The Bitcoin Standard

The Decentralized Alternative to Central Banking

Saifedean Ammous

• Verlag: Wiley
• Jahr: 2018
• ISBN:
  9781119473916
• Auflage: 1
• Thema: Business
• Thema: E-Commerce

A comprehensive and authoritative exploration of Bitcoin and its place in monetary history

When a pseudonymous programmer introduced "a new electronic cash system that's fully peer-to-peer, with no trusted third party" to a small online mailing list in 2008, very few people paid attention. Ten years later, and against all odds, this upstart autonomous decentralized software offers an unstoppable and globally accessible hard money alternative to modern central banks. The Bitcoin Standard analyzes the historical context to the rise of Bitcoin, the economic properties that have allowed it to grow quickly, and its likely economic, political, and social implications.

While Bitcoin is an invention of the digital age, the problem it purports to solve is as old as human society itself: transferring value across time and space. Author Saifedean Ammous takes the reader on an engaging journey through the history of technologies performing the functions of money, from primitive systems of trading limestones and seashells, to metals, coins, the gold standard, and modern government debt. Exploring what gave these technologies their monetary role, and how most lost it, provides the reader with a good idea of what makes for sound money, and sets the stage for an economic discussion of its consequences for individual and societal future-orientation, capital accumulation, trade, peace, culture, and art. Compellingly, Ammous shows that it is no coincidence that the loftiest achievements of humanity have come in societies enjoying the benefits of sound monetary regimes, nor is it coincidental that monetary collapse has usually accompanied civilizational collapse.

With this background in place, the book moves on to explain the operation of Bitcoin in a functional and intuitive way. Bitcoin is a decentralized, distributed piece of software that converts electricity and processing power into indisputably accurate records, thus allowing its users to utilize the Internet to perform the traditional functions of money without having to rely on, or trust, any authorities or infrastructure in the physical world. Bitcoin is thus best understood as the first successfully implemented form of digital cash and digital hard money. With an automated and perfectly predictable monetary policy, and the ability to perform final settlement of large sums across the world in a matter of minutes, Bitcoin's real competitive edge might just be as a store of value and network for the final settlement of large payments a digital form of gold with a built-in settlement infrastructure.

Ammous' firm grasp of the technological possibilities as well as the historical realities of monetary evolution provides for a fascinating exploration of the ramifications of voluntary free market money. As it challenges the most sacred of government monopolies, Bitcoin shifts the pendulum of sovereignty away from governments in favor of individuals, offering us the tantalizing possibility of a world where money is fully extricated from politics and unrestrained by borders.

The final chapter of the book explores some of the most common questions surrounding Bitcoin: Is Bitcoin mining a waste of energy? Is Bitcoin for criminals? Who controls Bitcoin, and can they change it if they please? How can Bitcoin be killed? And what to make of all the thousands of Bitcoin knockoffs, and the many supposed applications of Bitcoin's 'block chain technology'? The Bitcoin Standard is the essential resource for a clear understanding of the rise of the Internet's decentralized, apolitical, free-market alternative to national central banks.

Chapter 1
Money

Bitcoin is the newest technology to serve the function of money—an invention leveraging the technological possibilities of the digital age to solve a problem that has persisted for all of humanity's existence: how to move economic value across time and space. In order to understand bitcoin, one must first understand money, and to understand money, there is no alternative to the study of the function and history of money.

The simplest way for people to exchange value is to exchange valuable goods with one another. This process of direct exchange is referred to as barter, but is only practical in small circles with only a few goods and services produced. In a hypothetical economy of a dozen people isolated from the world, there is not much scope for specialization and trade, and it would be possible for individuals to each engage in the production of the most basic essentials of survival and exchange them among themselves directly. Barter has always existed in human society and continues to this day, but it is highly impractical and remains only in use in exceptional circumstances, usually involving people with extensive familiarity with one another.

In a more sophisticated and larger economy, the opportunity arises for individuals to specialize in the production of more goods and to exchange them with many more people—people with whom they have no personal relationships, strangers with whom it is utterly impractical to keep a running tally of goods, services, and favors. The larger the market, the more the opportunities for specialization and exchange, but also the bigger the problem of coincidence of wants—what you want to acquire is produced by someone who doesn't want what you have to sell. The problem is deeper than different requirements for different goods, as there are three distinct dimensions to the problem.

First, there is the lack of coincidence in scales: what you want may not be equal in value to what you have and dividing one of them into smaller units may not be practical. Imagine wanting to sell shoes for a house; you cannot buy the house in small pieces each equivalent in value to a pair of shoes, nor does the homeowner want to own all the shoes whose value is equivalent to that of the house. Second, there is the lack of coincidence in time frames: what you want to sell may be perishable but what you want to buy is more durable and valuable, making it hard to accumulate enough of your perishable good to exchange for the durable good at one point in time. It is not easy to accumulate enough apples to be exchanged for a car at once, because they will rot before the deal can be completed. Third, there is the lack of coincidence of locations: you may want to sell a house in one place to buy a house in another location, and (most) houses aren't transportable. These three problems make direct exchange highly impractical and result in people needing to resort to performing more layers of exchange to satisfy their economic needs.

The only way around this is through indirect exchange: you try to find some other good that another person would want and find someone who will exchange it with you for what you want to sell. That intermediary good is a medium of exchange, and while any good could serve as the medium of exchange, as the scope and size of the economy grows it becomes impractical for people to constantly search for different goods that their counterparty is looking for, carrying out several exchanges for each exchange they want to conduct. A far more efficient solution will naturally emerge, if only because those who chance upon it will be far more productive than those who do not: a single medium of exchange (or at most a small number of media of exchange) emerges for everyone to trade their goods for. A good that assumes the role of a widely accepted medium of exchange is called money.

Being a medium of exchange is the quintessential function that defines money—in other words, it is a good purchased not to be consumed (a consumption good), nor to be employed in the production of other goods (an investment, or capital good), but primarily for the sake of being exchanged for other goods. While investment is also meant to produce income to be exchanged for other goods, it is distinct from money in three respects: first, it offers a return, which money does not offer; second, it always involves a risk of failure, whereas money is supposed to carry the least risk; third, investments are less liquid than money, necessitating significant transaction costs every time they are to be spent. This can help us understand why there will always be demand for money, and why holding investments can never entirely replace money. Human life is lived with uncertainty as a given, and humans cannot know for sure when they will need what amount of money.¹ It is common sense, and age-old wisdom in virtually all human cultures, for individuals to want to store some portion of their wealth in the form of money, because it is the most liquid holding possible, allowing the holder to quickly liquidate if she needs to, and because it involves less risk than any investment. The price for the convenience of holding money comes in the form of the forgone consumption that could have been had with it, and in the form of the forgone returns that could have been made from investing it.

From examining such human choices in market situations, Carl Menger, the father of the Austrian school of economics and founder of marginal analysis in economics, came up with an understanding of the key property that leads to a good being adopted freely as money on the market, and that is salability—the ease with which a good can be sold on the market whenever its holder desires, with the least loss in its price.²

There is nothing in principle that stipulates what should or should not be used as money. Any person choosing to purchase something not for its own sake, but with the aim of exchanging it for something else, is making it de facto money, and as people vary, so do their opinions on, and choices of, what constitutes money. Throughout human history, many things have served the function of money: gold and silver, most notably, but also copper, seashells, large stones, salt, cattle, government paper, precious stones, and even alcohol and cigarettes in certain conditions. People's choices are subjective, and so there is no “right” and “wrong” choice of money. There are, however, consequences to choices.

The relative salability of goods can be assessed in terms of how well they address the three facets of the problem of the lack of coincidence of wants mentioned earlier: their salability across scales, across space, and across time. A good that is salable across scales can be conveniently divided into smaller units or grouped into larger units, thus allowing the holder to sell it in whichever quantity he desires. Salability across space indicates an ease of transporting the good or carrying it along as a person travels, and this has led to good monetary media generally having high value per unit of weight. Both of these characteristics are not very hard to fulfill by a large number of goods that could potentially serve the function of money. It is the third element, salability across time, which is the most crucial.

A good's salability across time refers to its ability to hold value into the future, allowing the holder to store wealth in it, which is the second function of money: store of value. For a good to be salable across time it has to be immune to rot, corrosion, and other types of deterioration. It is safe to say anyone who thought he could store his wealth for the long term in fish, apples, or oranges learned this lesson the hard way, and likely had very little reason to worry about storing wealth for a while. Physical integrity through time, however, is a necessary but insufficient condition for salability across time, as it is possible for a good to lose its value significantly even if its physical condition remains unchanged. For the good to maintain its value, it is also necessary that the supply of the good not increase too drastically during the period in which the holder owns it. A common characteristic of forms of money throughout history is the presence of some mechanism to restrain the production of new units of the good to maintain the value of the existing units. The relative difficulty of producing new monetary units determines the hardness of money: money whose supply is hard to increase is known as hard money, while easy money is money whose supply is amenable to large increases.

We can understand money's hardness through understanding two distinct quantities related to the supply of a good: (1) the stock, which is its existing supply, consisting of everything that has been produced in the past, minus everything that has been consumed or destroyed; and (2) the flow, which is the extra production that will be made in the next time period. The ratio between the stock and flow is a reliable indicator of a good's hardness as money, and how well it is suited to playing a monetary role. A good that has a low ratio of stock-to-flow is one whose existing supply can be increased drastically if people start using it as a store of value. Such a good would be unlikely to maintain value if chosen as a store of value. The higher the ratio of the stock to the flow, the more likely a good is to maintain its value over time and thus be more salable across time.³

If people choose a hard money, with a high stock-to-flow ratio, as a store of value, their purchasing of it to store it would increase demand for it, causing a rise in its price, which would incentivize its producers to make more of it. But because the flow is small compared to the existing supply, even a large increase in the new production is unlikely to depress the price significantly. On the other hand, if people chose to store their wealth in an easy money, with a low stock-to-flow ratio, it would be trivial for the producers of this good to create very large quantities of it that depress the price, devaluing the good, expropriating the wealth of the savers, and destroying the good's salability across time.

I like to call this the easy money trap: anything used as a store of value will have its supply increased, and anything whose supply can be easily increased will destroy the wealth of those who used it as a store of value. The corollary to this trap is that anything that is successfully used as money will have some natural or artificial mechanism that restricts the new flow of the good into the market, maintaining its value across time. It therefore follows that for something to assume a monetary role, it has to be costly to produce, otherwise the temptation to make money on the cheap will destroy the wealth of the savers, and destroy the incentive anyone has to save in this medium.

Whenever a natural, technological, or political development resulted in quickly increasing the new supply of a monetary good, the good would lose its monetary status and be replaced by other media of exchange with a more reliably high stock-to-flow ratio, as will be discussed in the next chapter. Seashells were used as money when they were hard to find, loose cigarettes are used as money in prisons because they are hard to procure or produce, and with national currencies, the lower the rate of increase of the supply, the more likely the currency is to be held by individuals and maintain its value over time.

When modern technology made the importation and catching of seashells easy, societies that used them switched to metal or paper money, and when a government increases its currency's supply, its citizens shift to holding foreign currencies, gold, or other more reliable monetary assets. The twentieth century provided us an unfortunately enormous number of such tragic examples, particularly from developing countries. The monetary media that survived the longest are the ones that had very reliable mechanisms for restricting their supply growth—in other words, hard money. Competition is at all times alive between monetary media, and its outcomes are foretold through the effects of technology on the differing stock-to-flow ratio of the competitors, as will be demonstrated in the next chapter.

While people are generally free to use whichever goods they please as their media of exchange, the reality is that over time, the ones who use hard money will benefit most, by losing very little value due to the negligible new supply of their medium of exchange. Those who choose easy money will likely lose value as its supply grows quickly, bringing its market price down. Whether through prospective rational calculation, or the retrospective harsh lessons of reality, the majority of money and wealth will be concentrated with those who choose the hardest and most salable forms of money. But the hardness and salability of goods itself is not something that is static in time. As the technological capabilities of different societies and eras have varied, so has the hardness of various forms of money, and with it their salability. In reality, the choice of what makes the best money has always been determined by the technological realities of societies shaping the salability of different goods. Hence, Austr...