The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties. In other words, Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest.

Sound money allows people to think about the long term and to save and invest more for the future. Saving and investing for the long run are the key to capital accumulation and the advance of human civilization.

a money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard‐earned wealth for sale in exchange for something easy to produce.

The gold standard allowed for unprecedented global capital accumulation and trade by uniting the majority of the planet's economy on one sound market‐based choice of money. Its tragic flaw, however, was that by centralizing the gold in the vaults of banks, and later central banks, it made it possible for banks and governments to increase the supply of money beyond the quantity of gold they held, devaluing the money and transferring part of its value from the money's legitimate holders to the governments and banks.

For anything to function as a good store of value, it has to beat this trap: it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down.

This is a historical lesson of immense significance, and should be kept in mind by anyone who thinks his refusal of Bitcoin means he doesn't have to deal with it. History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.

The senselessness of it all was not lost on the populations of these countries, and the soldiers on the front line risking their lives for no apparent reason but the unbounded vanity and ambition of monarchs who were usually related and intermarried. In the most vivid personification of the absolute senselessness of this war, on Christmas Eve 1914, French, English, and German soldiers stopped following orders to fight, laid down their arms, and crossed the battle lines to mingle and socialize with one another. Many of the German soldiers had worked in England and could speak English, and most soldiers had a fondness for football, and so many impromptu games were organized between the teams.1 The astounding fact exposed by this truce is that these soldiers had nothing against each other, had nothing to gain from fighting this war, and could see no reason to continue it. A far better outlet for their nations' rivalry would be in football, a universally popular game where tribal and national affiliations can be played out peacefully.

when the United States invaded Iraq, aerial bombardment destroyed the Iraqi central bank and with it the capability of the Iraqi government to print new Iraqi dinars. This led to the dinar drastically appreciating overnight as Iraqis became more confident in the currency given that no central bank could print it anymore.20 A similar story happened to Somali shillings after their central bank was destroyed.21 Money is more desirable when demonstrably scarce than when liable to being debased.

As Friedrich Hayek put it: I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop.25

The move toward digital payments was reducing the amount of sovereignty people have over their own money and leaving them subject to the whims of the third parties they had no choice but to trust.

Bitcoin is the first example of a new form of life. It lives and breathes on the internet. It lives because it can pay people to keep it alive. It lives because it performs a useful service that people will pay it to perform. It lives because anyone, anywhere, can run a copy of its code. It lives because all the running copies are constantly talking to each other. It lives because if any one copy is corrupted it is discarded, quickly and without any fuss or muss. It lives because it is radically transparent: anyone can see its code and see exactly what it does. It can't be changed. It can't be argued with. It can't be tampered with. It can't be corrupted. It can't be stopped. It can't even be interrupted. If nuclear war destroyed half of our planet, it would continue to live, uncorrupted. It would continue to offer its services. It would continue to pay people to keep it alive.

Realistically, the only way to kill it is to make the service it offers so useless and obsolete that no one wants to use it. So obsolete that no one wants to pay for it. No one wants to host it. Then it will have no money to pay anyone. Then it will starve to death.

Bitcoin is sovereign: it runs by its own rules, and there are no outsiders who can alter these rules.

Some of the prominent developers working on maintaining Bitcoin have become wealthy enough from investing in Bitcoin that they can make it their prime occupation without receiving pay from anyone.

To hack Bitcoin, in the sense of corrupting the ledger of transactions to fraudulently move coins to a specific account, or to make it unusable, would require a node to post an invalid block to the blockchain, and the network to adopt it and continue to build on it. Because nodes have a very low cost of detecting fraud, while the cost of adding a block of transactions is high and continuously rising, and because the majority of nodes in the network have an interest in Bitcoin surviving, this battle is unlikely to be won by attackers, and continues to get harder as the cost of adding blocks gets higher.

Bitcoin is a deep existential crisis: because Bitcoin is already in existence, with more security, processing power and an established user base, anybody looking to use digital cash will naturally prefer it over smaller and less secure alternatives. Because the replication of the code to generate a new coin is almost costless, and the imitation coins proliferate, no single coin is likely to develop any sort of significant growth or momentum unless there is an active team dedicated to nurturing it, growing it, coding it, and securing it.

There is a reason real‐world businesses don't issue their own currency, and that is that nobody wants to hold currency that is only spendable in one business. The point of holding money is holding liquidity which can be spent as easily as possible. Holding forms of money which can only be spent in particular vendors offers very little liquidity and serves no purpose. People will naturally prefer to hold the liquid means of payment, and any business that insists on payment in its own freely‐trading currency is just introducing significantly high costs and risks to its potential customers.