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.