The other day I was just talking to some of my friends from Blockchain club on our walk back to our residence halls after our meeting, when our conversation sparked one of the most incredible realizations of my life. We were talking about Bitcoins and what actually gave them their value. Then my one friend said, “I’m not exactly sure, but I suppose bitcoin first got its value after the first Bitcoin transaction was made. Some guy bought a pizza for 1 million Bitcoins. It kind of set the standard of what Bitcoin could actually buy. So I suppose that means that 1 bitcoin at that time was worth roughly one millionth of a pizza.” To this I replied, “So what is the value of a dollar? A hot dog? A hot dog is worth about a dollar.” And then it hit me. At that moment I had just realized the answer to a question of mine regarding one of the most fundamental questions of economics…
How much is a U.S. dollar worth? Or any currency for that matter? Well, the answer is that they are worth whatever we think they are. What was so special about gold hundreds of years ago? It was shiny, and rare, and looked really good in jewelry. Therefore gold became coveted. Gold, at that point, became worth something to us, and therefore we allowed it to become a currency to be traded for other valuable things. Economies are shaped by people trading what they believe something is worth. Fundamentally, there is NOTHING about a dollar or a bar of gold or a bitcoin that gives them their value other than what we assign its value to be. So yes, a dollar is worth about one hot dog. Because a hot dog is something that we can get for $1.
Now does that necessarily mean that if one government owed another government $1,000,000, they could perhaps make that payment with 1,000,000 hot dogs instead? Potentially. Why not? Hotdogs are really only worth 1 dollar. And those hot dogs could feed a million people for a day, or perhaps one person for a million days. Who knows? Thus is trade in theory… Everyone has their own value of the things they are willing to trade, whether it be currency, goods, services, etc.
Going back to the original point, the first bitcoin transaction was a guy who bought a pizza for 1 million bitcoins. That literally just means that some guy walked up to a pizza man and said:
Customer: hey do you think I could get this pizza with this virtually worthless thing?
Pizza man: no.
Customer: well what if I gave you a million of them?
Pizza man: oh that’s pretty cool. I guess we can do that.
That initial transaction sparked many others using bitcoin and set the value of bitcoin simply based on what it can buy (1,000,000 bitcoins= 1 pizza). Every centralized currency started this way. We only trade these currencies as a bargaining chip in lieu of actual favors in order to get the things we want.
Overall concept of post is easy to comprehend to reader and has nice layout. It would be nice to include some visual aids, either to the post itself or to the website- but that’s just my personal opinion. Be careful with alignment- there is a point in the middle of the post where it goes to center alignment and back to left justified and I’m not sure if that was intended or not. Also, be sure to remove the sample page and the tagline below your blog title.
This whole post is an interesting read. I have never understood how bitcoins work, but that’s probably okay. I like the whole article and the point where you said “every centralized currency started this way” was a very good point. Basically everything is a social construct that we give value to and I think it’s a wild concept.
Wow Avery! Your blog was really funny and enlightening, as well as super relatable. I have never given thought to economics in this way. Anything relating to the details of money I’ve considered to be really boring and uninteresting: you have changed my mind! The second you brought in comparing money to amounts of food, I was hooked. I also really enjoyed the little dialogue you included.
Overall you did an amazing job, I’m really excited to read your next post!