A Brief History of the Evolution of Money | From Currency and Fiat to the Consensus Path of Bitcoin

The story of money is actually a story of how humans seek trust. Whether it was shells, gold in the past, or today’s paper currency, behind every form of “money” lies a societal consensus on value. The emergence of fiat currency marked a turning point in this story.

The Three Basic Roles of Money

The so-called “money” did not exist from the very beginning. It is a combination of three functions developed by human society:

Unit of Account means that everyone uses it to measure value. The Cantonese idiom “一夜夫妻百二蚊” (a couple overnight costs 200 cents) reflects this concept—using money as a unit to gauge emotional value.

Medium of Exchange solves the problem of barter. In times without money, if A wants B’s item, but B only wants C’s item, the transaction stalls. With money introduced, everyone first exchanges their goods for money, then uses money to buy what they need. The phrase “無錢萬萬不能” (nothing can be done without money) captures this principle.

Store of Value allows people to preserve the fruits of their labor. For example, fishermen salting their catch for storage is an primitive form of value preservation—though salted fish is obviously not an ideal choice.

Currency and Fiat Money: Two Different Trust Models

In early human history, “currency” was backed by physical assets. Coffee beans had intrinsic value because they could be consumed; precious metals had intrinsic value because they could be made into jewelry. These “goods” with intrinsic value used as “coins” are traditional currency. Its advantage is that even if no one wants to trade with it, it can still be used.

However, as society became more complex, problems with traditional currency emerged. Unstable supply, difficulty in division, transportation challenges—all limited its efficiency as a medium of exchange.

At this point, fiat money came into being. Fiat money is a legal tender declared by law, with no physical backing, maintained solely by the coercive power of the state. This shift is crucial: while the public naturally preferred gold, fiat money is a strict regulation by the government.

The risks of fiat money are also clear—if the regime falls, the currency loses its value. This explains why there is a saying “黄金愛亂世” (gold loves turbulent times), because gold’s value transcends time, borders, and regime changes.

The End of the Gold Era: How Fiat Money Replaced Precious Metals

Historically, gold’s status as currency was almost unchallenged. It is rare, durable, and easy to divide, perfectly meeting all the requirements of money. But once it was widely used as currency, its intrinsic value became secondary.

In the mid-20th century, the international community reached a consensus—using fiat currency. The 1944 Bretton Woods Conference established the exchange rate of 35 USD per ounce of gold, known as the “gold standard.” At that time, the US dollar was called “greenback” because it was backed by gold.

But in 1971, U.S. President Nixon made a decision: to end the gold standard. From then on, the “US dollar” became simply “dollar,” with no gold backing, relying solely on U.S. economic strength and military power. Trust in the dollar essentially became trust in the United States.

This was a pivotal moment—human society shifted from trusting precious metals to trusting the credit of a single nation.

The Trap of Inflation: Can Fiat Money Still Store Value?

Modern governments attempt to link the circulation of fiat currency to productivity through regulation, creating an illusion that “money is stable.” But maintaining this balance is very difficult.

When the increase in circulating money exceeds productivity growth, inflation occurs. Holding fiat currency without investing causes assets to depreciate. In such an environment, the store of value function of fiat money is greatly weakened—today’s 100 yuan might only buy 80 yuan worth of goods next year.

This is why more and more people are seeking alternatives.

The Emergence of Bitcoin: Math Instead of Government Backing

In 2009, a mysterious individual or group introduced Bitcoin. This cryptocurrency is based on cryptography, but its fundamental innovation is that its scarcity is backed by mathematics, not political or economic entities.

Bitcoin’s supply is fixed at 21 million coins, guaranteed by algorithms, and not controlled by any government or institution. Consensus is generated from the bottom up, yet it has grown at a rate hundreds or thousands of times faster than gold. Today, Bitcoin’s market cap has surpassed $1.2 trillion, exceeding most national fiat currencies and about one-tenth of gold’s total market value.

The key here is: Bitcoin’s trust foundation is entirely different. You don’t need to trust a regime or institution—just trust cryptography and network consensus.

Who is the True “Money”? A Modern Asset’s Money-Likeness Evaluation

“Money” can also be an adjective, describing how strongly an asset functions as a unit of account, medium of exchange, and store of value.

The US dollar is the most widely used unit of account and medium of exchange globally, but it is a “leaky” store of value. Your dollar deposits are shrinking each year.

Gold is an excellent store of value, appreciating relative to the dollar over the long term. But because of this characteristic, it is less suitable for everyday pricing and transactions—no one would use a small piece of gold to buy breakfast.

Bitcoin is best understood as digital gold, primarily functioning as a store of value. Criticisms that Bitcoin is unsuitable for daily transactions are correct but also unnecessary—because Bitcoin was never designed to replace everyday payments from the start.

Fiat currency has gone through a complete cycle: from physically backed currency, evolving into pure government-backed fiat, and now facing inflation issues. In this process, people are beginning to rethink what true “money” is. Bitcoin, gold, and fiat each represent different eras of understanding of money. And this story is far from over.