Sunday, June 13, 2021

How Gold Became Money and Why Bitcoin Is Like Gold

Peter Thiel who co-founded PayPal and invested early in Facebook says Bitcoin is like gold:

The man's been putting his money where his mouth is, and so far profiting handsomely from it.

But what does he mean when he says:

"There will be one
online equivalent to gold,
and the one you'd bet on
would be the biggest."


"It's like bars of gold
in a vault that never move,
and it's a sort of hedge
of sorts against the whole
world falling apart."

Well to answer that question...

You have to know a few things about gold and how it became money.

What Is Money?

Money is:
any item



used as a...

1. Store of Value
2. Medium of Exchange
3. Unit of Account

Money is one of the best inventions of human civilization.

It's right up there with language and the microchip.

Because of money, people can produce far more than they consume and save what ever's leftover (their profit) for a rainy day.

OR they can exchange their profit for something else of value that they could not have produced themselves (or produced as easily themselves).

OR they can exchange their profit for tools or information that make them more productive, turning it into capital and investing it for a greater reward later instead of consuming it now.

That's the origin of the robust economic system called capitalism.

Money's function as a precise unit of account allows sophisticated capitalists to undertake productive endeavors on a massive, complex, and highly rewarding scale.

For money to fulfill these three critically important functions, it must have the following qualities...

Money has to be:

1. Durable
2. Portable
3. Fungible

1. Durable meaning: able to withstand wear, pressure, or damage.

Bananas would never make very good money, because they couldn't store your value for longer than some days.

Gold on the other hand can last for literally millions of years.

Most of the gold in the Universe– including on Earth– was probably created by the collision of neutron stars early on in the history of stars.

2. Portable meaning: able to be easily carried or moved.

A redwood tree is a lot more durable than a banana, and worth at least as much as the lumber that can be made from it, but it's not very portable.

Gold on the other hand is very rare and much more valuable per unit of weight than wood, so a fortune in gold can be moved around easily.

A 1 oz. gold coin you can hold in your hand has been worth over $1,000 USD since 2009.

3. Fungible meaning: able to replace or be replaced by another identical item; mutually interchangeable.

Precious gems like rubies are durable and portable, but not very fungible because it's more difficult to make any two gem stones exactly alike.

Precious metals like gold can be melted down relatively easily into exact units of any amount that are identical and interchangeable.

All U.S. silver coins of the same denomination contain the exact same amount of American coin silver, which is an alloy of 90% silver and 10% copper for strength.

As early societies sought to establish an advanced economy by developing a system of money, they found that gold suited the purpose best by far.

So how is Bitcoin the online equivalent to gold?

Well in the first place: There is a demand for something like gold in the digital economy for the same reasons there's been a demand for gold in the world market throughout the ages.

Extremely productive enterprises have a strong interest in a reliable store of value to keep, protect, and even grow all of the wealth that they create.

Bitcoin is computer software that meets that demand with a deadly clever design that gives it the same three qualities gold has: durability, portability, and fungibility.

Bitcoin is durable because it maintains a single, massive, public ledger of all transactions on a decentralized, peer-to-peer network with many nodes.

Bitcoin is not merely durable. It's marvelously secure and resilient.

Bitcoin is portable because it's digital money accessible from anywhere, and the system pays people in bitcoin for computer power to update ledgers.

Bitcoin is fungible to an even greater degree than gold, which is not as easily and cost-effectively divisible.

Bitcoin can continue to be divided into finer and finer units of the decimal system (up to a hundred millionth of a bitcoin– a satoshi) almost for free.

And last but not least, Bitcoin is like gold in another important way:

They're both inflation-proof.

Inflation means: prices going up.

When prices go up, your money buys less, so inflation makes you poorer.

What causes inflation?

Increases in the supply of money.

And that's the thing about the world's most widely used form of money...

The Federal Reserve, the private bank that issues U.S. dollars, is constantly increasing the supply.

And basically giving that new money to itself and its close friends on Wall Street and in Washington.

But when it does that, it decreases the value– the purchasing power– of every dollar in your account.

Look at how much value each U.S. dollar has lost over its history.

These numbers are directly from the Federal Reserve Bank itself:

Why has the purchasing power of each U.S. dollar gone down so dramatically since the Federal Reserve was created in 1913?

Because the Fed is constantly increasing the supply of USDs by creating new ones and giving them to the world's established, powerful elite in Wall Street and Washington.

Here's the Federal Reserve's own graph of the amount of dollars it has created just since 1984:

After that new money gets lent and begins to circulate in the economy, it devalues all the rest of the dollars out there by driving up prices.

When inflation happens, the bankers get richer and you get poorer.

Even if you have had a lot of success in life and accrued a lot of wealth, unless you are a central banker or make your money fairly high upstream in the chain of money lenders...

You are probably not nearly as wealthy as you would have been had the proprietors of the U.S. dollar not abused their control over the money supply to essentially steal from you to give to Wall Street and Washington.

That is unless you protected your wealth in hard assets like gold...

Click the graph of the money supply again and look at how it goes nearly vertical at the end of 2008 and then continues to expand at an unprecedented rate:

Ten years later there is still over four times the amount of USDs in circulation as there was in 2007.

That's radical!

Part of the ethos of American capitalism is an aversion to wealth redistribution, right?

Well this monetary expansion was the greatest single act of wealth redistribution– the absolutely biggest heist– in human history.

With a gun you can rob a bank.

But with a bank these people have robbed the entire world.

Politicians like Barack Obama, who was a U.S Senator running for POTUS in 2008 and voted for the Troubled Asset Recovery Program (the trillion dollar Wall Street Bailout), say it was to "save the economy."

It was. To save their unproductive, parasitic half of the economy, the half that makes its fortune by lending money that's created out of thin air to the rest of us, with interest, for profit.

The policy of this monetary-political regime is clear: to privatize the profits of powerful lobbying corporations, while socializing their losses by making you and me pay more for everything we buy to bail them out.

John McCain- Obama's Republican opponent in the 2008 presidential election- also voted for TARP.

See Republicans and Democrats get along just fine and agree on almost anything that steals from the productive people of the world to give to themselves and their friends.

But people who understand how money works– and how the USD is designed to slowly steal from the people who use it– have protected their wealth in hard assets.

Look what happens to the price of gold starting at the end of 2008 when the Fed started to radically expand the supply of money:

It continues its upward climb even more steeply than before and spends every year since 2009 above $1,000 an ounce. The Federal Reserve can manipulate the supply of money, but it can't manipulate the supply of gold.

You can be sure that libertarians like U.S. Congressman and presidential candidate Ron Paul– who has been investing in gold since 1971 when the U.S. government ended the gold standard by unilaterally terminating the Bretton Woods system– have done very well for themselves by understanding how the monetary system works and how to invest based on this information.

Forward thinking digital technology entrepreneurs like Peter Thiel, who also understand how the Federal Reserve's money works against us, saw the value of Bitcoin as an inflation hedge like gold to shelter your wealth almost as soon as the first bitcoin was issued in January of 2009.

Because unlike the USD, which is controlled by a few people who are constantly devaluing it to steal from everyone else who uses it, Bitcoin is not controlled by central bankers.

Instead of leaving it up to an elite few to have the incredibly unfair, definitely corrupting power to control the supply of its money, Bitcoin is hard coded to issue a certain, limited amount of new bitcoins at regular intervals.

And instead of giving a privileged few special access to new money as it's created like the Federal Reserve does, Bitcoin issues new coin as payment to anyone who lends some computing power to maintain Bitcoin's massive encrypted ledger.

"As good as gold" means something that you can rely on, the same way you could rely on gold throughout history as a safe store of value.

Unlike gold, the value of each unit of institutional money is constantly evaporating due to inflation.

But Bitcoin is a new kind of modern money, made possible for the first time by digital technology, and so promising as an inflation-proof investment to protect wealth, that hundreds of billions of dollars have already gone chasing after bitcoin.

Live Free,
Wes Messamore

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