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When they say that Bitcoin is a digital gold, it means that it can fulfill the role of gold as a millenia-old store of value. But why did the gold become such and how was it dismissed?







Gold has served as money to the biggest part of humanity for thousands of years thanks to its chemical stability, fungibility and of course scarcity. With all gold ever extracted still in use, the ratio of new gold to the existing stock has always been relatively small (e.g. not exceeding 2% in the XX century), assuring gold’s capacity to store wealth throughout the centuries. The other metal that once tried to compete with gold was silver, used for smaller transactions. However silver properties, such as corrosiveness, use in industrial processes, bigger presence in the ground and easier extraction, make silver stock-to-flow ratio much bigger (around 20% nowadays). This means that silver production can increase significantly if the price rises, inflating the supply up to the moment when the bubble bursts and the price plummets.



Since King Croesus first minted golden coins and the Roman Empire spread their usage within the Antique world, gold became universal money up until the XX century. To make transactions less cumbersome, gold-backed paper supports, such as bills or cheques, became widely used over time.&nbsp;



By the beginning of the XX century most countries had adopted the modern Gold Standard: the banks’ gold reserves were redeemable and equivalent to bank notes. The conversion between different countries’ currencies was a simple ratio of their weights in gold.&nbsp; 



<h2>After World War I : gold-exchange standard</h2>



Before 1914 each country defined its currency in terms of a fixed weight of gold, carefully observing the Gold Standard. The needs of World War I, however, pushed many European countries to temporarily abandon it and print more money, virtually extending their treasuries.&nbsp;



The post-war period was marked not only by ravaging inflation, logically steaming from over-printing, but also trade disbalance. To ease international trade Central Banks wanted to return to the gold standard (as the US did in 1919). At the Genoa conference in 1922 European countries and Japan decided on a gold-exchange standard, with Central Banks having part of their reserves in gold, and part - in other countries’ currencies, which were themselves directly exchangeable for gold.&nbsp; 



<h2>The Great Depression and dollar devaluation&nbsp; </h2>



This system did not last long, though, as the US Fed’s expansionary monetary policy, followed by the 1929 stock market crash, led to bank failures and large-scale economic downturn all around the industrialized world.



European countries like Germany, UK, Austria and Hungary set up currency exchange controls to prevent capital outflow. However, the situation was still getting worse, with the biggest Austrian and German banks collapsing in 1931, while other European banks suffered repeated bank runs. In 1931, the UK suspended gold convertibility of pound sterling - a currency thus far often used in international trade. Others followed, notably Japan, Scandinavian countries, Latin America… Only a handful of countries still respected the gold standard, notably the US and France.



&nbsp;In the US people were losing trust in financial institutions and were seeking to exchange their overvalued dollars for gold.&nbsp; The response of President Franklin D. Roosevelt was harsh: he ordered the confiscation of all gold from commercial banks (1933) and banned all private ownership of gold (1934), forcing Americans to sell their gold at a fixed rate of $20.67/ounce. With most of the country’s gold now stored at the Federal Reserve, he then priced the dollar at $34.45/ounce, which means a nominal devaluation of 40% that was de facto paid out of the pockets of the American people. These measures allowed to pump more money into the economy while lowering interest rates - all in favour of the new aggregate spending theory elaborated by John Maynard Keynes, who considered government spending a universal remedy for the economy. 



<h2>Bretton Woods: the gold window</h2>



By the end of World War II exhausted countries strived to find monetary stability, which they hoped to agree upon in an international monetary agreement signed in Bretton Woods&nbsp; in 1944.&nbsp;



The member countries were obliged to maintain fixed exchange rates by tying their currencies to gold, and since the United States held two-thirds of the world's gold, the others simply pegged the value of their currency to the dollar and used it as a reserve currency, putting the US in the center of the global monetary system. The gold price was set at&nbsp; $35 per ounce, and the US government promised to other countries’ Central Banks that they will&nbsp; be able to redeem dollars in gold upon request, opening the so-called gold window. Any potential disequilibrium within the exchange rates would be addressed by the newly created International Monetary Fund. The dollar, backed by gold, was considered “as good as gold” for trade.



In 1960, the U.S. held $19.4 billion in gold reserves, which was enough to cover the $18.7 billion in foreign dollars outstanding. The status quo did not last, though. The Vietnam war and the “Great Society” ambitious welfare program of 1964 cost the American Treasury more than it could afford. To finance this huge public debt the Fed was printing dollars, effectively dispersing the costs of the US inflation on the rest of the world.



The payments deficit growing, foreign governments started to worry that the United States would no longer back up the dollar in gold. Thus, during 1959–1969 the administration of President Charles de Gaulle was methodically reducing France’s dollar reserves, exchanging them for gold at an official exchange rate. 



<h2>The Nixon Shock and the end of the Gold Standard</h2>



By 1970, the United States only held $14.5 billion in gold against foreign dollar holdings of $45.7 billion. Dollar was much overvalued and more and more banks around the world started redeeming their holdings for gold. The problem worsened with the devaluation of the British pound in 1967 and the ensued collapse of the London Gold Pool (pooling of gold reserves by a group of eight central banks aiming at defending the gold price at $35) in 1968.



On August 15, 1971 President Nixon unilaterally announced the end of dollar convertibility to gold, defaulting on the US commitment and closing the “gold window".&nbsp;



Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock. The dollar was devalued from $35 per ounce of gold to $38 and the Fed was no longer allowed to redeem dollars with gold.&nbsp;



The U.S. government repriced gold to $42 per ounce in 1973, and then decoupled the value of the dollar from gold altogether. In 1976 the government officially changed the definition of the dollar, removing references to gold from statutes and officially ending the Gold Standard.



From this point, the international monetary system was made of pure fiat money – currencies without intrinsic value that have only been established as money by government regulation. Foreign exchange rates become floating. 



<h2>What does the end of the Gold Standard mean today</h2>



Nixon shock signed the end of the Gold Standard, and turned all currencies into nonredeemable paper money, or fiat money. Fiat isn’t backed by anything, allowing Central Banks to print as much as they wish, often in close collaboration with governments - and politicians tend to wish a lot, for newly created money can easily buy election votes.



The preferred method of producing new fiat money is through credit expansion: governments issue bonds (they borrow) that are bought by the Central Bank with the money created out of thin air. This isn’t the only method: the Central Bank has developed many others to inject liquidity; as a group they are called quantitative easing, or QE.&nbsp;&nbsp;



Central Bank balance sheets can tell a lot about the scale of this practice, and the Fed’s balance sheet is shocking: in only 13 years it has swelled from under $900 Bn to a jaw-dropping $8.349 Tr. This is more than 9 times.



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As for gold, its price surged from $35/ounce in 1944 to over $1830 in 2021.







<h2>So why are other countries still holding to their dollar reserves?</h2>



This is a delicate question. First, all actual currencies are fiat money and carry the same flaws that the dollar, as long as their Central Banks conduct a policy similar to the Fed’s. Furthermore, the dollar is an international exchange money, and American diplomats excel in their art to maintain this status quo, sometimes helped by the US military force.&nbsp;



Not all, however. Russia and China have been buying gold with their dollars for many years now, and Turkey, India and Gulf countries have been piling itat a quick pace since Covid-related crisis.&nbsp;



El Salvador, a small Latin-American nation, went even further and acknowledged Bitcoin as legal tender.



On a personal level people and companies around the world try to spend their fiat money as fast as they can, investing into real assets that, unlike fiat, keep value: company stocks, real estate, art, commodities… and Bitcoin of course. Quite logically, these assets’ prices have significantly risen recently (or more precisely, the buying power of fiat money dropped).



How long will this last? Noone really knows, even if inflation fears are at their highest and general economic sentiment is bleak. Fiat monetary system is a 50-year old colossus with the feet of clay, and it might be time to change it for a system more secure. 



 







If you wish to learn more about the Gold Standard and Bitcoin, we recommend a very instructive book by Saifedean Ammous “The Bitcoin Standard”, articles of a non-profit economic institute <a href="https://mises.org/">Mises </a>as well as <a href="https://wtfhappenedin1971.com/">https://wtfhappenedin1971.com/</a> for some interesting stats. .

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Blockchain is a recent invention. It is still in early stages of its development, and yet a burgeoning new blockchain-related industry is already emerging. Improving the technology, finding new use cases, developing the ecosystem… and of course looking to change the world are some of these new endeavors.



This section is dedicated to exploring different facets of the blockchain and bringing answers to an array of questions one might have - from “Why do we need it” to “How does it work” or “What is it used for”. The structure of Explore descending from general concepts to specific notions, you are welcome to choose your own path according to your interests and go down the rabbit hole. 



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<h2><a href="https://d.center/explore/blockchain-philosophy" class="ek-link">Blockchain philosophy</a></h2>



Why are crypto enthusiasts so enthusiastic? Blockchain is not a trivial technology, but the one that has a potential to change the very way our societies operate. Every organization and every community rely on trusted third parties, responsible for storing and managing data, with all the related risks . Replacing these trusted third parties with a decentralized data handling mechanism would eliminate much of the system’s deficiencies, and that’s exactly what blockchain does. 



<h2><a href="https://d.center/explore/bitcoin" class="ek-link">Bitcoin</a></h2>



The very first implementation of the blockchain, Bitcoin was created to solve the deficiencies of the monetary system and replace the so-called fiat money (dependent on Central Banks) with cryptocurrency, a completely independent alternative that runs on a decentralized peer-to-peer network.&nbsp; 



<h2><a href="https://d.center/explore/blockchain-fundamentals" class="ek-link">Blockchain fundamentals</a></h2>



A blockchain is a collection of technologies and methods that allow gathering data into a ledger, which is stored and updated by the network’s participants (which anyone can become). Data handling is its main role, although it also allows embedding more complex programs and running them in a decentralized way.&nbsp; 



<h2><a href="https://d.center/explore/blockchain-in-practice" class="ek-link">Blockchain in practice</a></h2>



Most blockchain encounters today are about cryptocurrencies - Bitcoin and many others that have appeared since. However the understanding of the technology becoming increasingly subtle, other blockchain real-world use cases appear, notably with the development of decentralized applications, or Dapps. A developed ecosystem makes these functionalities readily available and opens up previously restricted-access industries, such as finance.&nbsp;&nbsp; 



<h2><a href="https://d.center/explore/crypto-regulation" class="ek-link">Crypto regulation</a></h2>



Blockchain and its products are becoming an increasingly important part of our lives and our economies, which inevitably attracts the regulators’ attention. This is not a bad thing, though, for the right laws can support the technology and protect its users against related scams. Depending on a country however the attitude varies greatly, from progressive to autocratic. 



<h2>Beginner’s path </h2>



If you do not yet have a clear idea of what it is you would like to explore, let us suggest you a suite of 8 articles that will smoothly introduce you to the world of cryptoassets and Bitcoin in particular: it will help you to understand what it is used for, how it works and some necessary tools allowing to buy some of it.



<a href="https://d.center/explore/blockchain-philosophy" class="ek-link">Blockchain philosophy</a>



<a href="https://d.center/explore/bitcoin" class="ek-link">Bitcoin</a>



<a href="https://d.center/explore/how-does-bitcoin-work" class="ek-link">How does Bitcoin work</a>



<a href="https://d.center/explore/bitcoin-mechanism " class="ek-link">Bitcoin mechanism</a>



<a href="https://d.center/explore/blockchain-in-practice" class="ek-link">Blockchain in practice</a>



<a href="https://d.center/explore/blockhain-ecosystem" class="ek-link">Blockchain ecosystem</a>



<a href="https://d.center/explore/crypto-wallets" class="ek-link">Crypto wallets</a>



<a href="https://d.center/explore/crypto-exchanges " class="ek-link">Crypto exchanges</a>

Why do we need the blockchain? Are cryptocurrencies important to the tech? How can decentralization change our lives?



The consice answer is: 



The blockchain has the potential to change the existing balance of power by eliminating trusted third parties. 



Here's what it means.



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<h2 class="wp-block-heading">Trusted third party and its flaws</h2>



 Our societies, economies and institutions are built on trust: we trust Central Banks to maintain our currencies, we trust commercial banks to keep our savings, we trust social media to handle our data, we trust charities to use our donations to do good... All these institutions that centrally manage a flow of data (scriptural money released in the economy or on our account, personal photos, donations) are called trusted third parties. With our lives becoming increasingly digital (e.g. money is just a piece of data stored on bank servers), trusted third parties' influence is growing more and more. 



However, these trusted third parties are managed by humans, and as humans we are subject to mistakes and corruption. Information stored by trusted third parties can be hacked and stolen, its infrastructures can be damaged. A trusted third party controlling our data means that de facto we're no longer in its possession: our savings could be lost when a bank goes bankrupt, our online profile data could be sold against our will...etc



Trusted third parties are the weakest link in any organization - the principle also known as a single point of failure.



<h2 class="wp-block-heading">The Blockchain Solution</h2>



The major blockchain's breakthrough is solving the problem of a single point of failure. The blockchain eliminates trusted third parties and replaces them with an [tooltip content="computer code accessible to everyone"]open source protocol[/tooltip] that defines the rules of a trustless data handling. This protocol is run by a multitude of different independent computers all around the world, making the system decentralized. The bigger the blockchain network, the more secure the data it contains. 



Cryptocurrency is an intrinsic part of a blockchain, as it financially incentivizes all those independent computers to participate in the network.



By cutting intermediaries the blockchain allows people to reappropriate their data and be free to dispose of it as they like. Furthermore, in the absence of trusted third parties the data is protected from any intentional or accidental prejudice that these third parties could inflict.



<h2 class="wp-block-heading">Bitcoin</h2>



Bitcoin was the first blockchain implementation, dedicated to the decentralization of the monetary system. 



Classic money,&nbsp;like dollars and euros, are also called fiat money, meaning that they are imposed by the governments who protect Central Banks’ monopoly. Fiat money are not backed by any asset (they are not exchangeable against gold, for example) and the Central Banks can manage their emission as they wish. Fiat money circulation is controlled by commercial banks who keep accounts and validate transactions.



Bitcoin's ambition is to liberate our monetary system and give control over the money to the people who possess it. Bitcoin is the first money ever that does not depend on any organization, that is not imposed upon anyone, and that gets its value from the people who made a choice to use it.



Bitcoin, and the blockchain itself, is a practical implementation of cypherpunks', libertarians' and Austrian economic school's ideas praising the right to privacy and individual freedom, as well as the independent economy. It has the potential to disrupt the society as we know it by making human interactions censorship-resistant and secure.



It is important to note that Bitcoin cannot be dissociated from the blockchain technology, for the mere term "blockchain" has only appeared to describe Bitcoin structure and Bitcoin is the first (and still the most accomplished) implementation of the blockchain.

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Can we be sure that our money keeps its value and is always accessible, while it is controlled by the banks? 



Initially money has three main functions: a store of value, a unit of account and a medium of exchange. In order for a currency to last, its holders must trust its capacity to maintain its value and stay available as a means of exchange. History shows us that this trust can be lost quite fast though and the only currency that could ever stand the test of time was gold, mostly because of its inalterability and scarcity.&nbsp;



Money is a particularly poignant case of trusted third party flaws and dangers, and also the very reason the blockchain was created.







<h2>Printing money </h2>



Paper money first appeared during Tang dynasty in China (circa 800). At first it was intended as a practical alternative to carrying around heavy coins, and was fully backed by gold. Over time, however, the authorities did not resist the temptation of printing more paper money than their gold collateral, which resulted in massive inflation, complete collapse of the currency and an eventual return to hard money.&nbsp; 



Since then every country using paper money has repeated this experience. Over-printing can have numerous reasons, most often a war, and recently - economic crisis. What is sure is that every paper money eventually succumbs to over-printing, which leads to its collapse. 



Speaking of modern times, since 1971’s Nixon shock (unilateral decision to stop dollar convertibility to gold, thus effectively ending Bretton Woods treaty) and the end of the Gold Standard most world currencies are completely detached from gold. In the absence of a physical backup, these currencies derive their value from the notoriety of institutions that issued them. That’s why such money is called fiat money (in Latin fiat is a binding decree issued by authorities, also translated as “let it be done”).&nbsp; 



Most recently paper money has taken a digital form called “scriptural money”, and is massively issued by Central Banks, making short-term economic improvements and decreasing the value of money in a medium and long term. This massive overprinting, casually referred to as “Quantitative Easing” or “deblocking funds to support the economy”, effectively dilutes the existing holdings, making the prices of real and finite assets (stocks, real estate, art, and of course gold) skyrocket. 



<h2>Controlling money </h2>



With scriptural money it became much easier to control their circulation, since all money movements are carried out by a trusted third party - a bank. Depending on the government policies, the bank can decide whether its clients can withdraw, send, or exchange their money. Hence the money on a bank account does not really belong to its owner, as they cannot fully dispose of it.&nbsp; 



In the name of saving a bank from collapsing a deposit can be erased or cut (Cyprus 2013), in the name of saving the national currency all exchanges against foreign currencies can be banned (Argentina 2019), in the name of keeping the country from default cash withdrawals can be limited or stopped (Lebanon 2020), in the name of anti-money laundering a wire can be denied (everywhere in the world)... the list of possible dangers is long, and all of them steam from the fact that the money is being controlled by trusted third party - the banks (which themselves are being controlled by the government and the Central Bank). 



<h2>Bitcoin as digital gold</h2>







The blockchain solves the problem of a trusted third party by replacing it with a decentralized system. <a href="https://d.center/explore/bitcoin" class="ek-link">Bitcoin</a> is governed by its protocol and without any central authority. Its holders will always be able to send and receive bitcoins, the bitcoin emission will always be limited to 21 millions, and this won’t change unless the majority of Bitcoin users and ecosystem decides so (see <a class="ek-link" href="https://d.center/explore/mining-and-consensus">Bitcoin consensus and mining</a>).



Bitcoin is often referred to as digital gold, and for a reason: these values have much in common, notably their scarcity and a relative independence from the Central Banks. They have some differences though.



In case of gold, an increase in price motivates more companies to start its extraction (or allocating more resources to it), and the resulting increased supply progressively could lead to a decrease in price. An increase of Bitcoin price also leads to more miners wishing to extract new bitcoins, thus increasing the mining difficulty (mining becomes more expensive), however the supply of new bitcoins does not change (it is fixed by the protocole).The only thing that increases though is Bitcoin security, creating a virtuous circle, which does not exist for any other type of money: the bigger its price, the more secure it becomes.