also send across the globe near-instantly, without requiring an intermediary of any sort.

Censorship Resistance

This is one of the founding principles of Bitcoin, and one of the core functions of Money. Many people know about the idea that “Money is a medium of exchange”, but few realize that in order to act as a medium of exchange, money must be able to flow freely. As soon as someone, some organization or some institution can dictate where, when, how or with whom you can transact, we begin down the slippery slope of outright censorship.

In Bitcoin, censorship resistance is the idea that everyone using the network is equal. Anybody, at any time, can send a transaction to anyone they choose and the transaction will go through. The system is tamper-proof. No third party, like a company or a government, can restrict or prevent you from transacting with someone.

According to the Human Rights Foundation, more than 50% of the world’s population lives under an authoritarian regime. For these people, often living under ruthless dictators and human rights abusers, Bitcoin can be a valuable financial tool as a censorship-resistant medium of exchange. In China, people who used their WeChat app to pay for subway fare to attend Free Hong Kong protests were later tracked and arrested. Even in the US, workers in often legal industries like pawn shops, pornography sales, marijuana stores, and online gambling businesses are denied the right to use banks at all.

Censorship resistance is not about breaking rules though, it’s about neutrality. It’s about designing a system that can’t be corrupted in the first place. With Bitcoin’s censorship resistance, combined with its fixed monetary policy and decentralization, Bitcoin is the first truly neutral money in modern times. Having more Bitcoin does not allow you to change the rules to get your way, unlike how money works in our current system. The rules are set in stone and anyone who wants to can participate.

Is Bitcoin still a risk? Bitcoin has only existed for 11 years and its value in relation to traditional “fiat” dollars has been volatile.

So why the volatility?

Well it’s rather simple. Volatility is a result of the network emerging. Something that starts at zero and is actively being discovered by 7 billion people around the world is going to grow. Growth will NOT happen in a straight line and as such there will be wild swings (especially when measured against collapsing government money).

Furthermore, being so small in the grand scheme of things, the volatility is enhanced, and will remain so until the total economic mass of Bitcoin is much higher, ie; until it matures. As of the time of this article, the Bitcoin network has a market capitalization of about $.1.1 Trillion dollars. This means that it takes less money buying and selling to significantly sway the price in either direction.

The biggest real risk to the continued success of Bitcoin is just a question of: will people want this? Money needs users. Part of the motivation behind this website is to get people thinking about how money actually works. If you don’t think about that question, you are going to have more difficulty trying to understand Bitcoin.

Macroeconomic conditions suggest that the most likely future is the continued devaluation of traditional fiat money as governments continue to print more and more of it in a bid to “control” what is fundamentally uncontrollable, ie; human nature.

As this gets more out of hand, people will likely increasingly start to wonder ‘what really is money?’

In Bitcoin, they may find the answer. A neutral money that can’t be abused or corrupted. A money with perfect “store of value” properties, “medium of exchange” properties, and the ultimate “unit of account”. A money better than both gold and especially modern fiat with a level of scarcity that has never existed before.

A digital medium of exchange where you can transact globally without your information being routed through half a dozen intermediaries, all collecting your information & taking a piece along the way.

So that is all for this introduction to Bitcoin. Hope it’s been entertaining and informative so far.

The reason that we have inflationary money is that an inflationary monetary system reduces the burden of debt over time. Since prices and salaries rise over the years, debts become smaller over time. The easiest way to think of this is in terms of housing prices. Say you buy a house for $100,000 in 1970 and take out a loan to do it. By the time you finish paying off that loan in 2020, the house is now worth $600,000 due to inflation. In basic terms, $100,000 in 1970 is worth more in purchasing power than $100,000 in 2020. This is the largest benefit of inflationary money, your debts become worth less over time.

Knowing that your debt has a reduced burden over time encourages people to take out loans for many different things. People might take a loan out to start a new business, buy a car, or go to college. There are several good things about an inflationary system like this. 

This type of system has downsides though and those downsides are not frequently explored. A system of inflationary money doesn’t just reduce the burden of debt, it actively encourages people to take on more debt. 

If instead of buying a house with $100k in 1970 you just saved that money in the bank, you would have much less purchasing power in 2020 than if you bought a home that you could now sell for 600k. 100k in 1970 could buy you a house, in 20202, it doesn’t. While many of us understand this idea, people don’t realize how it hurts a lot of people. 

People in the middle class and above can invest their money in things like the stock market, while those with lower incomes can't afford to invest their money, they have to spend it on food and other necessities. This leads to a situation where the middle class and above benefit from inflationary money through investing while the lower class is stuck losing purchasing power every year since they have to spend most of their money and keep whatever is leftover in savings for emergencies.

When new money is created, the value of every already existing dollar – meaning the purchasing power-  falls. People who invest get to have their money grow, while those who save lose purchasing power because the new money that has entered the system dilutes the value of their saved dollars.

While rarely explored, this dynamic is one of the largest drivers of the increased inequality in America that we've seen over the last 50 years. New money is being created more than it ever has before. This extreme money printing manifests itself in the growth of investable financial assets, which is how you can see things like a stock market that grew for 10 years straight from 2009 to 2019 even though many people felt economic insecurity.

 It's the fact that new money gets created at all that penalizes savers, though the extreme rate that this has been done over the last 50 years is what has led to such drastic effects. Even in a scenario where the people who get access to new money were low-income earners, inequality will still rise. As people spend their new money, they put it into the pockets of the middle and upper class, who invest the money and get to watch it grow. This is why inequality will keep rising as long as new money creation keeps accelerating. 

It's important to understand that this rising inequality is inherent to our system of money, and as long as new money gets created in an inflationary monetary system this growth in inequality will happen. You can't fix inequality without understanding the monetary aspect of its rise.

The earliest forms of money that we have a record of date back between around 9000 to 6000 BC, which coincides with the development of modern agriculture. Societies were small and scattered back then, only just beginning to settle down. Whatever the main good a group of people had in relative abundance and was a necessity often became money. Animals and plant products were the main early forms of money.

Around 1000 BC we began to see the emergence of the first coins. The use of coins began to spread throughout China and India, later followed by Turkey, Greece, and Persia. Coins were made of any number of metals or even made out of materials like clay, whatever was best for a given society.

The choice of which metal to make your money out of does matter and had real impacts on an economy and the material choice was rarely scarce enough to function as good money. Eventually, a large amount of copper, bronze, whatever, floods the market, and a currency collapses. Ancient currencies had a very short lifespan on average before they would need to restart from scratch. This is eventually what led to the adoption of gold and silver as common currencies. these metals were common enough to be used for everyday transactions yet still have enough scarcity to retain value over time.

Over this period from 1000 BC to about 700 AD, the use of coinage as money became increasingly popular across the world. Around 700 AD began what is now known as the Islamic Golden Age. This was one of the first times throughout history where an expansive economy, throughout a large geographic area, all traded with one strong currency. 

The dinar, weighing 4.25 grams of gold, was the currency across the medieval Islamic world, a vast area that covered Northern Africa, up into today’s Middle East through Persia, and down towards India. Pegged to a metal such as gold, which is much more scarce than metals like copper or bronze, the currency supply was not able to be easily artificially inflated and the economy thrived as a result. Gold had been used as a currency before the Islamic Golden Age, but this is the first time where it was used at such a scale. 

The earliest forms of banking that we still use today were created during this time. Credit as a monetary concept, checks, places where you could save money similar to savings accounts, and loans began to be popularized during this period.

Taking a look into the history of paper money reveals that its history goes back much further than a lot of you may think. The earliest forms of banknote guarantee go back to early 7th century China, although it wasn’t until the 11th century that true paper money began circulating in the form we think about today. So paper money is not a new idea.

Paper monies have always failed throughout history because eventually, the government decides to print too much, and hyperinflation occurs. China eliminated paper money entirely in 1455 and wouldn't adopt it again for several hundred years. 

Moving west toward Europe, the first form of the British pound was created at a similar point in history. Named the Anglo-Saxon Pound, it was equal in weight to one pound of silver. Now, the Anglo-Saxon pound was not a coin in itself, it was just a form of measurement to price goods, or, a unit of account. 

The actual coins that circulated during this time were pence and shillings. 12 pence equaled one shilling and 20 shillings equaled 1 Anglo Saxon pound. At the time, these were made of pure silver. 

English currency was entirely silver through 1344, at which point the first English gold coin, the noble, joined the silver coins in circulation. Silver continued to be the basis for the Pound until 1816. At that point, it became gold. 

The system that we today is known as a fiat money system. Fiat money has no inherent value, it is not convertible, nor does it represent an amount of any good. All that it is ‘backed’ by is government declaration and trust that the supply won't be overinflated. 

The lesson of monetary history is that humans have always gravitated towards the forms of money which were scarcer, as long as that scarce money was sufficiently divisible. In the last fifty years, we've moved away from that trend. What exactly does that mean? Well, it's hard to say, and it's something that we'll touch on in later posts. For now, hopefully, you have a better understanding of how money developed throughout history and are interesting in learning more.

What is money? How does our system of money work? It’s a question most people don’t think about – but it turns out that ‘how’ a system of money works matters, and it affects areas of our lives, even nonfinancial ones, in ways that most of us don't really understand.

So what is money? Simply put, it is an exchange rate. It's a way for people to value goods, services and wealth in a common measurement and store that value throughout time. 

Money is a tool that lets us value goods and store wealth in one measurement. That's it, or all that it's supposed to be. Money is supposed to be neutral; not a political tool or a weapon, but a way for us to save our value into the future.

Money has three fundamental functions: unit of account, medium of exchange, and store of value. A unit of account means that goods are all priced using the same form of money. When you walk into a store and everything is priced in dollars - that means that the dollar is the unit of account. 

The second function is medium of exchange. A medium of exchange refers to being the actual tool used in the exchange between goods and services. If I'm selling my TV for $100 and you offer me silver coins instead of dollars, the coins function as the medium of exchange in that transaction. I'm still getting $100 worth of payment but the medium of exchange being used is silver coins.

The final function of money is a store of value, which means that the form of money should maintain its purchasing power over time. Being able to save money and store wealth over time is extremely important for any economically healthy population. Goods like gold, cattle, silk, real estate, and even things like fine art have often functioned as stores of value throughout history. These goods have tended to maintain value because they are relatively scarce. You can't snap your fingers and double the supply of gold the way a government can do with a poorly managed national currency. 

When asked the question ‘what is money?’ people will often default to the idea that money is something that you use in stores, but that gets the importance backwards. Lots of things can work well as a unit of account and medium of exchange, but not many things can store value well over time.

While citizens of wealthy nations generally rely on their national currencies to store their value, most countries around the world do not have the same luxury. People in those other countries are often much more comfortable using multiple currencies - they may try to store as much wealth by holding as many US dollars as they can and only converting those dollars into the local currency when they need to buy something.

Though the dollar is indeed a safe haven for people in many countries around the world it's actually not a very good store of value for Americans who use it as their only currency. This is something we'll talk about more in future posts. Store of value is the most important function of money, because it is the hardest to achieve. Many goods can be easily transferred, but not many can hold value well. 

The way our system of money works today is that new money is created first and foremost by the Federal Reserve, through bank loans. When you take a loan from the bank, new money is being created out of nowhere. The Federal Reserve uses interest rates to either encourage people to borrow more money or discourage them from borrowing as much. Before 1971, the US was on a gold standard, which meant that there was a cap to the number of new dollars that could be created based on gold reserves. After 1971, however, there is no longer a cap to the amount of money that can be created each year. The amount of new money that's been created since then has been exponential, with there being more than 10 times the amount of money circulating now than there was in 1970.

While interest rates are the traditional approach to money creation for our economy since 2008 the Federal Reserve has been adding to the money supply through what is known as quantitative easing which is essentially printing money to buy bonds. At the same time, people are starting to have more overtly political discussions about money creation. Stimulus packages for the coronavirus pandemic were sized in the trillions of dollars, and conversations about things like universal basic income suggest that new money creation is only getting started. What happens to a system of money when you create more and more of it? History is not kind to that approach, but it’s complicated. 

While this may be a bit of a dense topic, it's important to establish this base understanding of the purpose of money before we move forward into looking at more current issues. Money is just an exchange rate and it's supposed to be neutral, but our system today is anything but neutral and it's only becoming less fair over time. 

These are all topics that we’ll explore in more detail in the weeks to come.