Chapter 1:

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To understand the problems we face that Crypto & Bitcoin might solve, we first need to understand money. This first chapter is a brief glimpse at money throughout history, then we can take a more detailed look at today’s money known as fiat, and how it is different from crypto and more importantly, Bitcoin.

In economics and civilizations more generally, a currency should serve three main purposes: unit of account, medium of exchange, and store of value. A unit of account is a standard monetary unit used to measure the value of goods and services. A medium of exchange is an agreed-upon item used to conduct transactions between individuals or businesses. A store of value is an asset that can be saved, retrieved, and exchanged later for goods or services and is expected to hold its value over time. In other words, a currency must be widely accepted, easily traded, and maintain its value in order to fulfill these three purposes effectively.

Over this chapter and the next, we will see how important this really is. In our exploration of money, we will cover all the following money-related topics:

    Money can seem strange if you think about it too much. We are handing over pieces of paper, coins, or bleeping a plastic card and swapping it for food, clothes, etc. A quick summary of how we got where we are today will be helpful before we learn about Bitcoin.


    Legend has it that in ancient China, during the Han dynasty, a man named Bian He found a beautiful piece of jade and presented it to the emperor, hoping to be rewarded for his discovery. However, the emperor accused him of fraud and had his left foot amputated as punishment. Years later, Bian He discovered another jade and again presented it to the emperor, only to be accused once more. After three attempts, he finally proved the authenticity of the jade by sacrificing his own life to cut it in half and reveal a jade figurine inside. The emperor, recognizing his mistake, apologized and had Bian He buried with honors. Bian He hoped to exchange his discovery for a reward but instead had to prove its worth through a series of trades and negotiations.

    In ancient civilizations, humans used to barter, although not exclusively. This system was vital and widespread, yet Imperfect because it relied on the parties wanting something of equal value and more challenging, accepting and agreeing that things were of equal value. For example, how many sheaves of wheat is a cow worth? Does the person selling the cow want that many sheaves of wheat?

    While some societies had high trust and would allow for later settlement when only an imperfect barter was available, it was more difficult to trade at a distance- potentially for more desirable goods because you would have to trust someone you knew less or not at all. When ancient peoples bartered, it was slow, sometimes risky, and almost always restrictive. The solution was currency.


    Throughout the history of civilization, significant widespread types of currency include salt, shells, gold and silver, livestock, corn, and decorative beads. The specific reasons a currency was chosen usually involved the properties we mentioned previously:

    1. It could retain/store its value.
    2. It was more easily divisible than most bartered goods.
    3. Its value was universal and, therefore, widely accepted.

    In the past, many things have been used as currency. In medieval England, edible eels could be used for trade.

    In medieval England, eels were a commonly traded commodity and were considered a valuable source of food. The River Thames was particularly famous for its eel population, and eel fisheries were established along the riverbanks. Eels were sold live or preserved in vinegar, and they were often traded for other goods or used as a form of payment for debts.

    The eel trade was so important that laws were passed to regulate it. For example, in the 13th century, a law was enacted that required eel fishermen to pay a tax on their catch, which was then used to maintain the river and the fisheries. Eel fishing was also restricted to certain times of the year, typically between Michaelmas (September 29) and Christmas (December 25), to allow the eels to breed and ensure their population remained stable.

    Eels were also an important part of the diet of medieval England, particularly during Lent when meat was forbidden. They were typically served roasted, stewed, or baked in pies and were considered a delicacy. The trade in eels continued for centuries, with London becoming a major center for eel sales and distribution. Eels remained a significant form of sustenance, especially for Londoners, and were commonly sold in fish and chip shops in a jellied form.

    Eels were easy to catch compared to more desirable fish; they had a low value and could therefore be used for small transactions singly or larger trades in quantity, and their snake-like form made them easier to carry and count than a typical fish. Parmesan cheese was used in Italy. Parmesan cheese was valuable yet could be sliced into small or large sizes, and it stayed edible for months.

    Let’s explore some less quirky, more widespread examples in detail and how they measure up to the properties of money.


    Our first example of a widely used currency is salt. Salt was used widely for many centuries. The Romans, Egyptians, and others used it – often alongside other forms of currency like precious metals. As an interesting aside, the word salary comes from the word salt.

    There is a story about the city of Venice in the Middle Ages, where salt was particularly valuable because it was used to preserve fish, a staple of the Venetian diet. The Venetian government established a monopoly on the salt trade, which made it even more valuable. However, some Venetian merchants managed to smuggle salt into the city and sell it on the black market. To catch the smugglers, the government set up checkpoints and searched boats entering the city, but the smugglers found a clever way to hide their salt. They would mix it with dirt and shape it into cakes that looked like ordinary building materials, then transport them into the city without being detected.

    When they arrived at their destination, they would soak the mixture in water to dissolve the salt, leaving the dirt behind. The water would then be evaporated to recover the salt crystals, which could be sold on the black market for a high price.

    This process of dissolving salt in the water to separate it from impurities is called “brine washing” and was commonly used during ancient times to extract salt from rock salt deposits or salt water sources. While it was a labor-intensive process, it was worth the effort, as salt was a highly valuable and sought-after commodity in many cultures.

    This practice became so widespread that eventually the government lifted the monopoly and allowed anyone to trade salt openly, leading to a thriving market for the valuable commodity.

    Let’s compare salt to the three properties money should have.

    1. Salt doesn’t perish unless wet or mixed with other substances and as we have learned, is often still recoverable. Therefore, it retains/stores its value.
    2. Salt can be divided into a handful, buckets, or even cartloads and is therefore highly divisible compared to barter goods.
    3. Salt can preserve food and make it taste nicer. These universal utilities made it widely accepted. Everybody needed to keep food, so it had universal value.

    It is evident, however, that despite the properties of salt: nonperishable store of value, divisibility making it a unit of account, inherent utility so universally valued; it wasn’t ideal. For example, it could perish if the cart collapsed in a puddle, and it was bulky to carry a significant amount.

    Perhaps most significantly, it is possible that there could be an oversupply of salt, and therefore its value, other than as a preservative, could diminish. The price of goods relative to salt would increase, meaning it wasn’t always reliable as a long-term store of value.

    This is monetary inflation. The only difference to what we are experiencing today is the format of the money, salt instead of paper, coins, and numbers on a bank spreadsheet.

    Monetary inflation refers to a sustained increase in the overall level of prices in an economy, resulting in the loss of purchasing power of a given amount of money over time. This typically occurs when there is an increase in the supply of money in circulation, without a corresponding increase in the supply of goods and services. When there is more money chasing the same amount of goods, the prices of those goods tend to go up, resulting in inflation.

    Decorative beads

    The use of beads in ancient times was extensive and widespread. Ancient manufacturing sites were found in multiple centers around South America, the Philippines, and West Africa. However, there were likely many more sites because beads were used as currency in the Indo-Pacific region, dating back to before recorded history. Another example of manufacturing in West Africa dates to as early as 1100 AD.

    Beads came in all shapes, sizes, and colors. Tubular in West Africa, oval and round in the Philippines. Not only were these beads used locally, but they also spread internationally. They were an excellent currency for trade because they looked nice and were universally accepted as holding value; furthermore, to a greater extent than salt, they took time and skill to produce and therefore had good scarcity. As a result, they were commonly used not just for trade but to store spare wealth.

    The variety in size, shape, color, and scarcity meant that some beads were assigned more significant value than others. This was perfect for enabling trades large and small. Like coins of different denominations, beads were more helpful than barter goods.

    Western explorers like Columbus and Magellan traded in these beads; African beads were used in the Philippines and vice versa. Eventually, European manufacturers started making beads, becoming a top commodity sold to civilizations around the globe, including in exchange for enslaved people in West Africa. African Kings were happy to exchange wealth for surplus human capital, and Western slave traders were pleased to give away what was almost worthless to them for a valuable commodity of the era.

    Like precious metals in Europe, beads were also a status symbol. If you had excess wealth, you could wear it to show the neighbors you were more affluent than them, which would confer status and power. Although beads don’t buy anything like the commodities they used to, they are still worn by many cultures today.

    Over time, in West Africa, rulers amassed so many beads, primarily manufactured in Europe, which they circulated amongst the population for goods and services that the beads slowly became less valuable until they became almost worthless and were not accepted for barter anymore.

    This is another example of monetary inflation.

    Are you seeing something of a theme developing here? Would it have been beneficial to much of the ancient world if there had been some way of limiting the production of beads or the gathering and storage of salt? Let’s look at another quick case study.

    The Rai stones of Yapp

    Some isolated communities had to be even more creative to devise their currency. On the Island of Yapp in Micronesia, they used stones for money, fancy disc-shaped objects with a hole made in the center. These stones came in many sizes, from small 4-6 inches to giant stones about 3.5 meters in diameter. The heaviest stones weighed several tonnes. The currency was called Rai and was shipped from a neighboring island called Palau.

    The considerable effort to collect, ship, and fashion the shape made Rai scarce, especially the large sizes. Some of the Rai was so heavy it would need an effort by the whole village to move them. The larger stones were often displayed in the center of the town for all to see. Even when they changed ownership as the fortunes of villagers ebbed and flowed over the years, they would remain in the village center, but everyone would know to whom it belonged and gaze in awe at their prosperity. The largest, publicly held Rai discs could be used for trading desirable plots of land or large purchases like ships, perhaps to acquire more Rai stones on Palau.

    The beauty gave them universal value, the variation in size made them a suitable unit of exchange, and the scarcity made them a good store of wealth and, for a while at least, inflation resistant. You can still visit Yapp today and see the ruins of ancient villages with Rai stones still displayed in the jungle areas that were once home. I have never been, but some fascinating videos on YouTube go into more detail.

    You can probably guess what happened next. In the 19th century, an Irishman named David O’Keefe was shipwrecked on Yapp – along with his modern mining and crafting tools. Unfortunately, he churned out Rai stones at a great rate, monetary inflation ensued, and the Yapp economy was significantly disrupted. Although legend has it, the Irishman lived with many paramours on a neighboring island until some years later; he decided to visit his wife and died on the journey home.

    You might be interested to know that when you own bitcoin, it is never actually “in” your wallet. All the existing bitcoin is “on” the blockchain, the digital, globally replicated financial ledger. So if you own one bitcoin, the wallet app that shows your balance and allows you to spend it doesn’t contain any bitcoin! Instead, it simply holds the unique unbreakable cryptographic key, which gives you access and ownership to the specific instance of one bitcoin on the blockchain. This has parallels with the most prominent ancient Rai stones on Yapp.

    It is said that provided you trusted the seller, the Yapp people would even accept payment in Rai stones that were lost at sea. This is not the case with bitcoins. Lost bitcoin is unusable. Never lose your cryptographic key! We will discuss safely storing your crypto over much of the book.

    A cryptographic key is a piece of information used to encrypt or decrypt data in a cryptographic system. It is essentially a string of characters that is generated by an algorithm and is used to scramble and unscramble data in a way that only authorized parties can access it. We will go into depth about all things cryptographic in Chapter 3: Cryptography & the Cypherpunks.

    Precious metals

    Metals like gold, silver, copper, and electrum were used alongside these other forms of currency and alleviated the problems of perishability, and portability, to some extent. Metals also largely solved the problem of oversupply because they were finite in quantity, and you either had to earn it, trade for it, or go and dig it up. Creating or minting new bitcoins is called mining because it is synonymous with digging up precious metals. The mining system is called proof of work because if a bitcoin miner manages to “mint” some new bitcoin, it proves he has been hard at work securing the network. This raises questions, and we will go into great detail in Chapter 5: How Bitcoin Works. But let’s get back to precious metal.

    However, the early metal currencies had the problem of value opacity. This is because traders must constantly weigh and check the purity to assess the actual value. This made metals more suited for more significant transactions because not everybody would have the knowledge and equipment to trade in them accurately.

    The Lydian empire, situated in what is now modern-day Türkiye, was the first to introduce a centrally issued coin that made the currency transparent in value. The Lydian stater was made of gold, silver, and copper, stamped, and of a fixed weight. This lessened the problem of verification. It is uncertain, perhaps unlikely, that the ordinary Lydian citizen used the stater because of its high value. Still, historians agree that they were used by merchants, along with the wealthy and King Croesus, as a store of value and a unit of exchange. King Croesus was burned to death by the Persians and relieved of his kingdom and his staters.

    The idea of centrally issued coinage spread to Greece, and later incarnations of coinage solved the high-value problem of the stater by using cheaper metals like copper. And usually, a combination of copper, gold, and silver would complement other currencies like salt and barter items.

    Precious paper

    The Chinese used an interesting form of currency during the Tang dynasty from the 7th century AD to the 10th century AD. During this time, they introduced centrally issued paper money. This was a different concept to the paper money we have today and significantly different, even from the early paper monies used in European nations much later.

    The most crucial feature of flying cash, as it became known, was that the paper money obtained its value in much the same way as a metal coin, not through its imprinted value but through its scarcity. The paper money was printed using revolutionary woodblock printing, which was impossible to counterfeit. Even the authorities controlling the printing presses had limitations on what they could print because of the speed, process, and cost of printing. If you wanted flying cash, you would have to work or trade for it.

    Woodblock printing is a printing technique that involves carving an image into a block of wood, inking the block, and then pressing it onto paper to create a printed image. The carved areas of the block leave the paper blank, while the raised areas transfer ink onto the paper. Woodblock printing was also used for printing books, artwork, and textiles.

    Unfortunately for the Tang folk, as the printing process got cheaper and the woodblock presses more widespread, flying cash, like beads, salt, and our modern currencies, devalued to become worthless. However, unlike modern money, the flying cash decline took hundreds of years. We will explore the modern monetary inflation phenomenon in the next chapter.

    Official metals

    The Romans had the most widespread use of official metal coins, and they were used for centuries. The general availability, universal acceptance, divisibility through a range of values, and store of value through inherent worth were all reasons for the success and longevity of the Roman Empire. Conversely, the debasement of the Roman-issued coinage was a significant factor in the decline.

    Roman coins were debased by shaving metal off. The citizens were not stupid; they realized the coins were getting lighter and insisted on more when they bartered. This caused prices to rise, markets to collapse, and decline to be reinforced. Europe eventually went into the period known as the Dark Ages. Having reliable money is essential to a healthy society and a thriving civilization.

    Around the 12th century onwards, the gold Italian florin came into use. The florin was accepted across borders, and by the seventeenth century, other nations were following suit issuing their official gold and silver coins. Most potent was that centrally issued gold and silver coins from one country were often accepted and recognized as holding a clear specific value in others. International trade became much faster and safer. Other examples than the Italian florin include the Spanish silver dollar, and the gold doubloon, followed by the British pound and then the American eagle.

    But even official metals had their drawbacks, mainly regarding security, storage, and transportation, because people kept on stealing them. How rude. However, the gold standard significantly improved the problems – at least for a while.

    The Gold Standard

    In 1816 the introduction of the gold standard in England allowed for paper notes to be created, but they weren’t just printed to please; each note would back an amount of actual physical gold that could be redeemed. Later, in 1900 the United States past an act linking the value of banknotes to an amount of gold.

    Although, as we have seen, notes of various types had been used before, notes issued backed by a gold standard ushered in an era of unprecedented commerce and growth. Individuals, merchants, corporations, stock markets, and governments could trade globally without lugging around tons of precious metal coins and bars.

    At this point in history, it could be argued that perfect money was in use, although trade was not as fast as today’s electronic systems. However, this money had divisibility, a store of value, and universal acceptance. As a result, prosperity grew throughout the 18th and 19th centuries, within and across borders, where the gold standard was in use.

    Although the system wasn’t perfect as there were loopholes in the Gold Standard system that allowed wiley traders to profit from the difference in gold prices between countries. They would buy gold at a fixed price in one country, then sell it in another country where the price was higher, making a profit on the difference. This practice became known as “gold export arbitrage,” and it was technically legal at the time, although it was seen as a shady practice. So, while the Gold Standard was a widely accepted monetary system, it was not immune to clever exploitation by those looking to make a quick profit.

    In my opinion, the one remaining significant problem – other than not having enough of the stuff – was the centralized control of the system. Banks were the first to run the system and issued promissory notes backed by gold. But there were plenty of examples of bank runs when notes were issued without the gold to back them up. This malpractice would end in severe punishment for the bank owner, and the system overall worked.

    Then central banks were formed, and governments controlled the supply of the notes. Governments weren’t keen to punish themselves for printing too many notes for some reason. The beginning of the 20th century would usher in the first wave of free money for governments. The flaw of centralization leading to inflation should be obvious at this point – but not to almost every major government on the face of the planet – apparently.


    At this point, I ask you to consider the possibility of a system where the currency is secured by the most tangible commodity on the planet, with complete transparency of issuance and ownership, backed by provable work having been undertaken, outside the control of a centralized authority, with minimal and fixed inflation, in addition to instant digital transferability. We’ll come back to these properties of Bitcoin soon.

    In this chapter, we have seen that having reliable, trusted money is essential to a civilization. It enables transactions between people who do not trust each other to come back another day to fulfill the agreement made in a barter. However, when money is not backed by anything, the only thing giving it value is scarcity. But, as we have seen, monetary inflation can undermine scarcity with civilizational scale consequences. So, is this the end of the story of money? Has the gold standard fixed everything? Unfortunately, governments discovered another property that can give money value. That property is authority or fiat. And it comes with some big problems, as we will see.

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