You can’t understand Bitcoin if you don’t understand money

Explaining money from first principles.

Money is one of our oldest and most important technologies, and yet it is likely one of the most misunderstood.

Humanity has made a lot of mistakes with our money over the last 100 years, and we are beginning to experience the effects of this on our society.

We’ve moved from a stable, value preserving money to one that is manipulated, unstable and constantly losing value.

It seems as though our society has forgotten what it really is and how it works, so let’s take a look at money from first principles.

What is money?

Money is primarily a technology that allows people to move value across space and time.

As human society developed, we discovered that each person specialising in one task was more beneficial to the group.

This move to specialisation meant the creation of many new types of products and services within the society that took higher and higher amounts of time and energy to create.

In more primitive societies, barter and informal tracking of who owes what to who isn’t so difficult.

But when societies develop, and the goods and services available begin to multiply, it becomes practically impossible to barter between everything. 

This is the double coincidence-of-wants problem. How will the tailor buy bread for his family if the baker doesn’t need a new suit? 

How many loaves of bread would a new suit demand anyway? 

And what happens if there is a shortage of wheat, and bread becomes harder to produce? Does a suit go for fewer loaves in that case? How many loaves should be discounted if the suit is of poor quality?

All this and more for just two items.

It becomes easy to see that as the number of products (n) in an economy increases, the number of relative values of all these items becomes – every item needs a value in relation to every other.

But if money is used as an intermediary between these goods, then each good just needs to be priced in money, and n goods have n prices. Much more efficient.

So going back to our original definition of money, we can see that it is the intermediary between two time-intensive goods, and it functions to express the relative value of each.

So the next question becomes: what can be used as money? And therefore what are the properties of good money?

These questions are as relevant today as they were when money first came into use.

Let’s next take a look at the properties of money and why some monies are better than others.

Properties of money

Despite what you might hear in the mainstream, money isn’t just a figment of our collective imagination, a shared delusion, or something we all just happen to agree has value based on nothing.

When something is used as money, it has fundamental properties that allow it to be used as an exchange of value.

So what are these properties?

As we’ve already discussed, money needs to be able to move value across space and time.

Those three terms are very important, so let’s look at them individually.

Value – For anything to have value it needs to be relatively difficult to produce, or scarce. Leaves can’t be used as money because they literally grow on trees.

Space – To move value in space effectively, money needs to be easily moved around, as well as easily divisible for large and small transactions. Housing is a great long term store of value, but impossible to divide up and move.

Time – In order for money to move value across time, it needs to be durable, as well as having a limited supply. There’s no point holding money in the form of grains if they’re just going to rot over the winter, and if it’s easy to produce more of it, the relative value of one unit is always going to decrease over time.

For something to be used as money it also needs to be uniform, meaning each unit represents the exact same value as every other, so they can be exchanged freely. 

Acceptability is the last property of money. There’s no use holding money in a currency nobody accepts, because by definition you can’t use it to exchange value.

Now that we have a grasp of the fundamental properties needed in a substance to be used as money, let’s take a look at what has actually been used as money over the centuries.

What has been used as money?

Since its invention – thought to be as far back as 5000 B.C – humans have used whatever objects they could as money.

Some fit the criteria above and survived, others that didn’t were quickly abandoned.

This means that collectively, the use of different monies was a millennia-long process of trial and error, with the substances that best matched these criteria gradually winning out over time.

It’s important to note here that market forces applied to money just as they did to any other commodity throughout history.

We might forget this in the present day since the State has a monopoly over money in almost every country. 

However, until not so long ago, money and value were whatever the market (e.g the untold millions of individual transactions over time) said they were.

And these market forces slowly worked to promote or reject certain currencies over time, due to how effective they were at fulfilling the function of money.

The more our monetary technology advanced, the more effective and long-lived certain currencies became.

The first recorded examples of humans using money came in the form of livestock and grains anywhere from 7000-10,000 years ago. 

The obvious limitations of these commodities as money led us to begin using objects that were far more durable, portable and divisible. We began producing time-intensive objects such as weapons, jewellery, animal hides, carved stones and animal shells that easily outperformed the earlier forms of money.

Objects like these lasted for thousands of years as money until the discovery of metals, and the invention of metal coinage.

These stamped coins were superior in every characteristic to previous forms.

Ancient Greek coins. Source:

It was a significant upgrade in monetary technology and explains why coins eventually came to be used as money in almost all areas of the globe.

Out of all the metals used as money throughout history, gold appears time and time again as the most sought-after and valuable.

And this was solely due to the most important characteristic of money – scarcity.

More specifically, what is called the stock-to-flow (S2F) ratio.

It might sound daunting, but S2F is just a measure of the scarcity of a commodity. It is simply the new supply being produced (flow) divided by its existing reserves (stock).

The higher this ratio, e.g. the lower the flow is compared to the stock, the more scarcity a commodity has (also called its ‘hardness’).

And gold has by far the highest S2F ratio of any metal, due to its rarity in the earth’s crust, and the difficulty of mining it.

Added to the fact that gold has been mined for thousands of years, and the existing stock is well established, gold is consistently scarce.

I say ‘consistently’ as this is the key point behind scarcity.

There’s no point of a money being scarce for a short amount of time then abundant soon after.

Gold’s S2F ratio has stayed remarkably constant over the centuries. 

Source: The Bitcoin Standard

This is because increases in mining technology have been almost exactly offset by the increased difficulty of mining rarer and rarer deposits.

Therefore, because the supply of gold has been almost impossible to change dramatically, its value has stayed incredibly stable over the centuries, more so than any other form of money.

And because value and therefore money is relative, having a measure of value that stays constant while everything around it changes is hugely beneficial.

It’s almost impossible to overstate the importance of this fact.

Every other form of currency throughout history was easier to inflate, and was, therefore, more prone to manipulation.

Manipulation of a currency’s production inevitably leads to hyperinflation and the loss of all the currency’s value.

And if that currency happened to be competing against gold when its inflation began, value would immediately flow towards the harder asset.

Therefore, this constant and dependable supply has made gold the most reliable money throughout history.

Every other form of money was either too impractical to use or was inflated away due to this supply instability.

So if gold is so great, what happened to it?

Why aren’t we still using it today?

Let’s take a look at the downfall of gold, and what that means for today’s money.

The fall of God’s money, and the rise of fiat

Without being religious myself, I quite like the description of gold as ‘God’s money’.

If you were the benevolent creator of the earth and you were to bestow it with the perfect material as money, it would be difficult to make something more suitable than gold.

Its steady supply is quite miraculous in an ever-changing world.

Making better money than gold is difficult, but not quite impossible, however, as gold does contain one crucial flaw.

This flaw allowed it to eventually be co-opted and manipulated into irrelevance, and the flaw is its tendency to become centralised over time.

Italian bankers in the 17th and 18th centuries discovered that they could store gold for their clients and give them paper certificates of redeemability to this gold in return.

These paper certificates gradually began to be traded between merchants and individuals like they were real gold, since it was easier to transport and divide paper than the metal itself.

This system of paper representation of value worked incredibly well for Europe for hundreds of years. 

Historical timeline of dominant international currencies. Source:

That is until the largest banks were storing so much gold that it was relatively simple for nation-states to forcibly take control of the banks, and therefore the stockpiles of gold.

By the turn of the 20th century, a handful of nation-states across Europe had control of the majority of the world’s money supply.

These notes of certificate then became the official currency of these nations, the value of which was theoretically backed by gold.

The main flaw with this scheme, however, was that these states could begin printing vast numbers of notes that weren’t backed up by any gold in their vaults.

This practice is called fractional reserve banking, and it effectively bypassed gold’s inherently limited supply, allowing these governments to conjure ‘value’ out of thin air.

These governments eventually inflated the supply of these notes so far that they bore no resemblance to the value of the gold that was supposed to back them.

Source: The Bitcoin Standard

If a large number of citizens began demanding their claims to gold – which is what their notes represented – they would have discovered very quickly that the value they thought they had didn’t exist.

This meant that the countries engaging in this practice had to abandon the gold standard to avoid a full-blown economic meltdown.

The move off the gold standard started in 1914 with the beginning of WWI and was eventually completed in 1971.

This means that for at least the last 50 years, all the world’s currency has been backed by pure fiat – a decree of the government that the paper they issue has value.


And sure, paper notes still have most of the properties of money; they are even far more divisible and portable than gold.

But fiat currency is missing the key ingredient that ensured gold’s value over the centuries – the indisputable, unrelenting difficulty of its production.

In its place, fiat currency has nothing but a promise by the government not to inflate.

A promise that has been well and truly broken.

The US dollar has lost roughly 96% of its value since 1913 due to this inflation.

Source: St Louis Fed

And if current events of 2020 are anything to go by, this trend is only going to accelerate with the unprecedented trillions being printed to combat COVID-19.

When there’s a potentially unlimited supply of a money, 1/∞ is always going to be zero.

History is very clear on this: the average lifespan of a fiat currency is 27 years, and the longest-lived – the pound Sterling – has lost 99.5% of its value in its 300+ year existence.

The topic of inflation needs an article all to itself, but if there’s one message in this article it’s this:

If there’s any ability for individuals or groups to inflate a currency, they will.

As the saying goes, absolute power corrupts absolutely. 

Absolute power over a society’s money is only going to lead to one outcome: the manipulation of the money supply by those who have control over it for their own ends.

Silver coins in Rome were continuously clipped by successive rulers that over a 200 year period they lost over 60% of their value.

Source: Wikipedia

Coin clipping by rulers was so common and so effective at creating value for rulers at the expense of their citizens that it occurred all over the world, from England to Rome to India to China, for thousands of years.

That’s why money needs inherent, unbreakable characteristics in order to fight the greed and short term thinking of the people who want to abuse it.

Towards better money

The implications of the move away from the gold standard on our society is too complicated to begin discussing here.

The effects of basing an economy on an inflationary fiat currency that punishes savings and incentivises short-term, impulsive consumerism is all around us.

Inequality is at an all-time high and growing, the stock market soars while wages stay stagnant, debt in all its forms is ballooning, and most households don’t have $500 saved for an unexpected bill.

As gloomy as these trends are, despite all the negative outlooks you hear on the news, there’s one shining light in the darkness.


Born in the rubble of the 2008 financial crash, Bitcoin was created as a way out of the existing order, as an escape from the inevitable demise of our current fiat system.

Because, whether by hyperinflation, revolution or some other means, the end of our fiat money is coming, with recent events making that abundantly clear.

Bitcoin is still in its infancy, and still has clear teething problems to overcome, but with a bit of thought, it’s not hard to see what Bitcoin really is.

It’s not PayPal 2.0, it’s not a way to launder drug money and it isn’t a Ponzi scheme.

Bitcoin is fundamentally better money.

Better than our current fiat currency, better than gold, better than any money that has ever existed.

It’s provably scarce, with only 21 million coins ever in existence and a transparent, decreasing supply schedule.

This supply will be cut in half and will take Bitcoin’s S2F to equal that of gold in 2020, the only other asset in existence with that level of scarcity.

But this supply halving doesn’t stop there. It’s programmed to occur every four years, until 21 million coins in total are produced, sometime in 2140.


This is all done with automated code that nobody can alter.

So pretty soon, Bitcoin will become the most provably scarce asset in existence.

And all of this is secured by the most powerful computer network in the world, running peer-to-peer, open-source code.

The only thing against Bitcoin now is time.

We have a 5000-year history with gold, whereas Bitcoin is only 11.

But as we’ve seen, the properties given to Bitcoin by its pseudonymous inventor Satoshi Nakamoto make it the best money in existence. 

Give Bitcoin another 11 years and we’ll truly begin to see its full potential.