It was not long after the internet began appealing to a wide audience with the adoption of browsers in the late 1990s that virtual currency appeared in online gaming. The potential of virtual currency opened a world of new possibilities, and entrepreneurs acted. Capitalism creates new products to replace those when they fail to provide for every individual’s best interests in their life, liberty, and pursuit of happiness.
In 2008, virtual currency was taken to an entirely new level with the publishing of ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ by Satoshi Nakamoto. I read this paper soon after it was released and have been following bitcoin, cryptocurrency, and related developments ever since. I remember when the first commercial transaction was made using bitcoins to purchase a slice of pizza, which garnered a lot of publicity at the time in the small circles in which I was involved that wrote about and discussed currency and the growing impact of the internet.
National currency derives its value from the faith placed in government declarations, hence the name ‘fiat’ currency. Once that faith is lost, the currency is lost too. Bitcoin is different. Its value rests on people’s faith in maths, not politicians.
It still is early days for bitcoin. Nevertheless, it is already widely accepted because it clearly has advantages compared to national currencies. Commenting years ago on its price acceleration, bitcoin enthusiast Max Keiser stated: ‘Bitcoin has no top because fiat currency has no bottom.’
Bitcoin is an open system making available a global currency that anyone can use without asking for permission. The various features of bitcoin, like solving the double-spend problem, limiting the number of bitcoins, and achieving pseudonymity, are simply by-products of Satoshi’s invention that replicate the numerous features of gold, whether used as a physical coin or digital gold currency.
Because it is virtual, bitcoin does not have a physical form. So bitcoin offers a means to store accumulated wealth in a decentralized cryptocurrency that is beyond government restriction or confiscation, which is a sweeping statement that is based on current technology. There is no known way at present to break Bitcoin’s governing mathematical model.
It is worth noting that Satoshi avoided using in his paper words like ‘accounting’ and ‘ledger’ and had the good sense to come up with the word ‘blockchain’. Doing so helped make clear that bitcoin was something new and completely different from earlier types of currency and should therefore be meaningfully distinguished as an important advancement, which explains why I describe it as the third step function in the history of currency – from coin to bank ledgers to virtual.
Admittedly, when bitcoin first appeared I was skeptical and said so in a number of interviews at the time. Those generated some negative feedback from early bitcoin enthusiasts, which prodded me to study and ponder bitcoin’s potential thoroughly. By the time it reached $100 I was convinced that bitcoin was here to stay.
Both digital gold currency and cryptocurrency operate independently of a central bank, but the similarity ends there. There is a stark difference between the physical and virtual worlds, which helps explain bitcoin’s success and leads to one key point about bitcoin and its relation to gold.
They are complementary, not competitive. The disadvantage of gold, that it can be and has been confiscated by governments, is the advantage of bitcoin. The disadvantage of bitcoin, that you cannot hold it in your hand, is the advantage of gold, particularly given its successful 5000-year track record and eternal attributes.
Satoshi’s decision to choose gold to replicate as virtual currency was purposeful. How do I know that? On what basis can I make any insights into Satoshi’s thinking?
It is a speculative guess based on logic. Gold’s superior attributes and track record make it the ideal money to replicate, but my guess is also based on observation. My colleagues and I launched goldmoney.com in 2001 before the advent of social media, but the demand existed to discuss its new Digital Gold Currency product. So we began an email listserv called DGC Chat in which emails and replies were posted for the participants to read. Anyone could join with their email address. Real names were not required. Some people chose to disclose their name, while many others did not. Nevertheless, from the content of the discussions, it was clear that DGC Chat attracted a broad range of thinkers across the spectrum from business people to cypherpunks and probably some government snoops interested in staying informed of the emerging technology.
With such a diverse group, it is not surprising that the topics were varied, but one, in particular, kept recurring. It was that gold as a physical asset could be confiscated and has been confiscated by various governments throughout history, taking gold from the hands of their citizens and not the country’s enemies. The upshot of these exchanges on DGC Chat ended with the same thought. Would it not be a wonderful advancement for individual liberty if there were a currency that had all the attributes of gold but could not be confiscated.
I have no proof that Satoshi Nakamoto subscribed to DGC Chat, but what he created was wished for by many of the DGC Chat subscribers cherishing liberty and who recognised the growing tyranny of the State.
Note: Adopted from Money and Liberty: In the Pursuit of Happiness and The Theory of Natural Money.