The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Which is why Bitcoin is an excellent idea. It fulfills the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it now has a track record of several years, enough for it to be an animal in its own right.

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.

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

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.

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.

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.

is this consistently low rate of supply of gold that is the fundamental reason it has maintained its monetary role throughout human history, a role it continues to hold today as central banks continue to hold significant supplies of gold to protect their paper currencies.

precursory understanding of economics will make it clear that price controls are always counterproductive, resulting in surpluses and shortages.

Government is immune to the concept of opportunity costs, and rarely are the negative results of government intervention in economic activity even considered, and if they are, it is only to justify even more government intervention.

Government control of money has turned money from being the reward for producing value to the reward for obedience to government officials. It is impractical for anyone to develop wealth in government money without government acceptance. Government can confiscate money from the banking monopolies it controls, inflate the currency to devalue holders' wealth and reward it to the most loyal of its subjects, impose draconian taxes and punish those who avoid them, and even confiscate bills.

Finally, sound money is an essential requirement for individual freedom from despotism and repression, as the ability of a coercive state to create money can give it undue power over its subjects, power which by its very nature will attract the least worthy, and most immoral, to take its reins.

horizon. The only reason that an individual would choose to delay his gratification to engage in risky production over a longer period of time is that these longer processes will generate more output and superior goods. In other words, investment raises the productivity of the producer.

While microeconomics has focused on transactions between individuals, and macroeconomics on the role of government in the economy, the reality is that the most important economic decisions to any individual's well‐being are the ones they conduct in their trade‐offs with their future self.

It is only through the lowering of time preference that individuals begin to appreciate investing in the long run and start prioritizing future outcomes.

Keynes complained about goldmining being a wasteful activity that consumed a lot of resources while adding nothing to real wealth. While his critique does contain a kernel of truth, in the sense that increasing the supply of the monetary medium does not increase the wealth of the society using it, he misses the point that gold's monetary role is a result of it being the metal likely to attract the least human and capital resources toward its mining and prospecting, compared to all others. Because the supply of gold can only be increased by very small quantities, even with price spikes, and as gold is very rare and difficult to find, mining monetary gold would be less profitable than mining any other metal assuming a monetary role, leading to the least amount of human time and resources going to mining it.

Had government money been a superior unit of account and store of value, it would not need government legal tender laws to enforce it, nor would governments worldwide have had to confiscate large quantities of gold and continue to hold them in their central bank reserves. The fact that central banks continue to hold onto their gold, and have even started increasing their reserves, testifies to the confidence they have in their own currencies in the long term, and in the inescapable monetary role of gold as the value of paper currencies continues to plumb new depths.

“Every election is an advanced auction on stolen goods.”

Prices, then, are not simply a tool to allow capitalists to profit; they are the information system of economic production, communicating knowledge across the world and coordinating the complex processes of production. Any economic system that tries to dispense with prices will cause the complete breakdown of economic activity and bring a human society back to a primitive state.

The fatal flaw of socialism that Mises exposed was that without a price mechanism emerging on a free market, socialism would fail at economic calculation, most crucially in the allocation of capital goods

“[G]overnments believe that … when there is a choice between an unpopular tax and a very popular expenditure, there is a way out for them—the way toward inflation. This illustrates the problem of going away from the gold standard.”

Having the ability to print money, literally and figuratively, increases the power of any government, and any government looks for anything that gives it more power.

These investments are what Ludwig von Mises terms malinvestments—unprofitable projects and investments that only appear profitable during the period of inflation and artificially low interest rates, and whose unprofitability will be exposed as soon as inflation rates drop and interest rates rise, causing

Democracy thus becomes a mass delusion of people attempting to override the rules of economics by voting themselves a free lunch and being manipulated into violent tantrums against scapegoats whenever the bill for the free lunch arrives via inflation and economic recessions.

Maturity mismatching, or fractional reserve banking as a special case of it, is always liable to a liquidity crisis if lenders and depositors were to demand their deposits at the same time.

Bitcoin is a technology that survives for the very same reason the wheel, knife, phone, or any technology survives: it offers its users benefits from using it.

After being acquired by individuals to use on the Bitcoin network, and gaining economic value, Bitcoin began to get monetized through more people demanding it as a store of value. This sequence of activities conforms to Ludwig von Mises' Theory of Regression on the origins of money, which states that a monetary good begins as a market good and is then used as a medium of exchange. Bitcoin's collectible status among small communities is no different from seashells', Rai stones', and precious metals' ornamental value, from which they were to acquire a monetary role that raised their value significantly.

Should Bitcoin's growth stop and stabilize, it would stop attracting high‐risk investment flows, and become just a normal monetary asset expected to appreciate slightly every year.

In a society run on hard money, government impositions that are not economically productive are unlikely to survive for long, as there is little incentive to continue financing them.

The ever‐growing number of security breaches that happen to computer networks and email servers across the world on a daily basis have occurred to systems which offer the attackers not much more than data or opportunities to score political points. Bitcoin, on the other hand, contains billions of dollars of value, but continues to operate safely and reliably because it was built, from day one, to operate in a highly adversarial setting, subject to relentless attack. Programmers and hackers worldwide have tried to tear it apart using all sorts of techniques, and yet it has continued to operate according to the exact essence of its specification.