Author’s Note:
Before we begin, I want to clarify that this article contains a significant amount of specialized knowledge in finance. I will do my best to explain various concepts clearly, but there may be some inaccuracies due to my limited expertise. I apologize in advance for any misunderstandings or errors.
In recent years, two terms have periodically made headlines and captured public attention—though they haven’t been constant fixtures in daily life. One is Bitcoin, and the other is blockchain. Of course, the recent buzz has been dominated by the concept of the metaverse, but today’s discussion will focus on the earlier (and still relevant) hotspots.
Before diving into Bitcoin, I’d like to share some historical and conceptual background about currency.
First, “goods” and “currency” are distinct yet interdependent concepts. “Goods” refer to commodities and services, while “currency” refers to banknotes. A country’s central bank holds the authority to issue banknotes.
Banknotes themselves have little intrinsic value. Their circulation as money relies on the creditworthiness of the issuing nation, meaning people trust and are willing to use the central bank’s notes to exchange for goods and services.
The emergence of currency was a gradual process. In ancient times, people bartered goods directly. Later, they realized this was inconvenient and began using rare, portable items like seashells as intermediaries, effectively turning shells into currency. However, shells had drawbacks: they were abundant in coastal areas but scarce inland, making standardization impossible. They were also bulky, impractical for trading high-value items.
The discovery of precious metals like gold and silver marked a turning point. These metals were ideal for currency, valuable, compact, divisible, and corrosion resistant. Once mined, they quickly became monetary standards. Yet due to their scarcity, people also used more abundant metals like copper for coinage.
The Functions of Currency
Currency can be seen as a tool or medium. Simply put, it has little intrinsic value but serves to measure the value of goods.
Government-issued banknotes, mandated for all transactions and debt payments, are called fiat currency.
Speaking of fiat, modern mobile payments have led to incidents where merchants refuse cash, a mistake rooted in ignorance of fiat’s legal status.
Why Paper Money Didn’t Thrive Historically
Despite its early invention, paper money failed to gain traction due to government overprinting. The result was severe devaluation. Eventually, people reverted to silver and other precious metals, stunting paper money’s development.
In contrast, Western nations adopted the gold standard before paper currency. Proposed by physicist Isaac Newton, the gold standard tied banknote issuance to gold reserves. This system curbed inflation during the Industrial Revolution, stabilizing prices.
However, as economies grew, limited gold production exposed the gold standard’s flaws. Economics speaks of two “hands”: the visible hand of market regulation and the invisible hand of government intervention. Mainstream economics argues that during rapid growth, central banks should increase money supply via monetary policy to support expansion without triggering inflation or deflation.
Thus, during the 1929 Great Depression, countries on the gold standard suffered most.
Financial Bubbles
With this foundation, let’s discuss bubbles.
The first recorded financial bubble was the Dutch Tulip Mania. Tulip prices skyrocketed as demand outpaced supply, turning the flowers into speculative investments. People sold land and homes to buy tulips, inflating prices far beyond intrinsic value. When the bubble burst, prices collapsed.
Modern finance holds that every asset has an intrinsic value, determined by its ability to generate returns. For stocks, this ties to a company’s profitability. When asset prices vastly exceed intrinsic value without justification, a bubble forms.
Blockchain Technology
Now, the main course: blockchain.
As the name suggests, blockchain is a chain of data blocks linked chronologically. Using cryptography, once a block joins the chain, its data becomes nearly immutable.
In short, blockchain is a decentralized, trustless ledger. It eliminates intermediaries by recording transactions on a public, tamper-proof network. Its applications extend beyond cryptocurrencies to smart contracts, medical records, and auditing.
Bitcoin: Analysis
Bitcoin, created in 2009, is the first cryptocurrency but not synonymous with blockchain. My financial/historical perspective:
- Bitcoin isn’t yet a currency.
- Lacking government backing, it can’t serve as legal tender.
- Its value hinges on speculative “consensus” within the crypto community.
- Its finite supply (21 million by 2140) limits monetary potential.
- Like the gold standard, fixed supply clashes with economic growth needs.
Unlike tulips, Bitcoin’s underlying tech grants it enduring relevance. Yet its investment landscape resembles a game of musical chairs, early adopters profit, but latecomers’ risk significant losses.
Looking Ahead: Digital Currencies
Compared to Bitcoin, central bank digital currencies are state-controlled, balancing privacy and anti-crime measures.
Final Note:
This article isn’t investment advice. I encourage independent research and critical thinking about trends like Bitcoin and digital currencies.
Original article is below:
A Wanderer’s Reflection 
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