What is a dollar?
Is it a piece of paper? A number in an account? Have you heard of the Bitcoin in recent years? What is that, then? The Bitcoin is one of a number of money alternatives being tried in the financial market today.
Bitcoin describes itself in this way: “Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.”
Okay, fine. But how in the world can a manmade, non-government-issued invisible thing be used as currency? To answer this question, we’ll have to go back a few hundred years.
One of the most intriguing radio stories I’ve listened to in the last several years comes from public radio’s This American Life. The 2011 episode titled, “The Invention of Money,” took this question of “what is money” to history buffs, economics experts, and the like, trying to get an answer. The short version of the story—which is worth every minute of your attention—is that money was once gold or silver, which had a certain value. Then, we decided to keep the gold or silver locked away, but represent it with more transportable gold or silver certificates. That made sense, but then we broke the connection of these “bills” from their gold or silver. Enter, the dollar. Dollar bills then had value because we agreed they did. What? Yes, dollars have value because we say they do.
Don’t believe it? Listen to Act One of the This American Life story and learn how Brazil tricked their citizens into believing that their currency was stable, after suffering from staggering inflation. It turns out, what the country needed was a reset not of the financial markets, but of the financial mindset of the people. And it worked.
This bizarre value-by-agreement reality is the reason why animal pelts, salt, and tulips have all been accepted as currency over the past few centuries. And it’s why the Bitcoin has value. For the time being, the Bitcoin has value because we, the people, have agreed that it does.
So what do you think, Biz Kid? Will the Bitcoin last? Have you exchanged any of your money into Bitcoin?
Want to learn about the history of money? Check out our Season 1 episode, “What is money?” and learn all about the fascinating history of that paper in your pocket.