Money & Cryptocurrency

The history of money starts more than 50000 years ago and led to an efficient global financial system and cryptocurrencies. Today, economists divide money in multiple categories. We’re comparing “regular money” with cryptocurrency.

The history of money

The history of money covers thousands of years and is aligned with the development of societies. Our earliest ancestors were not able to communicate much and socialized little with few people. Over time, communication forms developed and people started to engage in agriculture, settled down, specialized in areas and exchanged products within their settlements. Consequently, more trade among different settlements through professional traders and middlemen evolved and required easier means of exchange. Trade professionalized rapidly and was accelerated through credit given by wealthy families. The use of middlemen such as traders and later-on banks enabled people to find trading partners and exchange goods with anyone around the globe. Today, we can easily find trading partners around the globe through the internet and exchange goods and services with them but the payment is still done through banks. Since 2009, people and businesses can use Bitcoin to exchange values through a public permissionless peer-to-peer network without middlemen. In the following list, you can see the details of the natural evolvement of money to a practical, easy means of exchange.


Barter is the direct exchange of goods and services. The history of barter origins around 9000 BC with simple exchanges among farmers in Egypt, for example exchanging a cow for a sheep. Barter trade was introduced by Mesopotamia tribes around 5000 BC, adopted by others and enabled people to specialize. When money was invented, barter took other forms but never stopped. During times of lack of money, barter trade is still an alternative (See Great depression in USA in 1930s).


Shells were used as jewellery and collectibles very early and date back to our ancestors around 75000 BC. Necklaces of shell and tooth were found that date back to approximately 40000 BC. At some point around 3500 BC – 1200 BC shells were utilized as means of exchange, for example by Sumerians in Mesopotamia and in coastal regions around the Indian Ocean.


Around 1000 BC physical coins were introduced in China and not much later in other ancient empires. At this time minting technologies were developed. Coins were manufactured from various metals and minted images often show the history. In order to carry them around as easy as possible many coins had holes in the middle and round shapes.


The first paper bills were used by the Chinese. Back then, they were not directly used as means of exchange but as credit and privately issued or exchanged between 2 people. The concept of paper money was brought to Europe from China by travellers such as Marco Polo through the Silk Road in the 13th century. European banknotes appeared in the 17th century.

Gold standard

The Gold Rush in California helped unify western America. In 1861, the first US paper currency was printed based on a Gold standard that was adopted by European countries to standardize transactions and participate in the global trade. In the Gold Standard Act of 1900 Gold was established as the only metal for redeeming paper currency at a specific price per ounce.

Pofessionalization of markets, end of the gold standard and new forms of money

Agencies such as the FED were created by governments in order to stabilize currencies. In times of war, the gold standard was suspended and new money was printed to finance it. That created strong inflation, made existing currencies worthless and caused savers losses. People tried to escape that by getting back into hoarding gold, other assets and even barter trade. The US went back to a modified gold standard but later-on allowed the government to repay debt in US Dollars and not in Gold. After the second world war, the US had the largest Gold reserves and other countries pegged their currencies to the US Dollar instead of Gold at fixed exchange rates. They bought their own currencies for US Dollars in foreign exchange markets in case of their currency becoming too low relative to the dollar. At some point, countries became afraid that the US could no longer back up Dollar with Gold and banks were redeeming their holdings for Gold. At a time of economic stagnation, president Nixon took several economic measures and decoupled the value of Gold from the US Dollar in 1971. Since then, money is not backed up and central banks can print money and lend it to commercial banks. Commercial banks can lend more money than they have to people to boost the economy and benefit from interest.

What is money?

In a broad sense, money is any item or verifiable record that is generally accepted as payment for goods and services or the payment of debt in a group, society or country. Investopedia offers the following definition of money and includes the different types of money such as fiat money, fiduciary money and cryptocurrencies.

Money is an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. (…) Money originates in the form of a commodity, having a physical property to be adopted by market participants as a medium of exchange. Money can be: market-determined, officially issued legal tender or fiat moneys, money substitutes and fiduciary media, and electronic cryptocurrencies.

Investopedia - Updated Nov 7, 2019

The terms money and currency are often used interchangeably. In short, currency is money in the form of paper or coins. More important than the definition of each of these terms is building a general understanding of our current money system, the functions of money, what makes money valuable, and the types of money. The 4 main types of money are the following:


Commodity money

Commodity money is related to a barter system and relies on intrinsic value. Examples of commodity money include cigarettes and gold.


FIAT money

A government usually creates a money system and declares fiat money to be legal tender. This requires all people within the country to comply and accept this currency as a means of payment – otherwise, they can be fined. Fiat money is not backed by physical commodity.


Fiduciary money

Fiduciary money depends for its value on the confidence that it will be generally accepted as a medium of exchange. Unlike fiat money, it is not declared legal tender by the government. Instead, the issuer of fiduciary money promises to exchange it back for a commodity or fiat money if requested. Examples of fiduciary money include cheques, banknotes, or drafts.


Commercial bank money

Commercial bank money can be described as claims against financial institutions that can be used to purchase goods. The commercial bank money describes the portion of a currency called “book money” which is debt generated by commercial banks. Commercial banks give out loans worth more than the value of the actual currency they hold. Credit can be exchanged for “real” money or to buy goods.

By looking at the 4 types of money, we have already touched upon the topic of money creation. How is money created? A government agency – in most cases a central bank – decides the monetary policy and adjusts the supply of money either by printing money (policy of quantitative easing) or decreasing the amount of liquidity in an economy, for example to avoid inflation. However, it’s important to understand that the actual creation of money by central banks is only about 3% of all money creation. 97% of money is created through loans of commercial banks. A German Bundesbank report explains this money creation in the past years.

Since the Eurosystem launched its accommodative non-standard monetary policy measures, the central bank reserves of commercial banks in the euro area have gone up sharply, more than seven-fold within a period of not quite ten years. At the same time, the broader monetary aggregate M3, which comprises the liabilities of domestic banks and central banks against domestic non-banks such as households and enterprises, grew only moderately.

Deutsche Bundesbank - April 25, 2017

Money is not only used as means of exchange. It also serves as store of value and as unit of account. A unit of account allows measuring the value or the cost of goods, services, and all sorts of assets. Money as unit of account enables us to compare very different things against each other such as grocery goods, services, income and liabilities. 

The money supply is usually divided in 3 categories: M1, M2 & M3. M1 money is the basic money supply used as a medium of exchange and includes physical currency, demand deposits, traveler’s checks, and other checkable deposits. The measurement of the money supply indicated a close relationship between money supply and some economic variables (GDP, inflation, price) for some time but it is no longer used as guide for monetary policy due to a lack of correlation. M2 is an extension of M1 and measures the money supply including cash, checking deposits, and easily convertible “near money” such as savings deposits, money market securities or mutual funds. M2 is used as a critical factor in forecasting inflation and economic growth. Therefore, central banks watch this indicator closely and react accordingly. Since 2000 the supply never shrank (YoY) in the USA but expanded from 4.6 trillion USD to 14.5 trillion USD in 2019 and in economic recessions (2001 & 2008) it rose at the fastest rate.


By now, we share a basic understanding of the money system and functions of money. Let’s take a closer look at money and what makes a currency valuable. A currency must fulfill the following criteria in order to be useful as money. Some properties are more important than others but it must be ensured that no factors are ignored since that may lead to significant costs. For example, a currency can fulfill all properties but it is only a good means of exchange once it is widely accepted.


Individual units in a set must be interchangeable, indistiguishable from other parts and worth exactly the same amount.


Money must not easily deteriorate, either in itself or as a result of wear and tear.


Counterfeiting must be extremely difficult (impossible).


Money should be able to be divided into smaller units of value to function as unit of account and enable small exchanges.


It must be easy to carry over, hand over or transfer money from one account to another, from one person to another person.


Money must be able to be easily carried or moved.


The supply of money should remain relatively constant or grow slowly and must be known to users.


Money must be easily recognized and distinguished from other substances, for example with certain distinct marks. 


One must be able to keep savings, sending and receiving transactions private.

Usability (Acceptance)

Everyone must be able to use the money for transactions. It must be easy to understand, accessible for all and widely accepted.


Money should not be subject to fluctuations in value.

What is cryptocurrency?

Cryptocurrency is an internet-based medium of exchange which uses cryptography to secure financial transactions, verify transfers of assets and control the creation of new units. Cryptocurrencies are based on blockchain technology. Well-known public permissionless blockchains such as Bitcoin and Ethereum are not controlled by any government or central authority. True decentralization of blockchain networks can theoretically make a blockchain immune from government interference. Achieving true decentralization isn’t easy and only a means to achieve trust in a network of unknown actors. Crypto enables parties to directly send data, values and money (cryptocurrency) via the use of private and public keys. More insights to cryptocurrency and blockchain technology is presented in blockchain basics, blockchain deep dives and the video below.

Money vs. cryptocurrency

As you can see in the infographic, Fiat money, Gold, Bitcoin and stable coins share some common traits. Gold is great as a store of value and not much used as means of exchange. Bitcoin has so far been utilized as means of exchange in a “rather” small circle, for speculation and as self-custodied store of value. It offers great properties to become peer-to-peer cash but it also comes with clear disadvantages compared to Fiat currencies and specifically Cash. Today, these disadvantages include:

  • Usability (Setup of wallets, purchasing process, costs and time of transactions, acceptance),
  • Anonymity of users and tracking possibilities of users and coins,
  • and Stability of the currency.

On the other hand, seizability resistance is one of the properties of Bitcoin that becomes existential when certain governments engage more and more in financial warfare or “temporary freezing” of assets. The usability of Bitcoin has improved significantly through innovations at the core and in the ecosystem, for example by the Some of these innovations will also help preserving the privacy of users but a few proposals have been rejected by Bitcoin network participants and it will take much more time to achieve this if ever possible. The Bitcoin system has been very stable in the past 11 years but the price has been extremely volatile. It can be assumed that the price will remain volatile for much longer until a certain adoption is achieved.

The usability of stablecoins and ETH/crypto transactions has improved even more through the launch of uncountable (self-custody) wallets & introduction of cheaper (L2) networks. The development of decentralized stablecoins is worth watching: The best (most secure) approach seems to be fully backed stablecoins with crypto-native collateral as that would reduce counterparty risks. Additionally, payment applications utilizing zkTech & mixers might enable better privacy for users.

There is a high likelihood we end up with a few global cryptocurrencies and many smaller currencies/assets. What’s the difference between a currency & a stock anyways if both are fully liquid & have the same properties? 🙂

More resources

Ray Dalio - Money, Credit & Debt

In order to understand the rise and fall of economies, you need to understand how money, credit, and debt work. People are willing to fight for wealth – which is most influenced by money and credit. Ray Dalio shares insights to the history of money and learnings.

Nick Szabo - Shelling Out: The Origins of Money

This is a comprehensive introduction to the precursors of money. Along with language, the precursors of money enabled humans to solve problems of cooperation that other animals cannot.

Carl Menger - The origins of money

Insight to the history of money and specifically commodities as means of exchange and their degrees of saleableness.

Investopedia - What is money?

Money makes the world go around. Economists define money, where it comes from, what it’s worth, and the characteristics of money.

The Money Project - Infographic: The Properties of Money

This is a fantastic infographic about money that includes the properties of money and truths about money.

the balance - History of the Gold Standard

This is a great explanation of the emergence and end of the gold standard.

The Conversation - Quantitative easing now looks permanent (January 23, 2020)

“After a pause of a few months, the world’s leading central banks are “printing” money again to try to bolster their economies. The ECB is creating new euros to buy bonds at a monthly pace of €20 billion (£17 billion). Meanwhile, the US Federal Reserve has also been running a new asset-buying programme, creating US$60 billion (£46 billion) a month since September..”

Blockgeeks - What is cryptocurrency?

A comprehensive introduction to cryptocurrencies and their inner workings.