The Evolution of Currency and the Revolutionary Potential of Bitcoin

Introduction

Currency is one of the most profound and consensual inventions in the process of human civilization. From barter to metal currency, from the gold standard to sovereign credit currency, the evolution of currency is accompanied by changes in trust mechanisms, transaction efficiency, and power structures. Today, the global currency system is facing unprecedented challenges: currency overissuance, trust crises, worsening sovereign debt, and geopolitical economic turmoil triggered by the hegemony of the US dollar.

The emergence of Bitcoin and its continuously expanding influence prompt us to rethink the nature of currency and the possible forms of future "value anchors". Bitcoin is not only revolutionary in terms of technology and algorithms, but more importantly, as the first "bottom-up" currency system in human history driven spontaneously by users, it is challenging the millennium paradigm of state-led currency issuance.

This article will review the historical evolution of currency anchors, analyze the dilemmas of the current gold reserve system, explore the economic innovations and limitations of Bitcoin, consider the possibilities of Bitcoin as a future value anchor, and look forward to the diversified development paths of the global monetary system.

1. The Historical Evolution of Currency Anchors

1. The Birth of Barter and Commodity Money

The earliest economic activities of mankind primarily relied on the "barter" model, where both parties in a transaction needed to exactly possess the items required by the other. This "coincidence of double coincidence of wants" greatly limited the development of production and circulation. To solve this problem, commodities with universally accepted value (such as shells, salt, livestock, etc.) gradually became "commodity money," laying the foundation for later precious metal currencies.

2. Gold Standard and Global Settlement System

Entering a civilized society, gold and silver, due to their natural properties of scarcity, divisibility, and difficulty to tamper, became the most representative general equivalents. Ancient empires used metallic currency as a symbol of national power and social wealth.

In the 19th century, the gold standard was established globally, linking national currencies to gold and standardizing international trade and settlement. England officially established the gold standard in 1816, and other major economies gradually followed suit. The biggest advantage of this system is that the "anchor" of the currency is clear and the trust cost between countries is low, but it also leads to a limitation on the money supply based on gold reserves, making it difficult to support the expansion of industrialization and the global economy.

3. The Rise of Credit Currency and Sovereign Credit

In the first half of the 20th century, the two World Wars thoroughly impacted the gold standard system. In 1944, the Bretton Woods system was established, linking the US dollar to gold, while other major currencies were then linked to the US dollar, forming the "dollar standard." In 1971, the US government announced the decoupling of the dollar from gold, marking the official entry of global sovereign currencies into the era of fiat currency, where nations issue currency based on their own credit, and manage the economy through debt expansion and monetary policy.

Fiat currency has brought great flexibility and room for economic growth, but it has also sown the seeds of trust crises, hyperinflation, and currency overissuance. Many countries have fallen into currency crises, and even some emerging economies have struggled amidst debt crises and foreign exchange turmoil.

2. The Real Dilemma of the Gold Reserve System

1. Concentration and Opacity of Gold Reserves

Although the gold standard has become history, gold remains an important reserve asset on the balance sheets of central banks around the world. Currently, about one-third of the official gold reserves are stored in the vaults of the Federal Reserve Bank of New York. This arrangement stems from the trust in the U.S. economy and military security in the post-World War II international financial system, but it has also brought significant concentration and opacity issues.

For example, Germany once announced that it would repatriate part of its gold reserves from the United States, citing a lack of trust in the U.S. treasury accounts and a long-standing failure to conduct on-site audits as one of the reasons. It is difficult for outsiders to verify whether the treasury accounts match the actual gold reserves. In addition, the proliferation of derivatives like "paper gold" has further weakened the correspondence between "account gold" and physical gold.

2. The non-M0 attribute of gold

In modern society, gold no longer possesses the attributes of a currency for daily circulation (M0). Individuals and businesses cannot directly settle daily transactions with gold, and it is even difficult to directly hold and transfer physical gold. The main role of gold is more as a settlement tool between sovereign nations, a reserve for large assets, and a hedging instrument in financial markets.

International gold settlement usually involves complex clearing processes, long time delays, and high security costs. Moreover, the transparency of intercentral bank gold trading is extremely low, with account verification relying on the trust endorsement of centralized institutions. This makes gold's role as a global "value anchor" increasingly symbolic rather than a reflection of real circulation value.

3. The Economic Innovations and Real Limitations of Bitcoin

1. The "algorithmic anchoring" of Bitcoin and its monetary attributes

Since its inception in 2009, Bitcoin's characteristics of a fixed total supply, decentralization, and transparency have sparked a new round of thinking about "digital gold" worldwide. The supply rules of Bitcoin are encoded in an algorithm, and the total supply cap of 21 million coins cannot be altered by anyone. This "algorithmically anchored" scarcity is similar to the physical scarcity of gold, but is more thorough and transparent in the era of the global internet.

All Bitcoin transactions are recorded on the blockchain, and anyone in the world can publicly verify the ledger without relying on any centralized institution. This attribute theoretically greatly reduces the risk of "discrepancy between the book and the physical" and significantly enhances the efficiency and transparency of clearing and settlement.

2. The "bottom-up" diffusion path of Bitcoin

Bitcoin differs fundamentally from traditional currency: traditional currency is issued and promoted "top-down" by state power, while Bitcoin is adopted spontaneously "bottom-up" by users and gradually spreads to businesses, financial institutions, and even sovereign nations.

Users lead, institutions follow: Bitcoin was initially adopted spontaneously by a group of cryptography enthusiasts and libertarians. As network effects strengthened, prices rose, and application scenarios expanded, more and more individuals, businesses, and even financial institutions began to hold Bitcoin assets.

Passive adaptation by countries: Some countries have designated Bitcoin as legal tender, while others have approved Bitcoin-related financial products, allowing institutions and the public to participate in the Bitcoin market through compliant channels. The user base and market acceptance of Bitcoin have driven sovereign nations to passively embrace this new form of currency.

Global Borderless Expansion: The network effect of Bitcoin has transcended sovereign borders, with a large number of users in both developed countries and emerging markets spontaneously adopting Bitcoin in their daily lives, asset reserves, and cross-border transfers.

This historic change indicates that whether Bitcoin can become a global currency no longer solely depends on the "approval" of countries or institutions, but rather on whether there are enough users and market consensus.

3. Limitations and Critique

Although Bitcoin has revolutionary potential in theory and technology, there are still many limitations in practical applications:

• High price volatility: The price of Bitcoin is highly susceptible to market sentiment, policy news, and liquidity shocks, with short-term fluctuations far exceeding those of sovereign currencies.
• Low transaction efficiency and high energy consumption: The Bitcoin blockchain has a limited number of transactions it can process per second, long confirmation times, and the proof of work mechanism consumes a large amount of energy.
• Sovereign resistance and regulatory risks: Some countries adopt negative or even suppressive attitudes towards Bitcoin, leading to a fragmented global market.
• Uneven wealth distribution and technical barriers: Early Bitcoin users and a small number of whales control a large amount of Bitcoin, leading to a high concentration of wealth. Additionally, ordinary users face certain technical barriers to participation, making them vulnerable to risks such as fraud and loss of private keys.

4. Similarities and Differences between Bitcoin and Gold: A Thought Experiment on Future Value Anchors

1. The Historical Leap in Transaction Efficiency and Transparency

In the era where gold serves as a value anchor, international bulk gold transactions often require the use of planes, ships, and armored vehicles for physical transfer, which not only takes days or even weeks but also incurs high transportation and insurance costs. For example, the German central bank once announced the repatriation of its gold reserves from overseas, and the entire plan took several years to complete.

More importantly, there is a serious problem of account opacity and difficulty in counting within the global gold reserve system. The ownership, storage location, and actual existence status of gold reserves often rely solely on unilateral statements from centralized institutions. In such a system, the trust cost between countries is extremely high, and the robustness of the international financial system is constrained.

Bitcoin addresses these issues in a completely different way. The ownership and transfer of Bitcoin are recorded on the chain, allowing anyone in the world to verify in real time and publicly. Whether individuals, businesses, or countries, as long as they possess the private key, they can allocate funds at any time without physical transfer or third-party intermediaries, and global transactions can be completed in just a few minutes. This unprecedented transparency and verifiability provide Bitcoin with an efficiency and trust foundation in bulk settlements and value anchoring that gold cannot match.

2. The "role hierarchy" concept of value anchors

Although Bitcoin far surpasses gold in terms of transparency and transfer efficiency, it still faces many limitations in daily payments and small-scale circulation—issues such as transaction speed, fees, and price volatility make it difficult to become "cash" or M0 in reality.

However, referring to the monetary hierarchy theory such as M0/M1/M2, one can envision the future monetary system having the following structure:

• Bitcoin and other "anchor assets" serve as value stores and major settlement tools at the M1+ level, similar to the position of gold in central bank assets, but more transparent and easier to settle.
• Stablecoins based on Bitcoin, layer two networks (such as the Lightning Network), and sovereign digital currencies (CBDC) undertake daily payments, micropayments, and retail settlement functions. These "subcoins" are anchored to Bitcoin or issued backed by it, achieving a unification of circulation efficiency and value stability.
• Bitcoin has become a "general equivalent" and "measuring unit" of social resources, widely recognized by the global market, but is not directly used for daily consumption; instead, it serves as the "ballast" of the economic system, similar to gold.

This layered structure can leverage the scarcity and transparency of Bitcoin as a global "value anchor," while also utilizing technological innovations to meet the convenience and low-cost demands of daily payments.

5. Possible Evolution of Future Monetary Systems and Critical Thinking

1. Multi-tiered, multi-role currency structure

The future monetary system is likely to no longer be dominated by a single sovereign currency, but instead consist of a coexistence of "value anchors - payment media - local currencies" in three layers, with cooperation and competition running parallel.

• Value Anchor: Bitcoin (or similar digital assets) serves as a decentralized global reserve asset, taking on roles such as "high-level currency" for cross-border settlement, central bank reserves, and value hedging.
• Payment mediums: stablecoins, sovereign digital currencies, Lightning Network, etc., anchored to Bitcoin or sovereign currencies, to achieve daily circulation, payments, and pricing.
• Local currency: The local currencies of various countries continue to play a role in regulating and managing the local economy, achieving tax, social welfare, and economic policy goals.

Under this multi-layered structure, the three major functions of currency (medium of exchange, measure of value, store of value) will be more clearly divided among different coins and levels, and the global economy's risk diversification and innovative capacity will also be enhanced.

2. New Trust Mechanisms and Potential Risks

But this new system is not without risks. Can algorithms and network consensus truly replace the credit of national sovereignty and central institutions? Will the decentralized characteristics of Bitcoin be eroded by mining power oligarchs, protocol governance loopholes, or technological advancements? Regulatory divergences, policy conflicts, "black swan" events, etc., on a global scale may all become factors of instability in the future monetary system.

In addition, sovereign countries may restrict the expansion of Bitcoin through strong regulation, taxation, technological blockades, and other means to protect their own interests. Whether Bitcoin can truly achieve global consensus and maintain its status as "digital gold" in a "bottom-up" path still requires the test of time.

Conclusion and Open Questions

Looking back at the evolution of currency, from barter to the gold standard, and then to credit money, each replacement of the "anchor" has been accompanied by profound changes in trust mechanisms and social organization. The emergence of Bitcoin has, for the first time, shifted the "value anchor" from physical resources and sovereign credit to