Tag Archives: bitcoin

Review: Saifedean Ammous – The Bitcoin Standard

In ‘The Bitcoin Standard‘ author Saifedean Ammous takes its readers on a tantalising journey into the world of money. The goal of the journey is to explain why Bitcoin could be the next phase in mankind’s hunt for sound money. Sound money can be freely chosen by people on basis of market interaction and not by government imposition.

After some general characteristics of money Ammous gives a historic overview describing why over periods in time certain objects or materials could attain the status of money. Exogene factors (like the arrival of colonists  on the island of Yap where the indigenous population developed a money system with large, difficult to move stones) or through endogene factors (the Roman era where the caesars made fatal decisions about reducing the percentage of precious metals in coins) ultimately led to the dismise and disappearance of certain types of money.

Other types of money could thrive for long periods in time and history. They would keep their value and use as method of payment or financing transactions. An example is the Bezant, the currency from the Byzantium empire that functioned over a millennium as money. Ammous explains that the salability of money (money holds its value over time), store of value (the material of which money is made, does not degrade over time) and stock-to-flow ratio (money is difficult to reproduce and inflate) are essential keys to why money can become successful. Over time the most successful and valuable money has unarguably been gold. It  fits all above mentioned characteristics perfectly: it holds its value over time and does not degrade. Through mining new gold becomes available in relative small quantities to the total amount of gold stock, so the market never gets overflowed with gold.

In the 19th century new technologies in the field of telecommunications (telegraph) and transport (trains) became available and would lead to significant changes in the use of money. The 19th century ‘invention’ of the nation state, saw the rise of the central bank as the ‘bank of banks’ within a nation. Central banks became the collectors and preservers of the nation’s gold stock.

Central banks printed paper money that represented the value of the available gold reserves and they could deliver gold to the owner of a piece of paper money on request. Because this was common procedure among all nation states, international trade benefited: the amount of printed money was tied to a nation’s gold stock reserve and internationally it meant fixed rates for exchanging money among nations.

This period of this stable money system came to an end in 1914 when countries like the United Kingdom abandoned this golden standard. From now on the central banks could (and would) print money that had no direct correlation to the stock of gold. The paper money could no longer be redeemed by the central bank for the equivalent of gold. The downside of being able to print fiat (=trusted) money with no back up of sound money is that the fiat money tends to lose its value over time. Especially in the Interbellum (the period between the 2 world wars from 1918-1939) this would lead to disastrous situations where endlessly printing and devaluating money could completely ruin economies (most prominent example being the German economy in the late 1920’s – early 1930’s). Ammous signals another dangerous development, the nation state’s governments as an interventionist in the macro economic playing field. Mainly following the theories of John Maynard Keynes, governments and central banks made decisions about devaluation/ revaluation of their local currencies versus other currencies and intervened in local economics by inflating the quantity of money in the hope that the local economy would receive a push.

Ammous totally destroys the vision of Keynes in that respect. Keynes not only had no clue what would be the -long term- result of interventions and was completely in the dark about why certain economic phenomena (like recession) would occur. Ammous  turns instead to the Austrian school of economists for answers how an economy should work and how economic phenomena can be explained and dealt with.

As much of our society and economic thinking and acting by government institutions is still drenched in Keynesian thinking, the results of this have led again and again to disastrous situations for the citizens and entrepreneurs of nation states: government’s decisions have lead to dramatic consequences as recently as the 2008 financial crisis.

For Ammous, Bitcoin “offers the modern individual to opt out of the totalitarian […] Keynesian socialist states”.Our economic models have to be reinvented again and the invention of Bitcoin could in the opinion of Ammous substantially contribute to a new era where Bitcoin has the potential to  function as the new form of sound money: it is extremely well salable and scalable (1 Bitcoin can be subdivided in 100.000 satoshi), does not degenerate over time and its supply is capped at 21 million Bitcoin. Bitcoins are being mined like gold and the last Bitcoin is expected to be mined in 2140.  The ultimate catch is that production of Bitcoin is not in the hands of governments but is in the hands of the people. The development of Bitcoin was heavily ‘set in stone’ with its first release as Satoshi Nakomoto noted in 2009. Nakamoto is the anonymous inventor of Bitcoin, who after a few years of intensive development went on to other projects.  Since Bitcoin became operational, making fundamental changes are very difficult because they need the consensus of the Bitcoin community.

Ammous does a splendid job of explaining the delicate relationship between all parts and parties involved in the Bitcoin model, where miners are being rewarded with Bitcoin for their intensive processing work (largest computer network in the world) and nodes are necessary for the more straightforward process of updating the ledger with a batch of new transaction that is being conmpiled every 10 minutes and added to the ledger.

Along the road of explaining how Bitcoin could become the new standard in money, Ammous demonstrates very outspoken opinions, that leaves the reader sometimes with a hit-and-miss feeling. Some of these rants are amusing and recognisable. For example when Ammous describes government organisations that can only thrive by their powerful masters, creating layer on layer of worthless bureacracy leading to depression and anxiety by its mainly unskilled workers. Other rants, for example about the relationship between the downfall of our culture, music and art and the state of the economy I found less appealing as Ammous neglects all artistic work from the 20th century.

Ammous is a Bitcoin maximalist: he goes to great lengths to explain why Bitcoin probably will survive as the only valuable cryptocurrency in the long run. He is not extremely worried by security hacks of Bitcoin, a successful hack would automatically mean a collapse of its value and price, so from that perspective there is little incentive to hack Bitcoin.

All  later developed cryptocurrencies Ammous considers them merely copycats of the original, lacking the delicate balance found in the original of Bitcoin. As an example he mentions the Ethereum DAO hack, where the developers decided to intervene in the blockchain and rewrite the ledger, something that would have been impossible on the Bitcoin blockchain. In Ammous’ opinion the potential and practical use of blockchains without Bitcoin (or any crypto for that matter) is practically absent.

All in all ‘The Bitcoin Standard’ is a must read for anyone who is interested in if and how Bitcoin might change our way of thinking of money. It gave me new and interesting insights on the subject. Ammous concludes with a positive message with the prospect that humans can now finally be in charge of money creation themselves and economies run by real people instead of shady governments that act less and less as true representatives for the citizens of the nations.

 

The_Rise_and_Rise_of_Bitcoin

Review ‘The rise and rise of Bitcoin’

The rise and rise of Bitcoin (TRARB) follows the path from the invention of Bitcoin and its the rise in the early years (until 2014) through the eyes of documentary maker Nicholas Mross. His brother Dan Mross is a Bitcoin enthousiast and computer scientist. He is the main person in the documentary, interviewing important names in the Bitcoin world and participating in events like Bitcoin conventions. The double ‘Rise’ title can be explained due to the volatile nature of Bitcoin, where more than once Bitcoin seemed to go definitely down, only to re-emerge with a higher price and bigger importance.

In 2012 Dan understands that the developments around Bitcoin could become important enough to start documenting them. Dan is followed through his personal involvement: mining Bitcoins. Mining is the process of earning a Bitcoin reward by offering computer processing power enabling the Bitcoin transactions. By the end of the documentary it is becoming clear that the days for mining are over for the ‘hobbyist geeks’. The market has become highly competitive and Dan decides to stop mining and sell his mining rig.

Throughout the actual developments and interviews the documentary is very useful to watch for people who are new to Bitcoin because with clear visuals its roots and the technology behind Bitcoin are being explained. A counter in the lower side of the screen reminds the viewer of the US dollar price of the Bitcoin of that moment in time during the documentary. Usually it fluctuates in the range of $1 to $250. It is not until the latest shots of the documentary that it passes the $ 1.000 landmark.

Bitcoin was invented as an alternative to the banking system and especially its 2008 collapse when worldwide banks needed to be bailed out at the expense of the taxpayer. The idea behind Bitcoin was that it couldn’t be manipulated by a central authority. Only a fixed amount of coins are issued, following a fixed set of rule.This is structurally different from how the fiat system works, where printing takes place in accordance to policies from a central bank. Satoshi Nakamoto was the mysterious person behind the Bitcoin principles and until now his identity is unknown. His 2008 white paper was a brilliant vision on bringing together technologies (like cryptography, peer-to-peer networking and proof of work) that would lead to the design and implementation to the world’s first cryptocurrency.

The Cyprus crisis in 2013, where consumers were cut off from their bank deposits gave Bitcoin for the first time an excellent use case: if the consumers had deposited their money in Bitcoin then it would have stayed out of reach from authorities, instead of being deprived from their deposits. Also in later cases (Zimbabwe, Venezuela) and in countries where there is no tradition of private banking, Bitcoin would prove to be an excellent reason for consumers to turn to Bitcoin.

An interview with Gavin Andresen is one of the interesting pieces in this documentary. Andresen kept a close (business) relationship with Nakamoto. Nakamoto gradually disappeared from the Bitcoin community around 2010-2011. In one of his last postings he regrets that his invention is now being used by the likes of Wikileaks to accept anonymous contributions. Andresen would be become the most influential developer until 2016 (when Andresen himself stepped down).

One aspect about Bitcoin would be a constant factor through the years: the very tense relationship with authorities. Mt. Gox, originally a trading card platform before it was transformed to become the world’s largest exchange would be subpoenaed by American authorities. A hack of the exchange in early 2014 send Mt. Gox into insolvency prematurely. The Mt. Gox episode is a very crucial element in early Bitcoin history and the documentary is probably the only filmed material from inside the company. The ‘dark web’ website ‘Silk Road’ would be very early on the radar of authorities. Silk Road made it possible to buy  drugs and medicines online. Payment could be settled only by transferring Bitcoin. In 2014 the website was dismantled by authorities and leading engineer Ross Ulbricht was arrested and send to jail.

Charlie Shrem (CEO of BitInstant) can be seen explaining his fear of going to jail or becoming a martyr. His company needs to spend large sums on lawyers to stay legally compliant. Besides these legal trouble it becomes clear that due to the popularity of Bitcoin his company has increasingly difficulties in handling the client transactions in a properly manner. Ultimately Shrem would also be arrested in 2014 and sent to jail on charges of money laundering.

Consumers would have their own struggles to keep their investment safe because of the many attempts of hacking exchanges, the worst example being the already mentioned Mt. Gox exchange. Throughout the documentary it becomes clear that after the wild first years the Bitcoin was becoming a more professional, streamlined industry. Many companies from the early years would be forced to stop (BitInstant, Tradehill) and be replaced by companies backed by large investment parties (like BitPay and Coinbase).

After the documentary was released there would be another development in the Bitcoin industry: the rise of alternative coins and hard forks from Bitcoin (like Litecoin and Bitcoin Cash). Vitalik Buterin appears as the lead writer for the Bitcoin Magazine. He would later become the founder of Ethereum, the largest competitor of Bitcoin. Roger Ver is portrayed in the documentary trying to convert Japanese retailers to use Bitcoin for client payments. Ver would become the man behind the Bitcoin Cash hard fork.

TRARB is a must see documentary for anyone who is interested in the short and turbulent history of Bitcoin and wants to know more of its origins. It will give a good insight to the big names in crypto. Throughout the documentary I felt an often returning feeling how fast all developments have gone in just a few years. This documentary will remain an important document on how a technological development revolutionised the financial-economic world. Maybe in 10 years we will look back at it as a fad that faded in oblivion or as a starting point of a technological development like the rise of internet in the mid 90’s.

Nootdorp, March 2018