The Evolution Of Currency: From Gold To Bitcoin

Money isn't everything — but it's something we can't do without.

Has money existed in today's paper currency form since it came into use? No. It has gone through a long evolution since its inception. Before money came into existence, as early as 6000 B.C., Mesopotamian tribes bartered goods — meaning they were exchanged. You pay for eggs with a measure of grain, if you have a surplus of the latter.

Coin Makes Its Appearance

The Chinese are credited with the introduction of a primitive bronze form of coins as a medium of exchange in 1,100 B.C. The first minted coins, however, were made in Lydia, which is western Turkey today. These coins were made from a naturally occurring gold and silver mixture called electrum, and had images that served as denominations.

The Chinese were once again the innovators as money went through the next stage in its evolutionary process. They began using folding money during the reign of the Tang dynasty — 618 A.D.-907 A.D. — in the form of privately issued bills of credit or exchange notes, according to Time.

Europeans, who began colonizing territories, were merrily using coins long after that, as they found it viable to mint coins using the precious metals acquired from their colonies.

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Private Paper Money Comes Into Being

It was only in the 17th century that some form of paper money came to be used in Europe. To facilitate ease of handling, banks began issuing bank notes to their clients, which could be carried instead of coins. These notes could be exchanged at banks for their face value in gold or silver coins. With the notes being issued by banks and private parties, they were neither widely available nor winning the confidence of the population.

Governments Take Over

The first issuance of paper currency by a European government was in 1685, when colonial governments in North America began issuing paper currency. As the military payroll from France was delayed, the French colonial government in Canada issued denominated playing cards to soldiers that could be exchanged for a fixed value of coins when they arrived. As the adage goes, necessity is the mother of invention.

Paper money found its way into the U.S. with the breakout of the Civil War, which spanned between 1861 and 1865. The uncertainty resulting from the Civil War led to a spike in the value of metals such as gold, silver and copper. Therefore, coins had more worth when melted than they did at face value. Thinking on its feet, the government arrived at an alternative of issuing coins made from alloys such as bronze and nickel. This worked for small denominations, but was not viable with large denominations. This forced the government to embrace paper currency. Though paper currency was initially viewed with skepticism and scorn, it gradually gained mainstream acceptance. In 1933, paper money officially took over entirely from coinage as the primary means of exchange.

Bimetallic Standard

Before that, the Coinage Act passed in 1792 led to the pegging of the U.S. dollar to a bimetallic silver-gold standard (24.75 grains of fine gold and 371.25 grains of fine silver). In 1816, Britain announced it was tying of the pound to a specific quantity of gold, with the government issuing sovereign, a small gold coin, which was valued at 1 pound sterling. The Coinage Act of 1873 allowed debt holders to demand their reimbursements in whichever metal they preferred.

The Gold Standard: Adoption And Abandonment

The Gold Standard Act of 1900 did away with silver and established gold as the only standard for redeeming paper money. The dollar's value was fixed at 25-8/10 grains of gold (90 percent pure gold), equivalent to 23.22 grains or 1.5046 grams of pure gold. This gold peg served as a check for the money supply, preventing the printing of too much money and running out of gold. In 1933, the U.S. officially abandoned the gold standard. The link between gold and the dollar was completely severed in 1971. The U.S. now boasts a fiat currency system, where the dollar is not pegged to any specific asset.

Move Over: Crypto Is Here

Talks on whether the paper money could be supplanted have began to surface as digital currencies gain popularity. Digital currency or cryptocurrency are limited entries in a database no one can change without fulfilling certain conditions, with cryptography used to secured communications, information and money online.

See also: How Bitcoin Cash Could Supplant The Original Crypto

It uses peer-to-peer technology, with no regulation from central authority or banks. Issuing digital currencies and managing transactions are all done by the network. Bitcoin was the cryptocurrency introduced and was created in 2009 by Satoshi Nakamoto, who remains anonymous. Its market cap of $176.11 billion accounts for roughly 56.5 percent of the total market cap of all digital currencies.

From $968.23 at the end of 2016, Bitcoin rallied to over $11,000 Wednesday before pulling back below the $10,000 level. The volatility on Wednesday was blamed on outages at the GDAX exchange, promoted by Coinbase, which is the key U.S. website for buying and selling Bitcoin.

Despite the buoyancy, not all are convinced of the legitimacy of this newest asset class.

JPMorgan Chase & Co. JPM's Jamie Dimon has been vocal in his criticism of digital currencies. In September, Dimon called bitcoin a fraud and said he would fire any employee who was trading the currency.

Others like Goldman Sachs Group Inc GS's Lloyd Blankfein have a more favorable outlook on crypto. In an Oct. 3 tweet, Blankfein said: "Still thinking about #Bitcoin. No conclusion - not endorsing/rejecting. Know that folks also were skeptical when paper money displaced gold."

Related Link: Cryptocurrency Mining: What It Is, How It Works And Who's Making Money Off It

Digital currency is the next logical evolution of money, Jefferies said in a Wednesday note, quoting Robleh Ali, a digital currency research scientist from MIT. The four key characteristics of money are: ease of authentication, divisibility, restricted supply due to the difficulty of production and persistence over time or immutability, according to Ali.

Tracing the evolution of money, Ali said it first started as being both decentralized and materialized — or assuming a physical or material form — with gold being the example.

Subsequently, with the delinking of money from the gold standard and debt becoming a more popular instrument, money began to be centralized and dematerialized, Ali said.

Now, for the first time, money is being decentralized and dematerialized with the advent of cryptocurrencies, said Jefferies analyst Mark Lipacis, quoting MIT's Ali.

A good digital currency must possess three characteristics, according to Ali: a good team, a philosophy of decentralization and a history of execution. A balance of power between miners, developers and users is needed for wide acceptance of a digital currency, Ali said. If power is concentrated among a few miners, rewards will also get concentrated, offering less incentive for using the coin.

The Future

Going by this logic, Ali said that when Ethereum shifts from a proof-of-work, or PoW, to a proof-of-stake, or PoS, system, its popularity could dwindle. PoW and PoS are different algorithms or methods to reach a consensus on which block should be added next to a chain. PoW requires a proof from miners that work of some kind has occurred before their block is accepted by others. In PoS, those with a high stake in the currency decide on the next block, concentrating power with a particular party.

Ethereum is the No. 2 digital currency in terms of market cap, accounting for about 14 percent of the total. Ethereum's planned shift would make other PoW currencies more popular, Ali said.

Five years down the line, Ali projects that tiers of coins will develop, with one tier considered an asset class,and another the currency per se. Given the challenges in currency values in less-developed countries, Ali said these countries could be the first ones to launch official digital currencies.