Why Bitcoin? (Part 1)

Historical foundations of the global economic system explained in plain English

When talking about “crypto”...

People often get lost in the technology and its complexities, the various use cases, and the potential for mass adoption. While all of that is super exciting, it's not what makes cryptocurrencies so relevant.

Let's quickly get the fundamentals right, then move on to the grand scheme of things rather than the tech. The first of its kind, Bitcoin, like all others that followed, is based on blockchain technology – and in the case of Bitcoin, the currency runs on a blockchain with the same name. A blockchain is essentially a distributed ledger, a decentralized database. This database holds data that, due to its decentralized nature and lack of centralized control, is immutable and transparent for everyone to check. Most blockchains are maintained by individuals who get rewarded for doing exactly that – maintaining the system.

Not all blockchains are the same. There are many different blockchains out there; some have their own coins or currencies, while others don’t. Some are more decentralized than others. "Crypto" stands for cryptography, a branch of mathematics. Blockchain technology is just one of its many applications. Many technologies we use daily, such as email, rely on cryptography. Interestingly, we don’t refer to email as "cryptomail." But with this particular system, which we now call cryptocurrency, the mystical prefix "crypto" stuck. Essentially, it is a digital payment system – a system for peer-to-peer transactions without a middleman.

The Grand Scheme

That’s the basics. And as you will see, you won’t need to understand how it works in-depth (it’s super interesting though. If you’d like a really accessible – and fun to read – book, I highly recommend this). It’s more important to understand why all these tech shenanigans matter. And why there is much more at stake than just some crazy people gambling with fantasy money of insane volatility.

In this article, I’ll explain the grand scheme, the economic context and what it all has to do with the shiny, pretty element we call gold and its liquid, dark counterpart that we call oil.

A journey from New Hampshire to Riyadh

To grasp the significance of current economic shifts, it is helpful to understand landmark agreements and pivotal events. This journey takes us from the Bretton Woods Agreement of 1944 to the emergence of the Petrodollar system and straight to the establishment of the global financial system as we know it today.

The Bretton Woods Agreement: Post-WWII economic stability

In 1944, delegates from 44 Allied nations met in Bretton Woods, New Hampshire, to design a framework for international economic cooperation.

Goals:

Avoid the instability that led to the Great Depression
Foster global growth and stability

Key components:

Fixed Exchange Rates: US dollar pegged to gold ($35/oz), other currencies pegged to the dollar
IMF and World Bank: Created to manage the global economy

For every US Dollar bill printed and circulated, the US had to hold the equivalent amount in gold reserves.

Why gold?

We tend to assume that gold is valuable. But why gold and not salt or diamonds?

Gold is good money because of its traits:

Durability: Doesn’t corrode or degrade
Portability: Easy to transport
Divisibility: Can be split into smaller units
Uniformity: Consistent quality and value
Limited Supply: Scarce, hard to replicate
Acceptability: Widely recognized over millennia

Money also needs to function as:

Store of Value
Medium of Exchange
Unit of Account

The End of the Gold Standard → Fiat Currency

The system worked for two decades. Then:

Vietnam War + Welfare programs → Huge US spending
Inflation rose
Trade deficits ballooned
Countries demanded gold for dollars

Result: Gold reserves depleted.

The Nixon Shock

August 15, 1971 – President Nixon unpegged the US Dollar from gold.

A "temporary" measure that lasted 50+ years.

Welcome to the Fiat Currency System: money backed by nothing but government decree.

"Fiat" = "Let it be" → Fiat lux, fiat money.

Oil enters the chat: The Petrodollar System

Why oil? Because Saudi Arabia had it, and the world needed it.

In 1974, the US struck a deal with Saudi Arabia:

Oil sales in US Dollars only
In return: military protection + Treasury bond investment

This boosted global demand for US Dollars and stabilized its dominance.

Then came 2008...

The financial crisis exposed:

Fragile institutions
Concentrated power
Lack of transparency

Governments bailed out banks, printed more money, and racked up debt.

Confidence in fiat currencies eroded.

The Fate of All Fiat Currencies

Historically, no fiat currency has survived forever.

Common causes of death:

Hyperinflation
Loss of confidence
Political instability
Economic mismanagement

Even major currencies (Deutsche Mark, Lira, Franc) are gone — replaced by the Euro.

How's the US Dollar Doing?

Inflation is sitting at 3.3% as of June 2024 (YOY). But:

Inflation compounds over time.

Example:

Year 1: 3%
Year 2: 2%
Year 3: 4%

Total inflation:
(1.03 × 1.02 × 1.04) − 1 = 9.25%
(Not: 3 + 2 + 4 = 9%)

Inflation Is Here to Stay

The Consumer Price Index (CPI) tracks a basket of everyday goods (food, gas, rent) and compares prices year-over-year.

It’s not about a single number – it’s about the trend.

Source: U.S. Bureau of Labor Statistics (BLS)
Here’s the math:
(1.0162) * (1.0012) * (1.0126) * (1.0213) * (1.0244) * (1.0181) * (1.0123) * (1.0470) * (1.0800) * (1.0340) * (1.0330) = 1.3307
The cumulative inflation from 2014 to 2024 is:
(1.3307 - 1) * 100 = **33.07%**
If we’d go back all the way to 2008, it would be a staggering 47%.
You get the point. It’s impressive and a bit horrifying. This means that **$100 in 2014 would be equivalent to $133.07 in 2024**. The paper money in your wallet loses value all the time. In other words, even if you earn more on paper, you can’t buy more. That’s what all the people on TikTok figured out.

And Then There’s Debt

The US federal debt has risen to an unprecedented $34 trillion.

That’s a number with 12 zeros. A thousand billion.

Which is nearly impossible to grasp — at least for me, growing up in an age where things were measured in millions, and billions already felt unimaginably high.

According to the US Treasury Department, the US is adding
$1 trillion in debt every ~100 days.

That’s approximately:

$300–330 billion per month

The GDP Didn’t Grow Fast Enough

The GDP didn’t grow at the same rate to back that debt — and that’s what makes it dangerous.

So, all in all, looking at these less-than-rosy numbers, it’s worth a thought experiment:

What if the US Dollar collapses, like so many other fiat currencies before?

Here are a few things that might happen:

Immediate Consequences

Market Panic: A sudden collapse of the USD would likely trigger panic in global financial markets, leading to massive sell-offs in equities, bonds, and other assets.
Liquidity Crisis: The USD is the world's most widely used currency for trade and finance. Its failure would cause a severe liquidity crisis as businesses and financial institutions struggle to find a stable medium of exchange.

Trade Disruptions

Contract Renegotiation: Most international trade contracts are denominated in USD. A collapse would necessitate renegotiation in other currencies, causing significant disruptions.
Good times for lawyers though.
Increased Transaction Costs: Transitioning to alternative currencies could increase costs and introduce inefficiencies in global trade.

Impact on Reserve Holdings

Reserve Revaluation: Central banks holding large USD reserves would see substantial losses, impacting financial stability.
Shift to Alternative Assets: Reserves would be reallocated to gold, euros, yen, or even emerging cryptocurrencies — increasing volatility.

Inflation and Currency Devaluation

Import Costs: Countries reliant on USD-denominated imports would face higher costs → inflation.
Currency Depreciation: Currencies pegged to or influenced by the USD would lose value → further inflation.

Debt and Financial Stability

Dollar-Denominated Debt: Servicing this debt becomes difficult, leading to defaults.
Financial Sector Instability: Banks with large USD exposure may face solvency issues, risking a global financial crisis.

Shift in Global Economic Power

New Reserve Currencies: The collapse would accelerate the shift toward the euro, RMB, or a currency basket.
Increased Influence: Economies with stronger financial systems — like the EU or China — would gain power globally.

So, Will the Dollar Collapse?

I don’t know. Not sure anybody does. But I also don’t know why the US Dollar should be the first fiat currency in history that doesn’t go down eventually.

Let’s hope it won’t happen in the foreseeable future.
It would be pretty bad.

So I find it’s always smart to understand what’s going on — and be prepared.

There are a lot of moving parts in the global economy (we’ll dive deeper into the West vs East dynamic in Part 2). Aside from the possibility of a USD collapse, there’s also the risk of collapse of the traditional financial system.

And we’ve come dangerously close a few times — e.g., in 1929.

The Birth of Bitcoin

And more recently: 2008.

To say that trust in traditional finance was shaken would be an understatement. But this time, something was different.

We had cooler technology.

Thanks to that disillusionment, an anonymous individual (or group) known as Satoshi Nakamoto released a whitepaper in 2008 introducing Bitcoin — a revolutionary digital currency.

A currency that:

Didn’t rely on government or central banks
Had limited supply
Was durable, divisible, scarce — just like gold

Bitcoin was born.

What Makes Bitcoin Good Money?

Let’s return to the traits that make good money:

Durability:
Bitcoin doesn’t degrade. It lives digitally on a decentralized network. As long as there’s electricity and internet, it endures.
Portability:
It’s extremely portable — sendable anywhere in minutes. No armored trucks needed.
Divisibility:
Divisible down to 0.00000001 BTC (1 satoshi), allowing both micro- and mega-transactions.
Uniformity:
Every Bitcoin is identical. Unlike diamonds, it has perfect consistency.
Limited Supply:
Only 21 million will ever exist. Built-in scarcity ensures value over time.
Acceptability:
Increasingly accepted worldwide. Like gold, its value grows with belief and use.

Bitcoin’s Functions as Money

Store of Value:
Limited, decentralized, and secure — protects against inflation and devaluation.
Medium of Exchange:
Digital, cost-effective, and increasingly usable.
Unit of Account:
Highly divisible, standardized, and globally accessible.

And unlike fiat currencies:

Bitcoin is not controlled by central banks.

That means:

No money printing
No inflationary policies
No single point of failure

Bitcoin is a paradigm shift.

It’s digital gold — but better:

Transparent
Programmable
Immutable

Yes, it’s made out of thin air.
No, it doesn’t have intrinsic value.
But neither does gold. Or fiat currency.

The Key Difference

Bitcoin is not backed by governments. It can be regulated — but not controlled.

That’s exactly why governments don’t like it.
And why many people embrace it.

Conclusion

The global economic system — from Bretton Woods to the Petrodollar — created the world we live in. Its flaws triggered a crisis. That crisis gave birth to an alternative: cryptocurrency.

Not just an alternative to gold.
Not just digital cash.

A true hedge against and alternative to the troubled fiat system.

Understanding that history helps us navigate what’s next.

In Part 2, we’ll explore today’s global economic tensions — and where Bitcoin fits in. 👀