As a beginner in this rabbit hole, this was a question I continually asked myself – Where does my money go? What happens to my money? I could not wrap my mind around the fact that the money I was making was going to just disappear out of my bank account. This led me to research what money is and where it is going (the latter of which is not something I discuss here). I’ve also outlined simple steps on how to get started on an exchange of your choosing.
What is fiat money?
Simply put: Fiat money is that which is not backed by any commodity such as gold or silver; and, is given value that is placed on it solely by the people that control it. In Latin, fiat means “a determination by authority” which in this case is the government.
Let’s take it back a century or so…
The USD was based on the Spanish silver dollar. It was a coin made of pure silver. Broken up into “pieces of eight” the Spanish coin was able to make change. The US moved on from coins to paper bills to help the nation fund the Civil War without purchasing expensive gold and silver. During 1862, the United States printed “greenback notes.” The printed notes were called greenback notes because of the green color on the back of each note.
A system for printing the notes was systematized in 1869 making it easier to print as much or as little as needed when needed as deemed necessary by the government. In 1944, the Bretton Woods Agreement established the USD as a dominant currency in the world. 27 years later in 1971, the gold standard was removed; and the USD was permitted to float without any weight backing it. This was a significant turning point in the history of currency and the USD. The gold standard was removed, meaning there was no longer any backing of the USD (via gold or silver). The only backing, of the USD, became what the government body printing the USD said there to be.
What is the gold standard?
Simply put: Paper money is directly correlated to the value of gold. If gold goes up the value of the paper money goes up and the opposite for the downward trajectory. In the early 1900’s an individual was able to trade their USD for gold at a bank. However, Britain stopped using the gold standard in 1931 and the US followed suit effectively in 1933.
Eighty Eight Years Ago…
In 1933, at the heels of the end of the Great Depression, US President Franklin D. Roosevelt (serving from 1933-1945) signed Order 6102 which forbade the hoarding of gold in coins, bullions, and certificates. This meant holding your own gold was illegal from 1933-1974 and banks were forbidden to pay out clients in gold. Citizens were required to hand over all but a small portion of their gold. FDR simultaneously abandoned the gold standard, and declared a nationwide ban on owning gold.
Order 6814 followed in 1934 requiring the confiscation and delivery of silver from private citizens; the purpose of this was to stabilize the silver mines and increase the value of silver. The purpose of both these Orders was to prevent lack of faith and confidence in the Central Banks.
FDR did many great things in regards to banking reform and boosting a suffering economy; The New Deal. His three R’s were:
1- Relief: for the unemployed and poor, primarily agriculturalists,
2- Reform: financial sector via SEC, FDIC, and SSA, and
3- Recovery: for the economy to bounce back.
What is bitcoin?
Simply put: bitcoin is a digital non-tangible asset class. Makes sense, right? Each bitcoin behaves like a digital computer file that is stored on a digital wallet or exchange of your choosing which can not ever be copied or double-spent, only moved. You can send people bitcoin, pay invoices, and get paid. Bitcoin, the network, is a purely Proof of Work concept and that is it’s greatest innovation. Each bitcoin can be transferred over the Bitcoin network. Transactions are recorded on the blockchain, and are verified from the node sending them to the network and verified/validated by the receiving node. This is done so that the same bitcoin (or sats) cannot be double spent. With the introduction of Schnorr signatures in the most recent Taproot upgrade, we will see an increase in privacy. Keep in mind: One bitcoin is equal to 1,000 millibitcoins or 100,000,000 satoshis. This unit will never change and is always fixed this way; remember there are only 21 million bitcoin. As the journey down this rabbit hold deepens your value of account will get easier if you think of value in terms of sats.
Where does my fiat go?
Simply put: It goes to the exchange and you get an IOU. There are two options to purchase bitcoin.
Option One: If you are really lucky to have friends that you trust, then you can exchange your paper fiat for bitcoin directly from your trusted source. You hand them the counted fiat and then your trusted friend sends you the corresponding amount of bitcoin. Trust is key here and I defer to an old proverb that was whispered to me as a child, “Trust but Verify.” Verification surpasses trust, always.
Option Two: If you don’t trust friends, question your friendship and then find an exchange you are comfortable with to purchase your bitcoin. This in itself has a few options in purchasing (listed below under step two).
Step One: You preload your personal banking information or credit card information to the exchange. Once verified on your exchange of choice, you can start making transactions.
Step Two: Your fiat is taken out of your linked account and this amount (and usually a convenience fee) goes to the exchange. After your funds settle with the exchange your transaction is completed. Your fiat money is not yours anymore and your now purchased bitcoin becomes an IOU. It really is not yours. Let me repeat that, it really is NOT yours. It will only become yours when you offload to a cold wallet or cold storage.
Option A: Time the market. This is never a good idea, you cannot sit on your exchange watching bitcoin move up and down all day. You will waste more fiat, nerves, and patience this way.
Option B: Exchange any amount of fiat for bitcoin everyday manually; Dollar Cost Averaging (DCA).
Option C: Set up a preset amount of fiat to exchange for bitcoin daily, weekly, bi-weekly, or monthly. This is Auto-DCA; essentially a cruise control feature of investing in bitcoin by exchanging fiat for sats. This is the preferred option of choice, and the smartest. Over time you will have a lower DCA versus option A and B.
The above options are what is known as “stacking sats.”
Your exchange of choice can be viewed as a hot wallet – it is continually connected to the internet to someone else’s server and is vulnerable to hacking. Therefore it is important to learn how to continually offload your bitcoin to a cold wallet and truly become your own bank.
So what’s the point?
Being responsible for your own wealth and decisions tied to your wealth is the point. While at first, this may all seem daunting, it really isn’t. There is a minimal level of technical competence necessary to operate the app where your exchange of choice is, upload your ID information, and press buttons to purchase sats to accumulate your bitcoin stack. We are on phones all day long and if you choose Option C in Step Two all you have to do is set the Auto-DCA once and let it cruise for you. Being in charge of your wealth, you become your own bank, in charge of your own money, and essentially your future.
Benjamin Franklin said it best, “Remember that time is money,” which begs us to ask, what would he say about bitcoin?